Attached files
file | filename |
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EX-31.1 - EX-31.1 - PERICOM SEMICONDUCTOR CORP | d29431_ex31-1.htm |
EX-31.2 - EX-31.2 - PERICOM SEMICONDUCTOR CORP | d29431_ex31-2.htm |
EXCEL - IDEA: XBRL DOCUMENT - PERICOM SEMICONDUCTOR CORP | Financial_Report.xls |
EX-32.1 - EX-32.1 - PERICOM SEMICONDUCTOR CORP | d29431_ex32-1.htm |
EX-32.2 - EX-32.2 - PERICOM SEMICONDUCTOR CORP | d29431_ex32-2.htm |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
FORM 10-Q
[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from ____________ to ____________
Commission File Number 0-27026
Pericom Semiconductor Corporation
(Exact Name of Registrant as Specified in Its Charter)
(Exact Name of Registrant as Specified in Its Charter)
California |
77-0254621 |
|||||
(State or Other
Jurisdiction of |
(I.R.S.
Employer |
|||||
Incorporation
or Organization) |
Identification
No.) |
3545 North First Street
San Jose, California 95134
(408) 435-0800
(Address of Principal Executive Offices and
Issuers Telephone Number, Including Area Code)
San Jose, California 95134
(408) 435-0800
(Address of Principal Executive Offices and
Issuers Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non- accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ]
|
Accelerated Filer [X] |
Non-accelerated Filer [ ]
|
Smaller Reporting Company [ ] |
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 126-2 of the Exchange Act)
Yes [ ] No [X]
As of May 2, 2012 the Registrant had outstanding 23,619,000
shares of Common Stock.
Pericom Semiconductor Corporation
Form 10-Q for the Quarter Ended March 31, 2012
INDEX
Form 10-Q for the Quarter Ended March 31, 2012
INDEX
PART I.
FINANCIAL INFORMATION |
Page | ||||||||||
Item
1: |
Condensed Consolidated Financial Statements (Unaudited) |
||||||||||
Condensed Consolidated Balance Sheets as of March 31, 2012 and July 2, 2011 |
3 | ||||||||||
Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2012 and April 2, 2011 |
4 | ||||||||||
Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2012 and April 2, 2011 |
5 | ||||||||||
Notes
to Condensed Consolidated Financial Statements |
6 | ||||||||||
Item
2: |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | |||||||||
Item
3: |
Quantitative and Qualitative Disclosures about Market Risk |
32 | |||||||||
Item
4: |
Controls and Procedures |
32 | |||||||||
PART II. OTHER INFORMATION |
|||||||||||
Item
1A: |
Risk
Factors |
33 | |||||||||
Item
2: |
Unregistered Sales of Equity Securities and Use of Proceeds |
43 | |||||||||
Item
6: |
Exhibits |
44 | |||||||||
Signatures |
2
PART I. FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
Item 1: Condensed Consolidated Financial Statements
Pericom Semiconductor Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
March 31, 2012 |
July 2, 2011 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||||
Current
assets: |
|||||||||||
Cash and cash
equivalents |
$ | 19,823 | $ | 30,023 | |||||||
Restricted
cash |
| 2,947 | |||||||||
Short-term
investments |
79,021 | 76,266 | |||||||||
Accounts
receivable |
|||||||||||
Trade (net of
allowances of $2,140 and $1,947) |
21,368 | 28,185 | |||||||||
Other
receivables |
3,752 | 5,859 | |||||||||
Inventories
|
17,185 | 21,942 | |||||||||
Prepaid
expenses and other current assets |
3,703 | 1,929 | |||||||||
Deferred
income taxes |
2,419 | 2,564 | |||||||||
Total current
assets |
147,271 | 169,715 | |||||||||
Property,
plant and equipment net |
57,262 | 60,859 | |||||||||
Investments
in unconsolidated affiliates |
2,724 | 2,596 | |||||||||
Deferred
income taxes non-current |
4,284 | 4,324 | |||||||||
Long-term
investments in marketable securities |
26,132 | 21,282 | |||||||||
Goodwill
|
16,779 | 16,669 | |||||||||
Intangible
assets (net of accumulated amortization of $5,868 and $3,868) |
13,601 | 15,690 | |||||||||
Other assets
|
9,748 | 9,881 | |||||||||
Total assets
|
$ | 277,801 | $ | 301,016 | |||||||
LIABILITIES
AND SHAREHOLDERS EQUITY |
|||||||||||
Current
liabilities: |
|||||||||||
Short-term
debt |
$ | 3,840 | $ | 8,671 | |||||||
Accounts
payable |
11,748 | 12,221 | |||||||||
Accrued
liabilities |
7,907 | 19,645 | |||||||||
Total current
liabilities |
23,495 | 40,537 | |||||||||
Industrial
development subsidy |
8,252 | 9,075 | |||||||||
Deferred
income taxes |
6,330 | 6,605 | |||||||||
Other
long-term liabilities |
1,934 | 2,074 | |||||||||
Total
liabilities |
40,011 | 58,291 | |||||||||
Commitments
and contingencies (Note 7) |
|||||||||||
Shareholders equity: |
|||||||||||
Common stock
and paid in capital no par value, 60,000,000 shares authorized; shares issued and outstanding: March 31, 2012, 23,750,000; July 2, 2011,
24,716,000 |
125,090 | 130,960 | |||||||||
Retained
earnings |
102,605 | 102,762 | |||||||||
Accumulated
other comprehensive income |
10,095 | 9,003 | |||||||||
Total
shareholders equity |
237,790 | 242,725 | |||||||||
Total
liabilities and shareholders equity |
$ | 277,801 | $ | 301,016 |
See notes to condensed consolidated financial
statements.
3
Pericom Semiconductor Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
||||||||||||||||
Net
revenues |
$ | 33,378 | $ | 39,555 | $ | 99,191 | $ | 123,001 | |||||||||||
Cost of
revenues |
21,789 | 27,190 | 64,088 | 82,488 | |||||||||||||||
Gross
profit |
11,589 | 12,365 | 35,103 | 40,513 | |||||||||||||||
Operating
expenses: |
|||||||||||||||||||
Research and
development |
5,669 | 5,238 | 16,262 | 14,695 | |||||||||||||||
Selling,
general and administrative |
7,114 | 7,231 | 21,513 | 21,960 | |||||||||||||||
Total
operating expenses |
12,783 | 12,469 | 37,775 | 36,655 | |||||||||||||||
Income (loss)
from operations |
(1,194 | ) | (104 | ) | (2,672 | ) | 3,858 | ||||||||||||
Interest and
other income, net |
847 | 1,132 | 2,555 | 13,683 | |||||||||||||||
Income (loss)
before income taxes |
(347 | ) | 1,028 | (117 | ) | 17,541 | |||||||||||||
Income tax
expense (benefit) |
(76 | ) | 514 | 123 | 6,338 | ||||||||||||||
Net income
(loss) from consolidated companies |
(271 | ) | 514 | (240 | ) | 11,203 | |||||||||||||
Equity in net
income of unconsolidated affiliates |
4 | 17 | 83 | 651 | |||||||||||||||
Net income
(loss) |
$ | (267 | ) | $ | 531 | $ | (157 | ) | $ | 11,854 | |||||||||
Basic income
(loss) per share |
$ | (0.01 | ) | $ | 0.02 | $ | (0.01 | ) | $ | 0.48 | |||||||||
Diluted
income (loss) per share |
$ | (0.01 | ) | $ | 0.02 | $ | (0.01 | ) | $ | 0.47 | |||||||||
Shares used
in computing basic income (loss) per share |
24,030 | 24,993 | 24,255 | 24,926 | |||||||||||||||
Shares used
in computing diluted income (loss) per share |
24,030 | 25,341 | 24,255 | 25,291 |
See notes to condensed
consolidated financial statements.
4
Pericom Semiconductor Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2012 |
April 2, 2011 |
||||||||||
CASH FLOWS
FROM OPERATING ACTIVITIES: |
|||||||||||
Net income
(loss) |
$ | (157 | ) | $ | 11,854 | ||||||
Adjustments
to reconcile net income (loss) to net cash provided by operating activities: |
|||||||||||
Depreciation
and amortization |
8,959 | 7,878 | |||||||||
Share-based
compensation |
2,833 | 3,255 | |||||||||
Tax benefit
resulting from stock option transactions |
382 | 715 | |||||||||
Excess tax
benefit resulting from stock option transactions |
(4 | ) | (101 | ) | |||||||
Write-off of
receivables |
300 | | |||||||||
Gain on
previously held shares in PTI |
| (11,004 | ) | ||||||||
Gain on sale
of investments |
(556 | ) | (1,520 | ) | |||||||
Write-off of
property and equipment |
292 | 68 | |||||||||
Equity in net
income of unconsolidated affiliates |
(83 | ) | (651 | ) | |||||||
Deferred
taxes |
(56 | ) | 4,091 | ||||||||
Changes in
assets and liabilities: |
|||||||||||
Accounts
receivable |
8,203 | 4,515 | |||||||||
Inventories
|
4,617 | 2,604 | |||||||||
Prepaid
expenses and other current assets |
(1,962 | ) | (707 | ) | |||||||
Other assets
|
75 | (225 | ) | ||||||||
Accounts
payable |
(451 | ) | (4,502 | ) | |||||||
Accrued
liabilities |
(2,401 | ) | (3,089 | ) | |||||||
Other
long-term liabilities |
41 | 1,638 | |||||||||
Net cash
provided by operating activities |
20,032 | 14,819 | |||||||||
CASH FLOWS
FROM INVESTING ACTIVITIES: |
|||||||||||
Purchase of
property, plant and equipment |
(5,108 | ) | (9,661 | ) | |||||||
Purchase of
available-for-sale investments |
(84,080 | ) | (158,187 | ) | |||||||
Maturities
and sales of available-for-sale investments |
76,749 | 161,447 | |||||||||
Acquisition
of PTI, net of cash acquired |
(8,076 | ) | (17,514 | ) | |||||||
Change in
restricted cash balance |
2,947 | (2,947 | ) | ||||||||
Net cash used
in investing activities |
(17,568 | ) | (26,862 | ) | |||||||
CASH FLOWS
FROM FINANCING ACTIVITIES: |
|||||||||||
Proceeds from
common stock issuance under stock plans |
525 | 1,043 | |||||||||
Proceeds from
short-term debt |
10,743 | 6,446 | |||||||||
Payments on
short-term debt |
(15,206 | ) | | ||||||||
Excess tax
benefit resulting from stock option transactions |
4 | 101 | |||||||||
Repurchase of
common stock |
(9,223 | ) | (2,483 | ) | |||||||
Net cash
provided by (used in) financing activities |
(13,157 | ) | 5,107 | ||||||||
EFFECT OF
EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
493 | 765 | |||||||||
NET CHANGE IN
CASH AND CASH EQUIVALENTS |
(10,200 | ) | (6,171 | ) | |||||||
CASH AND CASH
EQUIVALENTS: |
|||||||||||
Beginning of
period |
30,023 | 29,495 | |||||||||
End of period
|
$ | 19,823 | $ | 23,324 |
See notes to condensed consolidated financial
statements.
5
Pericom Semiconductor Corporation
Notes To Condensed Consolidated Financial Statements
(Unaudited)
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been
prepared by Pericom Semiconductor Corporation (Pericom or the Company) pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting
only of normal recurring adjustments and accruals, necessary for a fair presentation of the Companys financial position as of March 31, 2012, the
results of operations for the three and nine months ended March 31, 2012 and April 2, 2011 and cash flows for the nine months ended March 31, 2012 and
April 2, 2011. This unaudited quarterly information should be read in conjunction with the audited consolidated financial statements of Pericom and the
notes thereto included in the Companys Annual Report on Form 10-K as filed with the Securities and Exchange Commission on August 30,
2011.
The preparation of the interim condensed consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the period. Actual amounts could differ
from these estimates. The results of operations for the three and nine months ended March 31, 2012 are not necessarily indicative of the results to be
expected for the entire year. The three and nine month periods ended March 31, 2012 and April 2, 2011 each had 13 and 39 week periods,
respectively.
The Company participates in a dynamic high technology
industry and believes that changes in any of the following areas could have a material adverse effect on the Companys future financial position
or results of operations: advances and trends in new technologies; competitive pressures in the form of new products or price reductions on current
products; changes in the overall demand for products offered by the Company; changes in customer relationships; acquisitions and the subsequent
integration of the acquired entity with the Company; litigation or claims against the Company based on intellectual property, patent, product,
regulatory or other factors; risks associated with changes in domestic and international economic and/or political conditions or regulations and
environmental laws; availability of necessary components; interruptions at wafer suppliers and subcontractors; fluctuations in currencies given the
Companys sales and operations being heavily weighted and paid in foreign currencies; and the Companys ability to attract and retain
employees necessary to support its growth.
These interim condensed consolidated financial statements
include the accounts of Pericom Semiconductor Corporation and its wholly owned subsidiaries, PSE Technology Corporation (PSE-TW), Pericom
Semiconductor Hong Kong Limited (PSC-HK) and Pericom Asia Limited (PAL). In addition, PAL has three wholly-owned subsidiaries,
PSE Technology (Shandong) Corporation (PSE-SD) and Pericom Technology Yangzhou Corporation (PSC-YZ) for the Jinan, China and
Yangzhou, China operations, respectively, and Pericom Technology Inc. (PTI). The Company eliminates all intercompany balances and
transactions in consolidation.
FISCAL PERIOD For purposes of reporting
the financial results, the Companys fiscal years end on the Saturday closest to the end of June. The year ended July 2, 2011 is referred to as
fiscal year 2011 or fiscal 2011, whereas the current fiscal year 2012 or fiscal 2012 will end on June 30, 2012. Both fiscal 2011 and fiscal 2012
contain 52 weeks or 364 days. Periodically, the Company adds a 53rd week to a year in order
to end that year on the Saturday closest to the end of June.
WARRANTY The Company offers a standard
one-year product replacement warranty. In the past, the Company has not had to accrue for a general warranty reserve, but assesses the level and
materiality of return material authorizations (RMAs) and determines whether it is appropriate to accrue for estimated returns of defective
products at the time revenue is recognized. On occasion, management may determine to accept product returns beyond the standard one-year warranty
period. In those instances, the Company accrues for the estimated cost at the time management decides to accept the return. Because of
the
6
Companys standardized manufacturing processes and product testing procedures, returns of defective product are infrequent and the quantities have not been significant. Accordingly, historical warranty costs have not been material.
RECENTLY ISSUED ACCOUNTING
STANDARDS
In June 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, which requires comprehensive income to be reported in either a single statement or in two consecutive statements
reporting net income and other comprehensive income, rather than in a footnote or as part of a statement of changes to shareholder equity. The
amendment does not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other
comprehensive income to net income. This standard will be effective for the Companys fiscal year beginning July 1, 2012 with retrospective
application required. As this standard impacts presentation requirements only, the adoption of this guidance is not expected to have a material impact
on the consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08,
Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment, which provides updated guidance on the periodic
testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that
goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards.
This new guidance is effective for the Companys fiscal year beginning July 1, 2012, with early adoption permitted. The Company is currently
evaluating this guidance, but it is not expected that the adoption will have a material effect on the consolidated financial
statements.
2. GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the activity related to the
carrying value of the Companys goodwill during the nine months ended March 31, 2012 and April 2, 2011:
(in thousands) |
March 31, 2012 |
April 2, 2011 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Beginning
balance |
$ | 16,669 | $ | 1,681 | |||||||
PTI
acquisition |
| 15,543 | |||||||||
Elimination
of previous PTI goodwill |
| (1,325 | ) | ||||||||
Adjustments
|
(239 | ) | (95 | ) | |||||||
Currency
translation adjustments |
349 | 639 | |||||||||
Ending
balance |
$ | 16,779 | $ | 16,443 |
The adjustments to goodwill primarily relate to
indemnification amounts due to the Company pursuant to the PTI acquisition merger agreement, effectively reducing the merger
consideration.
The following table summarizes the components of other
intangible assets and related accumulated amortization balances for each of the period-ending dates shown, which were recorded as a result of business
combinations:
7
March 31, 2012 |
July 2, 2011 |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Gross |
Accumulated Amortization |
Net |
Gross |
Accumulated Amortization |
Net |
|||||||||||||||||||||
Customer
relationships |
$ | 5,900 | $ | (1,646 | ) | $ | 4,254 | $ | 5,777 | $ | (909 | ) | $ | 4,868 | |||||||||||||
eCERA trade
name |
44 | (42 | ) | 2 | 45 | (38 | ) | 7 | |||||||||||||||||||
Core developed
technology |
13,120 | (4,180 | ) | 8,940 | 12,040 | (2,648 | ) | 9,392 | |||||||||||||||||||
SaRonix supplier
relationship |
| | | 398 | (273 | ) | 125 | ||||||||||||||||||||
Total
amortizable purchased intangible assets |
19,064 | (5,868 | ) | 13,196 | 18,260 | (3,868 | ) | 14,392 | |||||||||||||||||||
In-process
research and development |
| | | 883 | | 883 | |||||||||||||||||||||
SaRonix trade
name |
405 | | 405 | 415 | | 415 | |||||||||||||||||||||
Total purchased
intangible assets |
$ | 19,469 | $ | (5,868 | ) | $ | 13,601 | $ | 19,558 | $ | (3,868 | ) | $ | 15,690 |
Amortization expense related to finite-lived purchased
intangible assets was approximately $778,000 and $2.4 million for the three and nine month periods ended March 31, 2012 and $628,000 and $1.9 million
for the three and nine month periods ended April 2, 2011, respectively. Amortization of intangible assets for the nine month period ended March 31,
2012 included accelerated amortization related to a supplier relationship of approximately $125,000 and subsequent asset write-off.
The Company performs an impairment review of its intangible
assets at least annually. Based on the results of its most recent impairment review, the Company determined that no impairment of its intangible assets
existed as of July 2, 2011. However, future impairment reviews could result in a charge to earnings.
The finite-lived purchased intangible assets consist of
supplier and customer relationships, trade names and existing and core technology, which have remaining useful lives from one to five years. The
Company expects future amortization expense associated with its intangible assets to be:
Months from March 31, 2012 |
||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Next 12 Months |
13-24 Months |
25-36 Months |
37-48 Months |
49-60 Months |
Over 60 Months |
Total |
|||||||||||||||||||||||
Customer
relationships |
$ | 963 | $ | 963 | $ | 963 | $ | 963 | $ | 402 | $ | | $ 4,254 |
|||||||||||||||||
eCERA trade
name |
2 | | | | | | 2 |
|||||||||||||||||||||||
Core developed
technology |
2,128 | 2,007 | 1,864 | 1,864 | 1,077 | | 8,940 |
|||||||||||||||||||||||
$ | 3,093 | $ | 2,970 | $ | 2,827 | $ | 2,827 | $ | 1,479 | $ | | $13,196 |
3. INCOME (LOSS) PER SHARE
Basic income (loss) per share is based upon the weighted
average number of common shares outstanding. Diluted income (loss) per share reflects the additional potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common stock.
Basic and diluted income (loss) per share for the three and
nine month periods ended March 31, 2012 and April 2, 2011 are computed as follows:
Three Months Ended |
Nine Months Ended |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in
thousands, except per share data) |
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
|||||||||||||||
Net income
(loss) |
($267 | ) | $ | 531 | ($157 | ) | $ | 11,854 | |||||||||||
Computation
of common shares outstanding basic earnings (loss) per share: |
|||||||||||||||||||
Weighted
average shares of common stock |
24,030 | 24,993 | 24,255 | 24,926 | |||||||||||||||
Basic income
(loss) per share |
($0.01 | ) | $ | 0.02 | ($0.01 | ) | $ | 0.48 | |||||||||||
Computation
of common shares outstanding diluted income (loss) per share: |
|||||||||||||||||||
Weighted
average shares of common stock |
24,030 | 24,993 | 24,255 | 24,926 | |||||||||||||||
Dilutive
shares using the treasury stock method |
| 348 | | 365 | |||||||||||||||
Shares used
in computing diluted income (loss) per share |
24,030 | 25,341 | 24,255 | 25,291 | |||||||||||||||
Diluted
income (loss) per share |
($0.01 | ) | $ | 0.02 | ($0.01 | ) | $ | 0.47 |
8
Options to purchase 2,611,000 and 2,724,000 shares of
common stock, and restricted stock units of 518,000 and 548,000 were outstanding during the three and nine months ended March 31, 2012 respectively,
but not included in the computation of diluted earnings per share because the options and units would be anti-dilutive under the treasury stock method.
Options to purchase 2,417,000 and 2,442,000 shares of common stock, and restricted stock units of 95 and 54,000 were outstanding during the three and
nine months ended April 2, 2011 respectively, but not included in the computation of diluted earnings per share because the options and units would be
anti-dilutive under the treasury stock method. As the Company incurred a net loss for the three and nine months ended March 31, 2012, diluted loss per
share is the same as basic loss per share since the addition of any contingently issuable shares would be anti-dilutive.
4. INVENTORIES
Inventories consist of:
(in thousands) |
March 31, 2012 |
July 2, 2011 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Raw materials
|
$ | 7,372 | $ | 5,905 | ||||||
Work in
process |
4,479 | 4,701 | ||||||||
Finished
goods |
5,334 | 11,336 | ||||||||
$ | 17,185 | $ | 21,942 |
The Company considers raw material inventory obsolete and
reserves it if the raw material has not moved in 365 days. The Company reviews its assembled devices for excess and records a reserve if the quantity
of assembled devices in inventory is in excess of the greater of the quantity shipped in the previous twelve months, the quantity in backlog or the
quantity forecasted to be shipped in the following twelve months. In certain circumstances, management will determine, based on expected usage or other
factors, that inventory considered excess by these guidelines should not be reserved. The Company does occasionally determine that the last twelve
months sales levels will not continue and reserves inventory in line with the quantity forecasted. As of March 31, 2012, the Company had reserved
for $4.2 million of inventory which was the same as $4.2 million of inventory reserves at July 2, 2011.
5. ACCRUED LIABILITIES
Accrued liabilities consist of:
(in thousands) |
March 31, 2012 |
July 2, 2011 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Accrued
compensation |
$ | 5,210 | $ | 6,979 | ||||||
Accrued
construction liabilities |
846 | 2,316 | ||||||||
Sales
commissions |
452 | 545 | ||||||||
Income taxes
payable |
161 | 249 | ||||||||
Contingent
earn-out liability |
| 4,774 | ||||||||
Acquisition-related liabilities |
| 3,541 | ||||||||
Other accrued
expenses |
1,238 | 1,241 | ||||||||
$ | 7,907 | $ | 19,645 |
6. BUSINESS COMBINATION
Acquisition of PTI
On August 31, 2010, the Company completed the acquisition
and obtained control of PTI pursuant to the terms of the Agreement and Plan of Merger (the Merger Agreement) for cash consideration of
$30.2 million. An additional approximately $6 million in earn-out consideration and bonus payments were the
9
Companys obligation pursuant to the Merger Agreement for the achievement of gross profit milestones during fiscal year 2011, and the payout of this amount was completed in the third quarter.
Fair Value of Consideration Transferred (in
thousands):
Cash
consideration |
$ | 30,236 | ||||
Acquisition
date fair value of contingent earn-out consideration |
4,087 | |||||
Acquisition
date fair value of previously held interest in PTI |
23,672 | |||||
Total |
$ | 57,995 |
Immediately prior to the acquisition, remeasurement of the
Companys interest in PTI led to a gain of $11 million, which amount was recorded in interest and other income in the fiscal 2011 condensed
consolidated statement of operations. This fair value measurement was based on the per share consideration paid in the transaction, including the fair
value of the earn-out, applied to the number of shares held by the Company immediately prior to closing.
In accordance with Accounting Standards Codification
(ASC) 805, a liability was recognized for the estimated acquisition date fair value of $4.1 million for the contingent consideration based
on the probability of the achievement of PTIs gross profit target. Actual achievement of PTIs gross profit target exceeded 100% of the
threshold, and the PTI stockholders earned the maximum consideration of $4.8 million, and the payout of this amount was completed in the third quarter
of fiscal year 2012.
Allocation of Consideration Transferred
The acquisition was accounted for as a business combination
under ASC 805. The purchase price of $58.0 million was allocated to the net tangible and intangible assets acquired and liabilities assumed based on
their fair values as of the date of the completion of the acquisition as follows (in thousands):
Net tangible
assets |
$ | 26,665 | ||||
Amortizable
intangible assets: |
||||||
Existing and
core technology |
7,165 | |||||
Customer
relationships |
5,368 | |||||
Backlog |
365 | |||||
Indefinite-lived intangible asset: |
||||||
In-process
research and development |
3,223 | |||||
Goodwill |
15,209 | |||||
Total |
$ | 57,995 |
As of the date of acquisition, inventories are required to
be measured at fair value. The fair value of inventory of $3.4 million was based on assumptions applied to the PTI acquired inventory balance. In
estimating the fair value of finished goods and work-in-progress inventory, the Company made assumptions about the selling prices and selling cost
associated with the inventory. The Company assumed that estimated selling prices would yield gross margins consistent with actual margins earned by PTI
during the second half of fiscal year 2010. The Company assumed that selling cost as a percentage of revenue would be consistent with actual rates
experienced by PTI during the second half of fiscal year 2010.
10
The fair value of the acquired land and buildings in
Shanghai, China was estimated based on the recent real estate transactions of comparable properties in the same geographic area. The acquired land and
buildings are being depreciated over estimated useful lives of 15 to 48 years.
Existing and core technology consisted of products which
have reached technological feasibility and relate to the PTI products. The value of the developed technology was determined by discounting estimated
net future cash flows of these products. The Company is amortizing the existing and core technology on a straight-line basis over an estimated life of
6 years.
Customer relationships relate to the Companys ability
to sell existing and future versions of products to existing PTI customers. The fair value of the customer relationships was determined by discounting
estimated net future cash flows from the customer contracts. The Company is amortizing customer relationships on a straight-line basis over an
estimated life of 6 years.
The backlog fair value relates to the estimated selling
cost to generate backlog at August 31, 2010. The fair value of backlog at closing was amortized over an estimated life of 3 months and is fully
amortized.
In-process research and development (IPRD)
consisted of the in-process projects to complete development of certain PTI products. The value assigned to IPRD was determined by considering the
importance of products under development to the overall development plan, estimating costs to develop the purchased IPRD into commercially viable
products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. This
methodology is referred to as the income approach, which discounts expected future cash flows to present value. The discount rate used in the present
value calculations was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks related to the products
development and success as well as the products stage of completion. Acquired IPRD assets are initially recognized at fair value and are
classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly,
during the development period after the acquisition date, these assets will not be amortized as charges to earnings; instead this asset will be subject
to periodic impairment testing. Upon successful completion of the development process for the acquired IPRD projects, the asset would then be
considered a finite-lived intangible asset and amortization of the asset will commence over an expected life of 6 years. Development of the PTI IPRD
products was completed during the three months ended March 31, 2012.
The deferred tax liability of $3.0 million associated with
the estimated fair value adjustments of assets acquired and liabilities assumed was recorded using the estimated statutory tax rate in the
jurisdictions where the fair value adjustments occurred.
Of the total estimated purchase price paid at the time of
acquisition, approximately $15.5 million was allocated to goodwill. Subsequently, goodwill has been reduced by approximately $334,000 as a result of
working capital adjustments and indemnification claims pursuant to the Merger Agreement. Goodwill represents the excess of the purchase price of an
acquired business over the fair value of the underlying net tangible and intangible assets and is not deductible for tax purposes. Among the factors
that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets was the acquisition of an assembled
workforce of experienced semiconductor engineers, synergies in products, technologies, skill sets, operations, customer base and organizational
cultures that can be leveraged to enable the Company to build an enterprise greater than the sum of its parts. In accordance with Accounting Standards
Codification (ASC) 350, IntangiblesGoodwill and Other, goodwill will not be amortized but instead will be tested for
impairment at least annually and more frequently if certain indicators of impairment are present. In the event that management determines that the
value of goodwill has become impaired, the Company will record an expense for the amount impaired during the fiscal quarter in which the determination
is made.
The amount of PTI net revenues included in the
Companys condensed consolidated statement of operations for the nine months ended March 31, 2012 was $9.1 million, and from the PTI acquisition
date of August 31, 2010 to April 2, 2011, was approximately $11.3 million.
Pro Forma Data for the PTI Acquisition
The following table presents the unaudited pro forma
results of the Company as though the PTI acquisition described above occurred at the beginning of the fiscal year on July 4, 2010. The data below
includes the
11
historical results of the Company and PTI on a standalone basis through the closing date of acquisition, with adjustments as noted in the supplemental information. The pro forma results presented do not purport to be indicative of the results that would have been achieved had the acquisition been made as of that date nor of the results which may occur in the future.
Nine Months Ended |
|||||||
---|---|---|---|---|---|---|---|
(unaudited) (in thousands except per share data) |
April 2, 2011 |
||||||
Revenue |
$ | 127,167 | |||||
Net
income |
11,365 | ||||||
Net income
per sharebasic |
0.46 | ||||||
Net income
per sharediluted |
0.45 | ||||||
Supplemental
Information on Pro Forma Adjustments |
|||||||
Pro forma
adjustment to revenue |
|||||||
Eliminate
intercompany sales |
$ | (383 | ) | ||||
Total revenue
adjustment |
$ | (383 | ) | ||||
Pro forma
adjustments to net income |
|||||||
Depreciation
and amortization |
$ | (673 | ) | ||||
Earnout and
compensation expense accruals |
(298 | ) | |||||
Eliminate the
Companys share of PTI income |
(467 | ) | |||||
Eliminate
intercompany sales and costs |
(155 | ) | |||||
Total net
income adjustments |
$ | (1,593 | ) |
7. COMMITMENTS AND CONTINGENCIES
The Companys future minimum commitments at March 31,
2012 are as follows:
Months from March 31, 2012 |
|||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Less than 12 Months |
12-24 Months |
24-36 Months |
36-48 Months |
48-60 Months |
Total |
|||||||||||||||||||||
Short-term debt
|
$ | 3,840 | $ | | $ | | $ | | $ | | $ | 3,840 | |||||||||||||||
Operating lease
payments |
1,641 | 1,104 | 195 | 39 | 2 | 2,981 | |||||||||||||||||||||
Capital
equipment purchase commitments |
1,319 | | | | | 1,319 | |||||||||||||||||||||
Yangzhou capital
injection |
7,000 | 8,000 | | | | 15,000 | |||||||||||||||||||||
Total
|
$ | 13,800 | $ | 9,104 | $ | 195 | $ | 39 | $ | 2 | $ | 23,140 |
The operating lease commitments are primarily the lease on
the Companys corporate headquarters, which expires in 2013 but with two consecutive options to extend for an additional five years
each.
The Company has no purchase obligations other than routine
purchase orders and the capital equipment purchase commitments shown in the table as of March 31, 2012.
The Company previously entered into an R&D Agreement
for its Yangzhou facility that would require the capital injections shown in the table. The Company is currently negotiating with the Yangzhou
government to terminate the R&D Agreement. If the termination is successful, the above capital injections would not be made.
8. INDUSTRY AND SEGMENT INFORMATION
The Company operates and tracks its results in one
reportable segment. The Company designs, develops, manufactures and markets a broad range of interface integrated circuits and frequency control
products.
The following table indicates the percentage of the
Companys net revenues and accounts receivable in excess of 10 percent with any single customer:
12
Net Revenues |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended |
Nine Months Ended |
||||||||||||||||||
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
||||||||||||||||
Customer
A |
18 | % | 16 | % | 17 | % | 20 | % | |||||||||||
Customer
B |
14 | % | 19 | % | 14 | % | 14 | % | |||||||||||
All
others |
68 | % | 65 | % | 69 | % | 66 | % | |||||||||||
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
Accounts Receivable |
|||||||||||||||||||
March 31, 2012 |
July 2, 2011 |
||||||||||||||||||
Customer
A |
24 | % | 16 | % | |||||||||||||||
Customer
B |
10 | % | 12 | % | |||||||||||||||
All
others |
66 | % | 72 | % | |||||||||||||||
100 | % | 100 | % |
For geographical reporting, the Company attributes net
revenues to the country where customers are located (the bill to location). The Company neither conducts business in nor sells to persons
in Iran, Syria, Sudan, or North Korea, countries located in referenced regions identified as state sponsors of terrorism by the U.S. Department of
State and subject to U.S. economic sanctions and export controls. The following table sets forth net revenues by country for the three and nine month
periods ended March 31, 2012 and April 2, 2011:
Net Revenues |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended |
Nine Months Ended |
||||||||||||||||||
(in thousands) |
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
|||||||||||||||
Taiwan |
$ | 15,227 | $ | 18,724 | $ | 45,232 | $ | 55,829 | |||||||||||
China
(including Hong Kong) |
11,543 | 13,712 | 34,422 | 42,311 | |||||||||||||||
United
States |
2,010 | 2,294 | 5,670 | 7,852 | |||||||||||||||
Other (less
than 10% each) |
4,598 | 4,825 | 13,867 | 17,009 | |||||||||||||||
Total net
revenues |
$ | 33,378 | $ | 39,555 | $ | 99,191 | $ | 123,001 |
Long-lived assets consist of all non-monetary assets,
excluding financial assets, deferred taxes, goodwill and intangible assets. The Company attributes long-lived assets to the country where they are
located. The following table sets forth the Companys long-lived assets by country of location as of March 31, 2012 and July 2,
2011:
(in thousands) |
March 31, 2012 |
July 2, 2011 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
China
(including Hong Kong) |
$ | 38,660 | $ | 40,112 | ||||||
Taiwan |
15,261 | 16,459 | ||||||||
United
States |
2,328 | 2,913 | ||||||||
Korea |
574 | 898 | ||||||||
Others (less
than 10% each) |
439 | 477 | ||||||||
Total
long-lived assets |
$ | 57,262 | $ | 60,859 |
9. STOCK REPURCHASE PROGRAM
On April 26, 2007, the Companys Board of Directors
authorized the repurchase of 2.0 million shares of the Companys common stock, and on April 29, 2008, the Board of Directors authorized the
repurchase of an additional $30 million of common stock. The Company may repurchase the shares from time to time in open market or private
transactions, at the discretion of the Companys management.
13
During the three and nine month periods ended March 31,
2012, the Company repurchased 425,766 and 1,184,229 shares for an aggregate cost of approximately $3.4 million and $9.2 million, respectively. During
the three and nine month periods ended April 2, 2011, the Company repurchased 115,718 and 278,879 shares for an aggregate cost of approximately $1.1
million and $2.5 million, respectively. Current cash balances and the proceeds from stock option exercises and purchases in the stock purchase plan
have funded stock repurchases in the past, and the Company expects to fund future stock repurchases from these same sources. As of March 31, 2012, the
Company had approximately $3.1 million of repurchase authority remaining.
10. SHAREHOLDERS EQUITY AND SHARE-BASED
COMPENSATION
PREFERRED STOCK
The Companys shareholders have authorized the Board
of Directors to issue 5,000,000 shares of preferred stock from time to time in one or more series and to fix the rights, privileges and restrictions of
each series. As of March 31, 2012, the Company has issued no shares of preferred stock.
STOCK OPTION PLANS
At March 31, 2012 the Company had four stock incentive
plans and an employee stock purchase plan, consisting of the 1995 Stock Option Plan, 2001 Stock Option Plan, SaRonix Acquisition Stock Option Plan,
2004 Stock Incentive Plan and the 2010 Employee Stock Purchase Plan.
Under the four stock incentive plans, the Company has
reserved an aggregate of 5.6 million shares of common stock as of March 31, 2012 for issuance to employees, officers, directors, independent
contractors and consultants of the Company in the form of incentive or nonqualified stock options, or grants of restricted stock.
The Company may grant stock options at the fair value on
the grant date for incentive stock options and nonqualified stock options. Options vest over periods of generally 48 months as determined by the Board
of Directors. Options granted under the Plans expire 10 years from the grant date.
The Company estimates the fair value of each employee stock
option on the date of grant using the Black-Scholes option valuation model and expenses that value as compensation using a straight-line method over
the options vesting period, which corresponds to the requisite employee service period. The Company estimates expected stock price volatility
based on actual historical volatility for periods that the Company believes represent predictors of future volatility. The Company uses historical data
to estimate option exercises, expected option holding periods and option forfeitures. The Company bases the risk-free interest rate for periods within
the contractual life of the option on the U.S. Treasury yield corresponding to the expected life of the underlying option.
No stock options were granted during the three months ended
March 31, 2012 or April 2, 2011.
The following table summarizes the Companys stock
option activity for the nine months ended March 31, 2012:
14
Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | (years) | (in thousands) | |||||||||||||||||
Options
outstanding at July 2, 2011 |
2,974 | $ | 10.89 | 4.88 | $ | 645 | |||||||||||||
Granted |
142 | 7.65 | |||||||||||||||||
Exercised |
(16 | ) | 7.73 | ||||||||||||||||
Cancelled or
expired |
(489 | ) | 12.67 | ||||||||||||||||
Options
outstanding at March 31, 2012 |
2,611 | $ | 10.40 | 5.07 | $ | 187 | |||||||||||||
Options
vested and expected to vest at March 31, 2012 |
2,566 | $ | 10.43 | 5.01 | $ | 178 | |||||||||||||
Options
exercisable at March 31, 2012 |
2,159 | $ | 10.65 | 4.38 | $ | 113 |
At March 31, 2012, 2.1 million shares were available for
future grants under the incentive plans. The aggregate intrinsic value of options exercised during the nine months ended March 31, 2012 was
approximately $6,000.
At March 31, 2012, expected future compensation expense
relating to options outstanding is $1.7 million, which will be amortized to expense over a weighted average period of 2.3 years.
Additional information regarding options outstanding and
exercisable as of March 31, 2012 is as follows:
Options Outstanding |
Exercisable Options |
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices |
Number Outstanding as of March 31, 2012 |
Weighted Average Remaining Contractual Term (years) |
Weighted Average Exercise Price |
Number Exercisable as of March 31, 2012 |
Weighted Average Exercise Price |
|||||||||||||||||||
$ 4.89 | $ 8.18 | 527,000 | 5.63 | $ | 7.74 | 375,000 | $ | 7.79 | ||||||||||||||||
8.24 | 8.88 | 532,000 | 4.27 | 8.52 | 441,000 | 8.51 | ||||||||||||||||||
8.94 | 10.20 | 522,000 | 6.01 | 9.80 | 373,000 | 9.76 | ||||||||||||||||||
10.25 | 11.50 | 565,000 | 3.96 | 10.98 | 525,000 | 10.94 | ||||||||||||||||||
11.81 | 18.10 | 465,000 | 5.64 | 15.56 | 445,000 | 15.57 | ||||||||||||||||||
$ 4.89 | $18.10 | 2,611,000 | 5.07 | $ | 10.40 | 2,159,000 | $ | 10.65 |
Restricted Stock Units
Restricted stock units (RSUs) are converted
into shares of the Companys common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to the employees
continuing service to the Company. RSUs generally vest over a period of 4 years and are expensed ratably on a straight-line basis over their respective
vesting period net of estimated forfeitures. The fair value of RSUs granted pursuant to the Companys 2004 Stock Incentive Plan is the product of
the number of shares granted and the grant date fair value of the common stock. A summary of activity of RSUs for the nine months ended March 31, 2012
is presented below:
15
Shares |
Weighted Average Award Date Fair Value |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | (years) | (in thousands) | |||||||||||||||||
RSUs
outstanding at July 2, 2011 |
592 | $ | 9.73 | 1.60 | $ | 5,253 | |||||||||||||
Awarded |
110 | 7.72 | |||||||||||||||||
Released |
(147 | ) | 9.97 | ||||||||||||||||
Forfeited |
(37 | ) | 9.67 | ||||||||||||||||
RSUs
outstanding at March 31, 2012 |
518 | $ | 9.24 | 1.45 | $ | 4,190 | |||||||||||||
RSUs expected
to vest after March 31, 2012 |
454 | $ | 9.27 | 1.36 | $ | 3,671 |
At March 31, 2012, expected future compensation expense
relating to RSUs is $3.1 million, which will be amortized to expense over a weighted average remaining recognition period of 2.3
years.
2010 EMPLOYEE STOCK PURCHASE
PLAN
The Companys 2010 Employee Stock Purchase Plan (the
Stock Purchase Plan) allows eligible employees of the Company to purchase shares of Common Stock through payroll deductions. The Company
reserved 2.0 million shares of the Companys Common Stock for issuance under this Plan, of which 1.9 million remain available at March 31, 2012.
The Stock Purchase Plan permits eligible employees to purchase Common Stock at a discount through payroll deductions during six-month purchase periods.
The six-month periods come to an end on or about May 1 and November 1 and the purchases are then made. Thus there were no purchases under the Stock
Purchase Plan for the three months ended March 31, 2012 and April 2, 2011. Participants in the Stock Purchase Plan may purchase stock at 85% of the
lower of the stocks fair market value on the first day and last day of the offering period. The maximum number of shares of Common Stock that any
employee may purchase during any offering period under the plan is 1,000 shares, and an employee may not accrue more than $10,000 for share purchases
in any offering period. During the first nine months of fiscal years 2012 and 2011, the Company issued 55,915 and 101,452 shares of common stock under
the Stock Purchase Plan and the predecessor 2000 Stock Purchase Plan at weighted average prices of $7.22 and $5.41, respectively. The weighted average
fair value of the awards for the first nine months of fiscal 2012 and 2011 were $2.43 and $2.49 per share, respectively.
The Company estimates the fair value of stock purchase
rights granted under the Companys Stock Purchase Plan on the date of grant using the Black-Scholes option valuation model. ASC Topic 718 states
that a lookback pricing provision with a share limit should be considered a combination of stock and a call option. The valuation results
for these elements have been combined to value the specific features of the stock purchase rights. The Company bases volatility on the expected
volatility of the Companys stock during the offering period. The expected term is determined by the time from enrollment until purchase, and the
Company uses the U.S. Treasury yield for the risk-free interest rate for the offering period.
The following table summarizes activity in the
Companys employee stock purchase plan during the nine months ended March 31, 2012:
Shares |
Weighted Average Purchase Price |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Beginning
Available |
1,944,707 | |||||||||
Purchases |
(55,915 | ) | $ | 7.22 | ||||||
Ending
Available |
1,888,792 |
At March 31, 2012, the Company had $24,000 in unamortized
share-based compensation related to its employee stock purchase plan which will be amortized and recognized in the consolidated statement of operations
over the next month.
16
SHARE-BASED COMPENSATION
The following table shows total share-based compensation
expense classified by Consolidated Statements of Operations reporting caption for the three and nine months ended March 31, 2012 and April 2, 2011
generated from the plans described above:
Three Months Ended |
Nine Months Ended |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In Thousands) |
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
|||||||||||||||
Cost of goods
sold |
60 | $ | 62 | $ | 161 | $ | 192 | ||||||||||||
Research and
development |
371 | 421 | 1,099 | 1,164 | |||||||||||||||
Selling,
general and administrative |
496 | 708 | 1,573 | 1,899 | |||||||||||||||
Pre-tax
share-based compensation expense |
927 | 1,191 | 2,833 | 3,255 | |||||||||||||||
Income tax
impact |
(41 | ) | (398 | ) | (689 | ) | (1,066 | ) | |||||||||||
Net
share-based compensation expense |
$ | 886 | $ | 793 | $ | 2,144 | $ | 2,189 |
Share-based compensation by type of award is as
follows:
Three Months Ended |
Nine Months Ended |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In Thousands) |
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
|||||||||||||||
Stock
options |
$ | 304 | $ | 553 | $ | 1,074 | $ | 1,606 | |||||||||||
Restricted
stock units |
549 | 571 | 1,556 | 1,402 | |||||||||||||||
Stock
purchase plan |
74 | 67 | 203 | 247 | |||||||||||||||
Total
share-based compensation expense |
$ | 927 | $ | 1,191 | $ | 2,833 | $ | 3,255 |
The amount of share-based compensation expense capitalized
in inventory at March 31, 2012 and July 2, 2011 is immaterial.
11. INCOME TAXES
Accounting for Uncertainty in Income
Taxes
The Companys total amount of unrecognized tax
benefits as of March 31, 2012 was $818,000. All of this amount would affect the Companys tax rate if recognized. In addition, as of March 31,
2012 the Company had accrued $84,000 for any interest and penalties related to unrecognized tax benefits.
The Companys effective tax rate may differ from the
federal statutory rate primarily due to state income taxes, research and development tax credits, stock-based compensation from incentive stock
options, differing tax rates in income-earning foreign jurisdictions, and the inability to utilize losses in certain foreign entities to offset
domestic income.
The Company is subject to examination by Federal, foreign,
and various state jurisdictions for the years 2005 through 2010. To the Companys knowledge, there are currently no examinations
underway.
Income Tax Expense
Income tax expense for the nine months ended March 31, 2012
and April 2, 2011 was $123,000 and $6.3 million, respectively, and was comprised of domestic federal and state income tax and foreign income and
withholding tax. The effective tax rate for the nine months ended March 31, 2012 is not meaningful since the Company had a pretax loss for the period,
and the tax resulted from the allocation of earnings between different tax jurisdictions. The effective tax rate for the nine months ended April 2,
2011 was 36%. As of March 31, 2012, the Company has recorded a valuation allowance of $1.1 million against its deferred tax assets.
17
12. INVESTMENT IN UNCONSOLIDATED
AFFILIATE
The Companys investment in an unconsolidated
affiliate is as follows:
(in thousands) |
March 31, 2012 |
July 2, 2011 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Jiyuan
Crystal Photoelectric Frequency Technology Ltd. |
$ | 2,724 | $ | 2,596 |
PSE-TW has a 49% equity interest in Jiyuan Crystal
Photoelectric Frequency Technology Ltd. (JCP), an FCP manufacturing company located in Science Park of Jiyuan City, Henan Province, China.
JCP is a key manufacturing partner of PSE-TW and supplies PSE-TW with blanks for its surface mount device (SMD) production lines. For the first nine
months of fiscal 2012 and 2011, the Companys allocated portion of JCPs results was income of $83,000 and $184,000,
respectively.
13. EQUITY AND COMPREHENSIVE INCOME
Comprehensive income consists of net income, changes in net
unrealized gains (losses) on available-for-sale investments and changes in cumulative currency translation adjustments at consolidated subsidiaries.
Changes in equity including comprehensive income for the nine months ended April 2, 2011 and March 31, 2012 are as follows:
(In Thousands) |
Shareholders Equity |
||||||
---|---|---|---|---|---|---|---|
Balance July
3, 2010 |
$ | 221,906 | |||||
Net
income |
11,854 | ||||||
Other
comprehensive income |
|||||||
Unrealized
gain (loss) on securities available for sale, net |
(630 | ) | |||||
Translation
gain (loss), net |
5,836 | ||||||
Total
comprehensive income |
17,060 | ||||||
Issuance of
common stock options and ESPP |
1,043 | ||||||
Stock expense
APIC |
3,255 | ||||||
Stock
repurchases |
(2,483 | ) | |||||
Balance April
2, 2011 |
$ | 240,781 | |||||
Balance July
2, 2011 |
$ | 242,725 | |||||
Net
loss |
(157 | ) | |||||
Other
comprehensive income |
|||||||
Unrealized
gain (loss) on securities available for sale, net |
85 | ||||||
Translation
gain (loss), net |
1,007 | ||||||
Total
comprehensive income |
935 | ||||||
Issuance of
common stock options and ESPP |
525 | ||||||
Stock expense
APIC |
2,828 | ||||||
Stock
repurchases |
(9,223 | ) | |||||
Balance March
31, 2012 |
$ | 237,790 |
As of March 31, 2012, accumulated other comprehensive
income consists of $338,000 of unrealized gains net of tax and $9.8 million of accumulated currency translation gains.
14. SHORT-TERM DEBT
As of March 31, 2012, the Companys subsidiary PSE-TW
has made short-term borrowings under its credit facilities totaling approximately $3.8 million. The loans are denominated in U.S. Dollars and Japanese
Yen and carry variable rates of interest currently ranging from 1.30% to 1.74% per annum. The loans have maturities ranging from 43 to 175 days. PSE-TW
has pledged $4.4 million in land and buildings for the loan and credit facilities.
18
15. INDUSTRIAL DEVELOPMENT SUBSIDY
As of March 31, 2012, industrial development subsidies in
the amount of $11.7 million have been earned and applied for by PSE-SD from the Jinan Hi-Tech Industries Development Zone Commission based on meeting
certain pre-defined criteria. The subsidies may be used for the acquisition of assets or to cover business expenses. When a subsidy is used to acquire
assets, the subsidy will be amortized over the useful life of the asset. When a subsidy is used for expenses incurred, the subsidy is regarded as
earned upon the incurrence of the expenditure. The remaining balance of the subsidies at March 31, 2012 was $8.3 million, which amount is expected to
be recognized over the next three to twenty years.
The Company recognized $191,000 and $880,000 of industrial
development subsidy as a reduction of cost of goods sold and $45,000 and $135,000 of industrial development subsidy as a reduction of operating
expenses in the consolidated statements of operations for the three and nine month periods ended March 31, 2012, respectively. The Company recognized
$316,000 and $914,000 of industrial development subsidy as a reduction of cost of goods sold and $58,000 and $185,000 of industrial development subsidy
as a reduction of operating expenses in the consolidated statements of operations for the three and nine month periods ended April 2, 2011,
respectively.
16. |
INVESTMENTS IN MARKETABLE SECURITIES |
The Companys policy is to invest in instruments with
investment grade credit ratings. The Company classifies its short-term investments as available-for-sale securities and the Company bases
the cost of securities sold using the specific identification method. The Company accounts for unrealized gains and losses on its available-for-sale
securities as a separate component of shareholders equity in the consolidated balance sheets in the period in which the gain or loss occurs. The
Company classifies its available-for-sale securities as current or noncurrent based on each securitys attributes. At March 31, 2012, a summary of
investments by major security type is as follows:
As of March 31, 2012 |
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Net Unrealized Gains (Losses) |
Fair Market Value |
||||||||||||||||||
Available-for-Sale Securities |
|||||||||||||||||||||||
Time
deposits |
$ | 10,163 | $ | | $ | | $ | | $ | 10,163 | |||||||||||||
US Treasury
securities |
3,647 | | (10 | ) | (10 | ) | 3,637 | ||||||||||||||||
National
government and agency securities |
8,130 | 165 | | 165 | 8,295 | ||||||||||||||||||
State and
municipal bond obligations |
788 | 1 | | 1 | 789 | ||||||||||||||||||
Corporate
bonds and notes |
61,863 | 497 | (198 | ) | 299 | 62,162 | |||||||||||||||||
Asset backed
securities |
10,102 | 19 | (93 | ) | (74 | ) | 10,028 | ||||||||||||||||
Mortgage
backed securities |
10,074 | 82 | (77 | ) | 5 | 10,079 | |||||||||||||||||
Total |
$ | 104,767 | $ | 764 | $ | (378 | ) | $ | 386 | $ | 105,153 |
At July 2, 2011 a summary of investments by major security
type is as follows:
As of July 2, 2011 |
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Net Unrealized Gains (Losses) |
Fair Market Value |
||||||||||||||||||
Available-for-Sale Securities |
|||||||||||||||||||||||
Time
Deposits |
$ | 10,740 | $ | | $ | | $ | | $ | 10,740 | |||||||||||||
US Treasury
securities |
600 | 2 | | 2 | 602 | ||||||||||||||||||
National
government and agency securities |
9,065 | 128 | (7 | ) | 121 | 9,186 | |||||||||||||||||
State and
municipal bond obligations |
1,250 | 8 | | 8 | 1,258 | ||||||||||||||||||
Corporate
bonds and notes |
53,346 | 458 | (105 | ) | 353 | 53,699 | |||||||||||||||||
Asset backed
securities |
11,381 | 32 | (75 | ) | (43 | ) | 11,338 | ||||||||||||||||
Mortgage
backed securities |
10,767 | 41 | (83 | ) | (42 | ) | 10,725 | ||||||||||||||||
Total |
$ | 97,149 | $ | 669 | $ | (270 | ) | $ | 399 | $ | 97,548 |
The above investments are included in short-term and
long-term investments in marketable securities on the Companys condensed consolidated balance sheets.
19
The following tables show the unrealized losses and fair
market values of the Companys investments that have unrealized losses, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at March 31, 2012 and July 2, 2011:
Continuous Unrealized Losses at March 31, 2012 |
|||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Less Than 12 Months |
12 Months or Longer |
Total |
|||||||||||||||||||||||||
(In
thousands) |
Fair Market Value |
Unrealized Losses |
Fair Market Value |
Unrealized Losses |
Fair Market Value |
Unrealized Losses |
|||||||||||||||||||||
National
government and agency securities |
$ | 3,977 | $ | 10 | $ | | $ | | $ | 3,977 | $ | 10 | |||||||||||||||
State and
municipal bond obligations |
370 | | | | 370 | | |||||||||||||||||||||
Corporate bonds
and notes |
17,098 | 181 | 1,003 | 17 | 18,101 | 198 | |||||||||||||||||||||
Asset backed
securities |
2,019 | 18 | 1,846 | 75 | 3,865 | 93 | |||||||||||||||||||||
Mortgage backed
securities |
1,655 | 3 | 388 | 74 | 2,043 | 77 | |||||||||||||||||||||
$ | 25,119 | $ | 212 | $ | 3,237 | $ | 166 | $ | 28,356 | $ | 378 | ||||||||||||||||
Continuous Unrealized Losses at July 2, 2011 |
|||||||||||||||||||||||||||
Less Than 12 Months |
12 Months or Longer |
Total |
|||||||||||||||||||||||||
(In
thousands) |
Fair Market Value |
Unrealized Losses |
Fair Market Value |
Unrealized Losses |
Fair Market Value |
Unrealized Losses |
|||||||||||||||||||||
National
government and agency securities |
$ | 2,254 | $ | 7 | $ | | $ | | $ | 2,254 | $ | 7 | |||||||||||||||
Corporate bonds
and notes |
12,765 | 103 | 251 | 2 | 13,016 | 105 | |||||||||||||||||||||
Asset backed
securities |
4,867 | 64 | 149 | 11 | 5,016 | 75 | |||||||||||||||||||||
Mortgage backed
securities |
3,407 | 10 | 336 | 73 | 3,743 | 83 | |||||||||||||||||||||
$ | 23,293 | $ | 184 | $ | 736 | $ | 86 | $ | 24,029 | $ | 270 |
The unrealized losses are of a temporary nature due to the
Companys intent and ability to hold the investments until maturity or until the cost is recoverable. The unrealized losses are primarily due to
fluctuations in market interest rates. The Company reports unrealized gains and losses on its available-for-sale securities in accumulated
other comprehensive income in shareholders equity.
The Company records gains or losses realized on sales of
available-for-sale securities in interest and other income, net on its condensed consolidated statements of operations. The cost of securities sold is
based on the specific identification of the security and its amortized cost. For the nine months ended March 31, 2012 and April 2, 2011, proceeds from
sales and maturities of available-for-sale securities were $76.7 million and $161.4 million, respectively, and realized gains were $556,000 and $1.5
million, respectively. Securities sales were higher than normal for the nine months ended April 2, 2011 both to raise cash for the PTI acquisition and
to reposition the portfolio for changing market conditions and opportunities.
The following table lists the fair market value of the
Companys short- and long-term investments by length of time to maturity as of March 31, 2012. Securities with maturities over multiple dates are
mortgage-backed (MBS) or asset-backed securities (ABS) featuring periodic principle paydowns through 2052.
(in thousands) |
March 31, 2012 |
|||||
---|---|---|---|---|---|---|
Contractual Maturities |
||||||
Less than 12
months |
$ | 14,035 | ||||
One to three
years |
55,393 | |||||
Over three
years |
20,177 | |||||
Multiple
dates |
15,548 | |||||
Total |
$ | 105,153 |
17. FAIR VALUE MEASUREMENTS
The Company defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of
observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs that may
be used to
20
measure fair value, of which the first two are considered observable and the last is considered unobservable:
|
Level 1 Quoted prices in active markets for identical assets or liabilities. |
|
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table represents the Companys fair
value hierarchy for financial assets measured at fair value on a recurring basis. Most of the investments are classified as Level 2 at March 31, 2012.
Level 2 pricing is provided by third party sources of market information obtained through the Companys investment advisors. The Company does not
adjust for or apply any additional assumptions or estimates to the pricing information it receives from advisors. The Companys investment
advisors obtain pricing data from independent sources, such as Standard & Poors, Bloomberg and Interactive Data Corporation, and rely on
comparable pricing of other securities because the Level 2 securities it holds are not actively traded and have fewer observable transactions. The
Company considers this the most reliable information available for the valuation of the securities.
The Companys Level 2 securities include time
deposits, government securities, corporate debt securities and mortgage-backed and asset-backed securities. Government securities include US federal
agency securities, foreign government and agency securities, and US state and municipal bond obligations. Many of the municipal bonds are insured;
those that are not are nearly all AAA/Aaa rated. The corporate debt securities are all investment grade and most are single A-rated or better. The
asset-backed securities are AAA/Aaa rated and are backed by auto loans, student loans, credit card balances and residential or commercial
mortgages.
As of March 31, 2012 |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
Investments (1) |
|||||||||||||||||||
Time
deposits |
$ | 11,609 | $ | | $ | 11,609 | $ | | |||||||||||
US Treasury
securities |
3,638 | 3,638 | | | |||||||||||||||
Government
and agency securities |
8,295 | | 8,295 | | |||||||||||||||
State and
municipal bond obligations |
789 | | 789 | | |||||||||||||||
Corporate
bonds and notes |
62,162 | | 62,162 | | |||||||||||||||
Asset-backed
securities |
10,028 | | 10,028 | | |||||||||||||||
Mortgage-backed securities |
10,078 | | 10,078 | | |||||||||||||||
Total |
$ | 106,599 | $ | 3,638 | $ | 102,961 | $ | |
(1) |
$1,446 of the time deposits are included in cash and cash equivalents; the balance of the investments are included in short-term and long-term investments in marketable securities on our consolidated balance sheet |
The Company had no transfers into or out of Level 2 during
the nine months ended March 31, 2012.
When assessing marketable securities for
other-than-temporary declines in value, a number of factors are considered. Analyses of the severity and duration of price declines, remaining years to
maturity, portfolio manager reports, economic forecasts, and the specific circumstances of issuers indicate that it is reasonable to expect marketable
securities with unrealized losses at March 31, 2012 to recover in fair value up to the Companys cost bases within a reasonable period of time.
The Company does not intend to sell investments with unrealized losses before maturity, when the obligors are required to redeem them at full face
value or par. The Company believes the obligors have the financial resources to redeem the debt securities. Accordingly, the Company does not consider
the investments to be other-than-temporarily impaired at March 31, 2012.
The Company has determined that the amounts reported for
cash and cash equivalents, accounts receivable, deposits, accounts payable, accrued liabilities and debt approximate fair value because of their short
maturities and/or variable interest rates.
21
18. SUBSEQUENT EVENT
On April 26, 2012, the Board of Directors authorized an
additional share repurchase program for up to $25 million of shares of the Companys common stock. Shares may be repurchased from time to time in
the open market or through private transactions, at the discretion of Pericom management. As of April 27, 2012, Pericom had approximately 23.6 million
shares of common stock outstanding.
22
Item 2: Managements Discussion and Analysis
of Financial Condition and Results of Operations
of Financial Condition and Results of Operations
Pericom Semiconductor Corporation
The following information should be read in conjunction
with the unaudited financial statements and notes thereto included in Part 1 Item 1 of this Quarterly Report and the audited financial
statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual
Report on Form 10-K for the year ended July 2, 2011 (the Form 10-K).
Factors That May Affect Operating
Results
This Quarterly Report on Form 10-Q includes
forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements
other than statements of historical fact are forward-looking statements for purposes of these provisions, including any statements
regarding our sales to Taiwan and China, the effect on supply chain and our operations of the 2011 Japan earthquake and tsunami, the continuation of a
high level of turns orders, higher or lower levels of inventory, future gross profit and gross margin; the plans and objectives of management for
future operations; our tax rate; currency fluctuations; the adequacy of allowances for returns, price protection and other concessions; the sufficiency
of cash generated from operations and cash balances; our exposure to interest rate risk; expectations regarding our research and development and
selling, general and administrative expenses; and our possible future acquisitions and assumptions underlying any of the foregoing. In some cases,
forward-looking statements can be identified by the use of terminology such as may, will, expects,
plans, anticipates, estimates, potential, or continue, or the negative thereof or other
comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there
can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ
materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any
forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth (i) in Item 1A, Risk Factors, of
Part II of this Form 10-Q, and (ii) in Note 1 to the Notes to Condensed Consolidated Financial Statements. All forward-looking statements and reasons
why results may differ included in this Quarterly Report are made as of the date hereof, and we assume no obligation to update any such forward-looking
statement or reason why actual results may differ.
23
Results of Operations
The following table sets forth certain statement of
operations data as a percentage of net revenues for the periods indicated.
Three Months Ended |
Nine Months Ended |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
||||||||||||||||
Net
revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
Cost of
revenues |
65.3 | % | 68.7 | % | 64.6 | % | 67.1 | % | |||||||||||
Gross
profit |
34.7 | % | 31.3 | % | 35.4 | % | 32.9 | % | |||||||||||
Operating
expenses: |
|||||||||||||||||||
Research and
development |
17.0 | % | 13.3 | % | 16.4 | % | 11.9 | % | |||||||||||
Selling,
general and administrative |
21.3 | % | 18.3 | % | 21.7 | % | 17.9 | % | |||||||||||
Total
operating expenses |
38.3 | % | 31.6 | % | 38.1 | % | 29.8 | % | |||||||||||
Income (loss)
from operations |
(3.6 | )% | (0.3 | )% | (2.7 | )% | 3.1 | % | |||||||||||
Interest and
other income, net |
2.6 | % | 2.9 | % | 2.6 | % | 11.1 | % | |||||||||||
Income (loss)
before income taxes |
(1.0 | )% | 2.6 | % | (0.1 | )% | 14.2 | % | |||||||||||
Income tax
expense (benefit) |
(0.2 | )% | 1.3 | % | 0.1 | % | 5.1 | % | |||||||||||
Net income (loss)
from consolidated companies |
(0.8 | )% | 1.3 | % | (0.2 | )% | 9.1 | % | |||||||||||
Equity in net
income of unconsolidated affiliates |
0.0 | % | 0.0 | % | 0.0 | % | 0.5 | % | |||||||||||
Net income
(loss) |
(0.8 | )% | 1.3 | % | (0.2 | )% | 9.6 | % |
Net Revenues
The following table sets forth our revenues and the
customer concentrations with respect to such revenues for the periods indicated.
Three Months Ended |
Nine Months Ended |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In thousands) |
March 31, 2012 |
April 2, 2011 |
% Change |
March 31, 2012 |
April 2, 2011 |
% Change |
|||||||||||||||||||||
Net
revenues |
$ | 33,378 | $ | 39,555 | 15.6 | % | $ | 99,191 | $ | 123,001 | 19.4 | % | |||||||||||||||
% of net sales
accounted for by top 5 direct customers (1) |
44.8 | % | 52.3 | % | 46.9 | % | 51.5 | % | |||||||||||||||||||
Number of direct
customers that each account for more than 10% of net sales |
2 | 2 | 2 | 2 | |||||||||||||||||||||||
% of net sales
accounted for by top 5 end customers (2) |
26.1 | % | 30.0 | % | 27.4 | % | 26.2 | % | |||||||||||||||||||
Number of end
customers that each account for more than 10% of net sales |
1 | 0 | 0 | 0 |
(1) |
Direct customers purchase products directly from us and include distributors, contract manufacturers and original equipment manufacturers (OEMs). |
(2) |
End customers are OEMs and their products are manufactured using our products. End customers may purchase directly from us or from distributors or contract manufacturers. For end customer data, we rely on information provided by our direct distribution and contract manufacturing customers. |
We design, develop and market high-performance integrated
circuits (ICs or IC products) and frequency control products (FCPs or FCP products) used in many of todays advanced
electronic systems. Our IC products include products that support the connectivity, timing and signal conditioning of high-speed parallel and serial
protocols that transfer data among a systems microprocessor, memory and various peripherals, such as displays and monitors, and between
interconnected systems. Our FCPs are electronic components that provide frequency references such as crystals, oscillators, and hybrid timing
generation products for computer, communication and consumer electronic products. Our analog, digital and mixed-signal ICs, together with our FCP
products enable higher system bandwidth and signal quality, resulting in better operating reliability, signal integrity, and lower overall system cost
in applications such as notebook computers, servers, network switches and routers, storage area networks, digital TVs, cell phones, GPS and digital
media players.
Net revenues consist of product sales, which we generally
recognize upon shipment, less an estimate for returns and allowances.
24
Net revenues decreased $6.2 million or 15.6% in the third
quarter of fiscal 2012 versus the third quarter of fiscal 2011. This decrease is primarily the result of reduced end user demand due to economic
softness in the PC, notebook, and consumer-product end markets. Net revenue for IC and FCP products in the third quarter of fiscal 2012 versus the
third quarter of fiscal 2011 reflected:
|
a $5.4 million decrease in sales of IC products to $20.9 million, a decrease of 20.5%, and |
|
a decrease of $790,000 or 5.9% in sales of our FCP products to $12.5 million. |
Net revenue decreased $23.8 million or 19.4% in the first
nine months of fiscal 2012 versus the first nine months of fiscal 2011. This decrease reflects reductions in IC and FCP product sales:
|
a $20.1 million decrease in sales of IC products to $62.4 million, for a 24.3% sales decrease, and |
|
a decrease of $3.7 million or 9.2% in sales of our FCP products to $36.7 million. |
The following table sets forth net revenues by country as a
percentage of total net revenues for the three and nine months ended March 31, 2012 and April 2, 2011:
Net Revenues |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended |
Nine Months Ended |
||||||||||||||||||
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
||||||||||||||||
Taiwan |
46 | % | 47 | % | 46 | % | 45 | % | |||||||||||
China
(including Hong Kong) |
35 | % | 35 | % | 35 | % | 34 | % | |||||||||||
United
States |
6 | % | 6 | % | 6 | % | 6 | % | |||||||||||
Other (less
than 10% each) |
13 | % | 12 | % | 13 | % | 15 | % | |||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % |
Over the past several years, sales to Taiwan and China have
constituted the majority of our sales. We expect this trend will continue in the future.
Our net revenue levels have been highly dependent on the
number of new orders that are received for products to be delivered to the customer within the same quarter, also called turns orders.
Because of our lack of visibility into demand when turns orders are high, it is difficult to predict which products to build to match future demand. We
believe the current high level of turns orders will continue indefinitely. The sustainability of customer demand is uncertain and our markets are
highly dependent on worldwide economic conditions. The high level of turns orders together with the uncertainty of product mix and pricing makes it
difficult to predict future levels of sales and may require us to carry higher levels of inventory.
Gross Profit
The following table sets forth our gross profit for the
periods indicated:
Three Months Ended |
Nine Months Ended |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In thousands) |
March 31, 2012 |
April 2, 2011 |
% Change |
March 31, 2012 |
April 2, 2011 |
% Change |
|||||||||||||||||||||
Net
revenues |
$ | 33,378 | $ | 39,555 | 15.6 | % | $ | 99,191 | $ | 123,001 | 19.4 | % | |||||||||||||||
Gross
profit |
11,589 | 12,365 | 6.3 | % | 35,103 | 40,513 | 13.4 | % | |||||||||||||||||||
Gross profit as
a percentage of net revenues (gross margin) |
34.7 | % | 31.3 | % | 35.4 | % | 32.9 | % |
The decrease in gross profit in the third quarter of fiscal
2012 as compared to the third quarter of fiscal 2011 of $776,000 is the result of:
|
a 15.6% decrease in sales, which led to $1.9 million of decreased gross profit, partially offset by |
|
a gross margin increase from 31.3% to 34.7%, resulting in a $1.1 million improvement in gross profit. |
25
The decrease in gross profit in the first nine months of
fiscal 2012 as compared to the first nine months of fiscal 2011 of $5.4 million is primarily the result of:
|
a 19.4% decrease in sales, which led to $7.8 million of decreased gross profit, partially offset by |
|
a gross margin increase from 32.9% to 35.4%, resulting in a $2.4 million increase in gross profit. |
Future gross profit and gross margin are highly dependent
on the level and product mix of net revenues. This includes the mix of sales between lower margin FCP products and our higher margin integrated circuit
products. Although we have been successful at favorably improving our integrated circuit product mix and penetrating new end markets, there can be no
assurance that this will continue. Accordingly, we are not able to predict future gross profit levels or gross margins with certainty.
During the three and nine months ended March 31, 2012,
gross profit and gross margin benefited as a result of the sale of inventory of $30,000 and $171,000 respectively, that we had previously identified as
excess and written down to zero value, as compared with benefits of $14,000 and $42,000, respectively, for the same periods of the prior
year.
Research and Development
(R&D)
Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In thousands) |
March 31, 2012 |
April 2, 2011 |
% Change |
March 31, 2012 |
April 2, 2011 |
% Change |
||||||||||||||||||||
Net
revenues |
$ | 33,378 | $ | 39,555 | 15.6 | % | $ | 99,191 | $ | 123,001 | 19.4 | % | ||||||||||||||
Research and
development |
5,669 | 5,238 | 8.2 | % | 16,262 | 14,695 | 10.7 | % | ||||||||||||||||||
R&D as a
percentage of net revenues |
17.0 | % | 13.3 | % | 16.4 | % | 11.9 | % |
Research and development expenses consist primarily of costs related to personnel and overhead, non-recurring engineering charges, and other costs associated with the design, prototyping, testing, manufacturing process design support, and technical customer applications support of our products. The $431,000 expense increase for the three month period ended March 31, 2012 as compared to the same period of the prior year is primarily attributable to increases of $235,000 in consulting services and $164,000 in severance costs related to personnel reductions made by the Company in the three months ended March 31, 2012. The $1.6 million expense increase for the nine month period ended March 31, 2012 as compared to the same period of the prior year is primarily attributable to increases of $441,000 in depreciation and amortization, $380,000 in consulting services, $326,000 for masks and assembly expenditures, $156,000 in severance costs and 151,000 in facilities-related expenses.
We believe that continued spending on research and
development to develop new products and improve manufacturing processes is critical to our long-term success, and as a result we expect to continue to
invest in research and development projects. In the short term, we intend to continue to focus on cost control as business conditions improve. If
business conditions deteriorate or the rate of improvement does not meet our expectations, we may implement further cost-cutting
actions.
Selling, General and Administrative
(SG&A)
Three Months Ended |
Nine Months Ended |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In thousands) |
March 31, 2012 |
April 2, 2011 |
% Change |
March 31, 2012 |
April 2, 2011 |
% Change |
|||||||||||||||||||||
Net
revenues |
$ | 33,378 | $ | 39,555 | 15.6 | % | $ | 99,191 | $ | 123,001 | 19.4 | % | |||||||||||||||
Selling, general
and administrative |
7,114 | 7,231 | 1.6 | % | 21,513 | 21,960 | 2.0 | % | |||||||||||||||||||
SG&A as a
percentage of net revenues |
21.3 | % | 18.3 | % | 21.7 | % | 17.9 | % |
Selling, general and administrative expenses consist
primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The expense
reduction of approximately $117,000 for the three month period ended March 31, 2012 as compared to the same period of the prior year is attributable
primarily to a $247,000 reduction in compensation expenses,
26
partially offset by a $100,000 increase in severance costs related to personnel reductions made by the Company in the three months ended March 31, 2012. The expense decrease of approximately $447,000 for the nine month period ended March 31, 2012 as compared to the same period of the prior year is attributable primarily to decreased expenditures of $782,000 in compensation expenses, partially offset by $300,000 of charges for receivables write-offs.
We anticipate that selling, general and administrative
expenses will increase in future periods over the long term due to increased staffing levels, particularly in sales and marketing, as well as increased
commission expense to the extent we achieve higher sales levels. We intend to continue our focus on controlling costs. If business conditions
deteriorate or the rate of improvement does not meet our expectations, we may implement further cost-cutting actions.
Interest and Other Income, Net
Three Months Ended |
Nine Months Ended |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In thousands) |
March 31, 2012 |
April 2, 2011 |
% Change |
March 31, 2012 |
April 2, 2011 |
% Change |
|||||||||||||||||||||
Interest
income |
$ | 975 | $ | 1,128 | 13.6 | % | $ | 2,555 | $ | 3,366 | 24.1 | % | |||||||||||||||
Gain on
previously held interest in PTI |
| | | 11,004 | |||||||||||||||||||||||
Other income
(expense) |
(15 | ) | (238 | ) | (169 | ) | (514 | ) | |||||||||||||||||||
Exchange gain
(loss) |
(113 | ) | 242 | 169 | (173 | ) | |||||||||||||||||||||
Interest and
other income |
$ | 847 | $ | 1,132 | $ | 2,555 | $ | 13,683 |
Interest and other income for the three month period ended
March 31, 2012 decreased $285,000 as compared with the same period of the prior year due primarily to an exchange loss this year compared with an
exchange gain last year due to currency fluctuation, and somewhat lower returns and realized gains on invested balances this year, partially offset by
reductions in other expenses. Interest and other income for the nine month period ended March 31, 2012 decreased $11.1 million as compared with the
same period of the prior year due primarily to an $11.0 million gain recorded on our previously held interest in Pericom Technology Inc.
(PTI) last year and somewhat lower returns on invested balances this year, partially offset by reductions in other expenses and an exchange
gain this year compared with an exchange loss last year.
Income Tax Expense (Benefit)
Three Months Ended |
Nine Months Ended |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In thousands) |
March 31, 2012 |
April 2, 2011 |
March 31, 2012 |
April 2, 2011 |
|||||||||||||||
Pre-tax
income (loss) |
$ | (347 | ) | $ | 1,028 | $ | (117 | ) | $ | 17,541 | |||||||||
Income tax
expense (benefit) |
(76 | ) | 514 | 123 | 6,338 | ||||||||||||||
Effective tax
rate |
22 | % | 50 | % | NM | 36 | % | ||||||||||||
NM means not
meaningful |
The tax benefit of $76,000 in the quarter adjusted our
year-to-date taxes to the appropriate level based on fiscal year-to-date projected results. The $123,000 of income taxes for the nine month period
ended March 31, 2012 despite having $117,000 of pretax losses is due primarily to the allocation of earnings between different tax
jurisdictions.
Our effective tax rate may differ from the federal
statutory rate primarily due to state income taxes, research and development tax credits, share-based compensation from incentive stock options,
tax-exempt interest income, and differing tax rates in income-earning foreign jurisdictions.
27
Equity in Net Income of Unconsolidated
Affiliates
Three Months Ended |
Nine Months Ended |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In thousands) |
March 31, 2012 |
April 2, 2011 |
Change |
March 31, 2012 |
April 2, 2011 |
Change |
|||||||||||||||||||||
Equity in net
income of JCP |
$ | 4 | $ | 17 | $ | (13 | ) | $ | 83 | $ | 184 | $ | (101 | ) | |||||||||||||
Equity in net
income of PTI |
| | | | 467 | (467 | ) | ||||||||||||||||||||
Total |
$ | 4 | $ | 17 | $ | (13 | ) | $ | 83 | $ | 651 | $ | (568 | ) |
Equity in net income of unconsolidated affiliates consists
of our allocated portion of the net income of Jiyuan Crystal Photoelectric Frequency Technology Ltd. (JCP), an FCP manufacturing company
located in Science Park of Jiyuan City, Henan Province, China. JCP is a key manufacturing partner of PSE-TW, and PSE-TW has acquired a 49% equity
interest in JCP. For the three and nine month periods ended March 31, 2012, the Companys allocated portion of JCPs results was income of
$4,000 and $83,000, respectively, as compared with income of $17,000 and $184,000 for the three and nine month periods ended April 2, 2011,
respectively.
Equity in net income of unconsolidated affiliates for the
nine month period ended April 2, 2011 also includes our allocated portion of the net income of PTI prior to the acquisition of the rest of PTI at the
end of August 2010. Our allocated portion of PTIs results was income of $467,000 for July and August 2010.
Liquidity and Capital Resources
As of March 31, 2012, our principal sources of liquidity
included cash, cash equivalents and short-term and long-term investments of approximately $125.0 million as compared with $127.6 million on July 2,
2011.
Our investment in debt securities includes government
securities, corporate debt securities and mortgage-backed and asset-backed securities. Government securities include US treasury securities, US federal
agency securities, foreign government and agency securities, and US state and municipal bond obligations. Many of the municipal bonds are insured;
those that are not are nearly all AAA/Aaa rated. The corporate debt securities are all investment grade and nearly all are single A-rated or better.
The asset-backed securities are AAA/Aaa rated and are backed by auto loans, student loans, credit card balances and residential or commercial
mortgages. Most of our mortgage-backed securities are collateralized by prime residential mortgages issued by government agencies including FNMA, FHLMC
and FHLB. Those issued by banks are AAA-rated. At March 31, 2012, unrealized gains on marketable
securities net of taxes were $338,000. When assessing marketable securities for other than temporary declines in value, we consider a number of
factors. Our analyses of the severity and duration of price declines, portfolio manager reports, economic forecasts and the specific circumstances of
issuers indicate that it is reasonable to expect marketable securities with unrealized losses at March 31, 2012 to recover in
fair value up to our cost bases within a reasonable period of time. We have the ability and intent to hold investments with unrealized losses until
maturity, when the obligors are required to redeem them at full face value or par, and we believe the obligors have the financial resources to redeem
the debt securities. Accordingly, we do not consider our investments to be other than temporarily impaired at March 31, 2012.
As of March 31, 2012, $19.8 million was classified as cash
and cash equivalents compared with $30.0 million as of July 2, 2011. The maturities of our short term investments are staggered throughout the year so
that cash requirements are met. Because we are a fabless semiconductor manufacturer, we have lower capital equipment requirements than other
semiconductor manufacturers who own wafer fabrication facilities. For the nine month period ended March 31, 2012, we spent approximately $5.1 million
on property and equipment compared to $9.7 million for the nine month period ended April 2, 2011. We generated approximately $2.6 million of interest
income for the nine month period ended March 31, 2012, as compared with $3.4 million of interest income for the nine month period ended April 2, 2011.
In the longer term we may generate less interest income if our total invested balance decreases and these decreases are not offset by rising interest
rates or increased cash generated from operations or other sources.
Our net cash provided by operating activities of $20.0
million for the nine months ended March 31, 2012 was primarily the result of non-cash expenses of $9.0 million in depreciation and amortization, $2.8
million of share-based compensation expense, $382,000 of tax benefit from stock option transactions and
28
$300,000 of receivables write off, partially offset by a $556,000 gain on sale of investments in marketable securities and $83,000 equity in net income of unconsolidated affiliates. Additional contributions to cash included decreases of $8.2 million in accounts receivable and $4.6 million in inventory. Such contributions were partially offset by a net loss of $157,000, increases of $2.0 million in prepaid expenses and other current assets, and decreases of $451,000 in accounts payable and $2.4 million in accrued liabilities. Our net cash provided by operating activities was $14.8 million in the nine months ended April 2, 2011.
Our cash used in investing activities of $17.6 million for
the nine months ended March 31, 2012 was the result of additions to property and equipment of approximately $5.1 million, payment of PTI earnout and
purchase consideration of $8.1 million, and purchases of available for sale investments exceeding sales and maturities of available for sale
investments by approximately $7.3 million, partially offset by a $2.9 million decrease in restricted cash balances. Our cash used in investing
activities was $26.9 million for the nine months ended April 2, 2011.
Our cash used in financing activities for the nine months
ended March 31, 2012 of $13.2 million was primarily the result of using $9.2 million for repurchase of our common stock and repayments of short-term
debt exceeding draws by $4.5 million, partially offset by $525,000 of proceeds from common stock issuance under stock plans. Our cash provided by
financing activities was $5.1 million for the nine months ended April 2, 2011.
A portion of our cash may be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business,
we may evaluate potential acquisitions of such businesses, products or technologies.
Our long-term future capital requirements will depend on
many factors, including our level of revenues, the timing and extent of spending to support our product development efforts, the expansion of sales and
marketing efforts, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity, and the continuing
market acceptance of our products. We could be required, or could elect, to seek additional funding through public or private equity or debt financing
and additional funds may not be available on terms acceptable to us or at all. We believe our current cash balances and cash flows generated by
operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures.
Contractual Obligations and Commitments
Our contractual obligations and commitments at March 31,
2012 are as follows:
Payments Due by Period |
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(In thousands) |
Total |
Less than 1 Year |
1 3 Years |
3 5 Years |
Thereafter |
||||||||||||||||||
Short-term
debt |
$ | 3,840 | $ | 3,840 | $ | | $ | | $ | | |||||||||||||
Operating
leases |
2,981 | 1,641 | 1,299 | 41 | | ||||||||||||||||||
Capital
equipment purchase obligations |
1,319 | 1,319 | | | | ||||||||||||||||||
Yangzhou
capital injection |
15,000 | 7,000 | 8,000 | | | ||||||||||||||||||
Total
obligations |
$ | 23,140 | $ | 13,800 | $ | 9,299 | $ | 41 | $ | |
We lease certain facilities under operating leases with
termination dates on or before December 2013. Generally, these leases have multiple options to extend for a period of years upon termination of the
original lease term or previously exercised option to extend.
We have no purchase obligations other than routine purchase
orders and the capital equipment purchase commitments shown in the table as of March 31, 2012.
We previously entered into an R&D Agreement for our
Yangzhou facility that would require the capital injections shown in the table. We are currently negotiating with the Yangzhou government to terminate
the R&D Agreement. If the termination is successful, the additional capital injections would not be made.
29
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, defined by
Regulation S-K Item 303(a)(4).
Critical Accounting Policies
Our condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such statements requires us to
make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets
and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to
be reasonable given the circumstances. Actual results may vary from our estimates.
The methods, estimates and judgments we use in applying our
most critical accounting policies have a significant impact on the results we reports in our financial statements. The Securities and Exchange
Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and
results of operations, and require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates
of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include revenue recognition and accounts
receivable allowances, which impact the recording of revenues; valuation of inventories, which impacts costs of goods sold and gross margins;
accounting for income taxes, which impacts the income tax provision and net income; impairment of goodwill, other intangible assets and investments,
which impacts the goodwill, intangible asset and investment accounts; and stock-based compensation, which impacts costs of goods sold and operating
expenses. These policies and the estimates and judgments involved are discussed further below.
REVENUE RECOGNITION. We recognize revenue from
the sale of our products upon shipment, provided title and risk of loss has passed to the customer, the price is fixed or determinable and collection
of the revenue is reasonably assured. A provision for estimated future returns and other charges against revenue is recorded at the time of shipment.
For the nine months ended March 31, 2012, the majority of our revenues were from sales to distributors.
We sell products to large, domestic distributors at the
price listed in our price book for that distributor. We recognize revenue at the time of shipment. At the time of sale we record a sales reserve for
ship from stock and debits (SSDs), stock rotations, return material authorizations (RMAs), authorized price protection
programs, and any special programs approved by management. The sales reserve is offset against revenues, which then leads to the net revenue amount
reported.
The market price for our products can be significantly
different from the book price at which the product was sold to the distributor. When the market price, as compared with the book price, of a particular
sales opportunity from the distributor to their customer would result in low or negative margins to the distributor, a ship from stock and debit is
negotiated with the distributor. SSD history is analyzed and used to develop SSD rates that form the basis of the SSD sales reserve recorded each
period. We capture these historical SSD rates from our historical records to estimate the ultimate net sales price to the distributor.
Our distribution agreements provide for semi-annual stock
rotation privileges of typically 10% of net sales for the previous three-month period. The contractual stock rotation applies only to shipments at book
price. Asian distributors typically buy our product at less than book price and therefore are not entitled to the 10% stock rotation privilege. In
order to provide for routine inventory refreshing, for our benefit as well as theirs, we grant Asian distributors stock rotation privileges between 1%
and 5% even though we are not contractually obligated to do so. Each month a sales reserve is recorded for the estimated stock rotation privilege
anticipated to be utilized by the distributors that month. This reserve is the sum of product of each distributors net sales for the month and
their stock rotation percentage.
From time to time, customers may request to return parts
for various reasons including the customers belief that the parts are not performing to specification. Many such return requests are the result
of customers incorrectly using the parts, not because the parts are defective. These requests are reviewed by management and when approved result in a
RMA being established. We are only obligated to accept returns of defective parts. For customer convenience, we may approve a particular return request
even though we are not obligated to do so. Each month a sales reserve is recorded for the approved RMAs that have not yet been returned. We do not keep
a general warranty reserve because historically valid warranty
30
returns, which are the result of a part not meeting specifications or being non-functional, have been immaterial and parts can frequently be re-sold to other customers for use in other applications.
Price protection is granted solely at the discretion of our
management. The purpose of price protection is to reduce the distributors cost of inventory as market prices fall, thus reducing SSD rates. Our
sales management prepares price protection proposals for individual products located at individual distributors. Our general management reviews these
proposals and if a particular price protection arrangement is approved, the dollar impact will be estimated based on the book price reduction per unit
for the products approved and the number of units of those products in the distributors inventory. A sales reserve is then recorded in that
period for the estimated amount.
At the discretion of our management, we may offer rebates
on specific products sold to specific end customers. The purpose of the rebates is to allow for pricing adjustments for large programs without
affecting the pricing we charge our distributor customers. The rebate is recorded at the time of shipment.
Customers are typically granted payment terms of between 30
and 60 days and they generally pay within those terms. Relatively few customers have been granted terms with cash discounts. Distributors are invoiced
for shipments at book price. When they pay those invoices, they claim debits for SSDs, stock rotations, cash discounts, RMAs and price protection when
appropriate. Once claimed, these debits are then processed against the approvals.
The revenue we record for sales to our distributors is net
of estimated provisions for these programs. When determining this net revenue, we must make significant judgments and estimates. Our estimates are
based on historical experience rates, inventory levels in the distribution channel, current trends and other related factors. However, because of the
inherent nature of estimates, there is a risk that there could be significant differences between actual amounts and our estimates. Our financial
condition and operating results depend on our ability to make reliable estimates and management believes such estimates are
reasonable.
PRODUCT WARRANTY. We offer a standard one-year
product replacement warranty. In the past we have not had to accrue for a general warranty reserve, but assess the level and materiality of RMAs and
determines whether it is appropriate to accrue for estimated returns of defective products at the time revenue is recognized. On occasion, we may
determine to accept product returns beyond the standard one-year warranty period. In those instances, we accrue for the estimated cost at the time the
decision to accept the return is made. As a consequence of our standardized manufacturing processes and product testing procedures, returns of
defective product are infrequent and the quantities have not been significant. Accordingly, historical warranty costs have not been
material.
SHIPPING COSTS. Shipping costs are charged to
cost of revenues as incurred.
INVENTORIES. Inventories are recorded at the
lower of standard cost (which generally approximates actual cost on a first-in, first-out basis) or market value. We adjust the carrying value of
inventory for excess and obsolete inventory based on inventory age, shipment history and our forecast of demand over a specific future period of time.
Raw material inventory is considered obsolete and reserved if it has not moved in 365 days. We review our assembled devices for excess and write them
off if the quantity of assembled devices in inventory is in excess of the greater of the quantity shipped in the previous twelve months, the quantity
in backlog or the quantity forecasted to be shipped in the following twelve months. In certain circumstances, we will determine, based on expected
usage or other factors, that inventory considered obsolete by these guidelines should not be written off. We occasionally determine that the last
twelve months sales levels will not continue and reserve inventory in line with the quantity forecasted. The semiconductor markets that we serve
are volatile and actual results may vary from our forecast or other assumptions, potentially impacting our assessment of excess and obsolete inventory
and resulting in material effects on our gross margin.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS. We
perform an impairment review of our goodwill and intangible assets at least annually and more frequently if certain indicators of impairment are
present. In the event that management determines that the value of goodwill or intangible assets has become impaired, we will record an expense for the
amount impaired during the fiscal quarter in which the determination is made. Based on the results of our most recent impairment review, we determined
that no impairment of our goodwill and intangible assets existed as of July 2, 2011. However, future impairment reviews could result in a charge to
earnings.
31
INVESTMENTS. We have made investments
including loans, bridge loans convertible to equity, or asset purchases as well as direct equity investments. These loans and investments are made with
strategic intentions and have been in privately held technology companies, which by their nature are high risk. These investments are included in other
assets in the balance sheet and are carried at the lower of cost, or market if the investment has experienced an other-than-temporary decline in value.
We monitor these investments quarterly and make appropriate reductions in carrying value if a decline in value is deemed to be other than
temporary.
DEFERRED TAX ASSETS. Our deferred income tax
assets represent temporary differences between the financial statement carrying amount and the tax basis of existing assets and liabilities that will
result in deductible amounts in future years, including net operating loss carryforwards. Based on estimates, the carrying value of our net deferred
tax assets assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions. Our
judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. If,
in the future, we experience losses for a sustained period of time, we may not be able to conclude that it is more likely than not that we will be able
to generate sufficient future taxable income to realize our deferred tax assets. If this occurs, we may be required to increase the valuation allowance
against the deferred tax assets resulting in additional income tax expense.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
At March 31, 2012 our investment portfolio consisted of
investment-grade fixed income securities, excluding those classified as cash equivalents, of $105.2 million. These securities are subject to interest
rate risk and will decline in value if market interest rates increase. However, we do not believe that such a decrease would have a material effect on
our results of operations over the next fiscal year. Due to the short duration and conservative nature of these instruments, we do not believe that we
have a material exposure to interest rate risk.
When the general economy weakens
significantly, as it did in 2008 and 2009, the credit profile, financial strength and growth prospects of certain issuers of interest-bearing
securities held in our investment portfolios may deteriorate, and our interest-bearing securities may lose value either temporarily or other than
temporarily. We may implement investment strategies of different types with varying duration and risk/return trade-offs that do not perform well. At
March 31, 2012, we held a significant portion of our corporate cash in diversified portfolios of investment-grade marketable
securities, mortgage- and asset-backed securities, and other securities that had unrealized gains net of tax of $338,000. Although we consider
unrealized gains and losses on individual securities to be temporary, there is a risk that we may incur other-than-temporary impairment charges if
credit and equity markets are unstable and adversely impact securities issuers.
We transact business in various non-U.S. currencies,
primarily the New Taiwan Dollar, the Hong Kong Dollar and the Chinese Renminbi. We are exposed to fluctuations in foreign currency exchange rates on
accounts receivable and accounts payable from sales and purchases in these foreign currencies and the net monetary assets and liabilities of our
foreign subsidiaries. A hypothetical 10% favorable or unfavorable change in foreign currency exchange rates would have a material impact on our
financial position and results of operations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that
information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
32
Our management, with the participation of our principal
executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures. Based on such evaluation,
our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of March
31, 2012.
Changes in Internal Control over Financial
Reporting
There were no changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2012 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A: Risk Factors
This quarterly report on Form 10-Q contains forward-looking
statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking statement
as a result of various factors, including those set forth below. The listing below includes any material changes to and supersedes the description of
the risk factors affecting our business previously disclosed in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended July 2, 2011.
FACTORS THAT MAY AFFECT OPERATING
RESULTS‘
In the past, our operating results have varied
significantly and are likely to fluctuate in the future, making it difficult to predict our future operating results.
We continue to face a challenging business environment and
limited visibility on end-market demands.
Wide varieties of factors affect our operating results,
many of which are beyond our control. These factors and risks include, but are not limited to, the following:
|
changes in the quantity of our products sold; |
|
changes in the average selling price of our products; |
|
general conditions in the domestic or global economy and in the semiconductor industry; |
|
changes in our product mix; |
|
a change in the gross margins of our products; |
|
the operating results of the FCP product line, which normally has a lower profit margin than IC products; |
|
expenses incurred in obtaining, enforcing, and defending intellectual property rights; |
|
the timing of new product introductions and announcements by us and by our competitors; |
|
customer acceptance of new products introduced by us; |
|
delay or decline in orders received from distributors; |
|
growth or reduction in the size of the market for interface ICs; |
|
the availability of manufacturing capacity with our wafer suppliers, especially to support sales growth and new products; |
|
changes in manufacturing costs; |
|
fluctuations in manufacturing yields; |
|
disqualification by our customers for quality or performance related issues; |
|
the ability of customers to pay us; |
|
increased research and development expenses associated with product introductions or process changes; |
|
the impairment of our goodwill, intangible assets or other long-lived assets; and |
|
fluctuations in our effective tax rate from quarter to quarter. |
All of these factors are difficult to forecast and could
seriously harm our operating results. Our expense levels are based in part on our expectations regarding future sales and are largely fixed in the
short term. Therefore, we may be unable to reduce our expenses fast enough to compensate for any unexpected
33
shortfall in sales. Any significant decline in demand
relative to our expectations or any material delay of customer orders could harm our operating results. In addition, if our operating results in future
quarters fall below public market analysts and investors expectations, the market price of our common stock would likely
decrease.
The demand for our products depends on the growth of our end
users markets.
Our continued success depends in large part on the
continued growth of markets for the products into which our semiconductor and frequency control products are incorporated. These markets include the
following:
|
computers and computer related peripherals; |
|
data communications and telecommunications equipment; |
|
electronic commerce and the Internet; and |
|
consumer electronics equipment. |
Any decline in the demand for products in these markets
could seriously harm our business, financial condition and operating results. These markets have also historically experienced significant fluctuations
in demand. We may also be seriously harmed by slower growth in the other markets in which we sell our products.
Customer demands for our products are volatile and difficult
to predict.
Our customers continuously adjust their inventories in
response to changes in end market demand for their products and the availability of semiconductor components. This results in frequent changes in
demand for our products. The volatility of customer demand limits our ability to predict future levels of sales and profitability. The supply of
semiconductors can quickly and unexpectedly match or exceed demand because end customer demand can change very quickly. Also, semiconductor suppliers
can rapidly increase production output. This can lead to a sudden oversupply situation and a subsequent reduction in order rates and revenues as
customers adjust their inventories to true demand rates. A rapid and sudden decline in customer demand for our products can result in excess quantities
of certain of our products relative to demand. In this event, our operating results might be adversely affected as a result of charges to reduce the
carrying value of our inventory to the estimated demand level or market price.
We may have difficulty accurately predicting revenues for
future periods.
Our expense levels are based in part on anticipated future
revenue levels, which can be difficult to predict. Our business is characterized by short-term orders and shipment schedules. We do not have long-term
purchase agreements with any of our customers. Customers can typically cancel or reschedule their orders without significant penalty. We typically plan
production and inventory levels based on forecasts of customer demand generated with input from customers and sales representatives. Customer demand is
highly unpredictable and can fluctuate substantially. If customer demand falls significantly below anticipated levels, our gross profit would be
reduced.
The markets for our products are characterized by
rapidly changing technology, and our financial results could be harmed if we do not successfully develop and implement new manufacturing technologies
or develop, introduce and sell new products.
The markets for our products are characterized by rapidly
changing technology, frequent new product introductions and declining selling prices over product life cycles. We currently offer a comprehensive
portfolio of silicon and quartz based products. Our future success depends upon the timely completion and introduction of new products, across all our
product lines, at competitive price and performance levels. The success of new products depends on a variety of factors, including the
following:
|
product performance and functionality; |
|
customer acceptance; |
|
competitive cost structure and pricing; |
|
successful and timely completion of product development; |
|
sufficient wafer fabrication capacity; and |
|
achievement of acceptable manufacturing yields by our wafer suppliers. |
34
We may also experience delays, difficulty in procuring
adequate fabrication capacity for the development and manufacture of new products, or other difficulties in achieving volume production of these
products. Even relatively minor errors may significantly affect the development and manufacture of new products. If we fail to complete and introduce
new products in a timely manner at competitive price and performance levels, our business would be significantly harmed.
If we do not develop products that our customers and
end-users design into their products, or if their products do not sell successfully, our business and operating results would be
harmed.
We have relied in the past and continue to rely upon our
relationships with our customers and end-users for insights into product development strategies for emerging system requirements. We generally
incorporate new products into a customers or end-users product or system at the design stage. However, these design efforts, which can
often require significant expenditures by us, may precede product sales, if any, by a year or more. Moreover, the value to us of any design win will
depend in large part on the ultimate success of the customer or end-users product and on the extent to which the systems design
accommodates components manufactured by our competitors. If we fail to achieve design wins or if the design wins fail to result in significant future
revenues, our operating results would be harmed. If we have problems developing or maintaining our relationships with our customers and end-users, our
ability to develop well-accepted new products may be impaired.
Intense competition in the semiconductor industry may
reduce the demand for our products or the prices of our products, which could reduce our revenues and gross profits.
The semiconductor industry is intensely competitive. Our
competitors include Analog Devices, Cypress Semiconductor, Fairchild Semiconductor, Hitachi, Integrated Device Technology, Maxim Integrated Products,
Motorola, On Semiconductor, NXP, Parade Technologies, PLX Technology, Silicon Laboratories, STMicroelectronics, Texas Instruments, and Toshiba. Most of
those competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and
longer-standing customer relationships than we do. We also compete with other major or emerging companies that sell products to certain segments of our
markets. Competitors with greater financial resources or broader product lines may have a greater ability to sustain price reductions in our primary
markets in order to gain or maintain market share.
We believe that our future success will depend on our
ability to continue to improve and develop our products and processes. Unlike us, many of our competitors maintain internal manufacturing capacity for
the fabrication and assembly of semiconductor products. This ability may provide them with more reliable manufacturing capability, shorter development
and manufacturing cycles and time-to-market advantages. In addition, competitors with their own wafer fabrication facilities that are capable of
producing products with the same design geometries as ours may be able to manufacture and sell competitive products at lower prices. Any introduction
of products by our competitors that are manufactured with improved process technology could seriously harm our business. As is typical in the
semiconductor industry, our competitors have developed and marketed products that function similarly or identically to ours. If our products do not
achieve performance, price, size or other advantages over products offered by our competitors, we might lose market share. Competitive pressures could
also reduce market acceptance of our products, reduce our prices and increase our expenses.
We also face competition from the makers of ASICs and other
system devices. These devices may include interface logic functions that may eliminate the need or sharply reduce the demand for our products in
particular applications.
Downturns in the semiconductor industry, rapidly
changing technology, accelerated selling price erosion and evolving industry standards can harm our operating results.
The semiconductor industry has historically been cyclical
and periodically subject to significant economic downturns, characterized by diminished product demand, accelerated erosion of selling prices and
overcapacity, as well as rapidly changing technology and evolving industry standards. In the future, we may experience substantial period-to-period
fluctuations in our business and operating results due to general semiconductor industry conditions, overall economic conditions or other factors. Our
business is
35
also subject to the risks associated with the effects of
legislation and regulations relating to the import or export of semiconductor products.
Our earnings are subject to substantial quarterly and
annual fluctuations and to adverse economic conditions and market downturns
Our revenues and earnings have fluctuated significantly in
the past and may fluctuate significantly in the future. General economic or other conditions could cause a downturn in the market for our products or
technology. The 2008-2009 financial disruption affecting the banking system, investment banks, insurance companies and financial markets resulted in a
tightening in the credit markets, a low level of liquidity in many financial markets and extreme volatility in fixed income, credit and equity markets.
In 2011 and 2012, concerns over European sovereign debt and the ability of countries to borrow funds have again raised questions about the loan portfolios of
large international banks, and low economic growth rates have increased the possibility of an economic downturn. In addition to the potential impact of
such disruptions on our marketable securities portfolio, there could be a number of follow-on effects on our business that could also adversely affect
our operating results. Disruptions may result in the insolvency of key suppliers resulting in product delays; the inability of our customers to obtain
credit to finance purchases of our products and/or customer insolvencies that cause our customers to change delivery schedules, cancel or reduce
orders; a slowdown in global economies which could result in lower end-user demand for our products; and increased impairments of our investments. Net
investment income could vary from expectations depending on the gains or losses realized on the sale or exchange of securities, gains or losses from
equity method investments, and impairment charges related to marketable securities. Our cash and marketable securities investments represent
significant assets that may be subject to fluctuating or even negative returns depending upon interest rate movements and financial market conditions
in fixed income securities. Volatility in the financial markets and overall economic uncertainty increases the risk of substantial quarterly and annual
fluctuations in our earnings.
Our contracts with our wafer suppliers do not obligate
them to a minimum supply or set prices. Any inability or unwillingness of our wafer suppliers generally, and GlobalFoundries, Inc. and MagnaChip
Semiconductor, Inc. in particular, to meet our manufacturing requirements would delay our production and product shipments and harm our
business.
In recent years, we have purchased over 65% of our wafers
from MagnaChip and GlobalFoundries, with the balance coming from three to five other suppliers. Our reliance on independent wafer suppliers to
fabricate our wafers at their production facilities subjects us to possible risks such as:
|
lack of adequate capacity; |
|
lack of available manufactured products; |
|
lack of control over delivery schedules; and |
|
unanticipated changes in wafer prices. |
Any inability or unwillingness of our wafer suppliers
generally, and GlobalFoundries and MagnaChip in particular, to provide adequate quantities of finished wafers to meet our needs in a timely manner
would delay our production and product shipments and seriously harm our business. In March 2004, GlobalFoundries shut down one of their production
facilities that was used to manufacture our products. We transitioned the production of these products to different facilities. The transfer of
production of our products to other facilities subjects us to the above listed risks as well as potential yield or other production problems, which
could arise as a result of any change.
At present, we purchase wafers from our suppliers through
the issuance of purchase orders based on our rolling three-month forecasts. The purchase orders are subject to acceptance by each wafer supplier. We do
not have long-term supply contracts that obligate our suppliers to a minimum supply or set prices. We also depend upon our wafer suppliers to
participate in process improvement efforts, such as the transition to finer geometries. If our suppliers are unable or unwilling to do so, our
development and introduction of new products could be delayed. Furthermore, sudden shortages of raw materials or production capacity constraints can
lead wafer suppliers to allocate available capacity to customers other than us or for the suppliers internal uses, interrupting our ability to
meet our product delivery obligations. Any significant interruption in our wafer supply would seriously harm our operating results and our customer
relations. Our reliance on independent wafer suppliers may also lengthen the development cycle for our products, providing time-to-market advantages to
our competitors that have in-house fabrication capacity.
36
In the event that our suppliers are unable or unwilling to
manufacture our key products in required volumes, we will have to identify and qualify additional wafer foundries. The qualification process can take
up to three and nine months or longer. Furthermore, we are unable to predict whether additional wafer foundries will become available to us or will be
in a position to satisfy any of our requirements on a timely basis.
We depend on single or limited source assembly
subcontractors with whom we do not have written contracts. Any inability or unwillingness of our assembly subcontractors to meet our assembly
requirements would delay our product shipments and harm our business.
We primarily rely on foreign subcontractors for the
assembly and packaging of our products and, to a lesser extent, for the testing of finished products. Some of these subcontractors are our single
source supplier for some of our packages. In addition, changes in our or a subcontractors business could cause us to become materially dependent
on a single subcontractor. We have from time to time experienced difficulties in the timeliness and quality of product deliveries from our
subcontractors and may experience similar or more severe difficulties in the future. We generally purchase these single or limited source components or
services pursuant to purchase orders and have no guaranteed arrangements with these subcontractors. These subcontractors could cease to meet our
requirements for components or services, or there could be a significant disruption in supplies from them, or degradation in the quality of components
or services supplied by them. Any circumstance that would require us to qualify alternative supply sources could delay shipments, result in the loss of
customers and limit or reduce our revenues.
The complexity of our products makes us susceptible to
manufacturing problems, which could increase our costs and delay our product shipments.
The manufacture and assembly of our products is highly
complex and sensitive to a wide variety of factors, including:
|
the level of contaminants in the manufacturing environment; |
|
impurities in the materials used; and |
|
the performance of manufacturing personnel and production equipment. |
In a typical semiconductor manufacturing process, silicon
wafers produced by a foundry are cut into individual die. These die are assembled into individual packages and tested for performance. Our wafer
fabrication suppliers have from time to time experienced lower than anticipated yields of suitable die. In the event of such decreased yields, we would
incur additional costs to sort wafers, an increase in average cost per usable die and an increase in the time to market or availability of our
products. These conditions could reduce our net revenues and gross margin and harm our customer relations.
We rely on independent manufacturers who may not be able
to meet our manufacturing requirements.
We do not manufacture any of our IC products. Therefore, we
are referred to in the semiconductor industry as a fabless producer. We depend upon third party foundries to produce wafers and
subcontractors to manufacture IC products that meet our specifications. We currently have third party manufacturers located in China, Taiwan,
Singapore, Malaysia, India, Korea and Japan that can produce products which meet our needs. However, as the industry continues to progress to smaller
manufacturing and design geometries, the complexities of producing semiconductors will increase. Decreasing geometries may introduce new problems and
delays that may affect product development and deliveries. Due to the nature of the industry and our status as a fabless IC semiconductor
company, we could encounter fabrication-related problems that may affect the availability of our products, delay our shipments or increase our costs.
We are directly involved in the manufacture of our FCP products. As technologies continue to evolve there may be manufacturing related problems that
affect our FCP products. In addition, we have opened up a new FCP facility located in the Jinan Development Zone in Shandong Province, China, which
also involves the uncertainties of staffing and operating a new facility in a country where we have no previous operating experience.
In March 2011, an earthquake and tsunami occurred off the
northeast coast of Japan which has disrupted the global supply chain for core materials manufactured in Japan that are incorporated in our products
and
37
manufacturing equipment. While we believe our supply
requirements are relatively secure, we are closely monitoring the effect of the events in Japan on end demand patterns and inventory levels throughout
the supply chain. Such supply chain disruptions stemming from the occurrences in Japan could negatively impact our ability to procure an adequate
supply to fulfill our customers demand for our products.
Only a small number of our semiconductor products are
currently manufactured by more than one supplier. We place our orders on a purchase order basis and do not have a long term purchase agreement with any
of our existing suppliers. In the event that a supplier was unable or unwilling to continue to manufacture our products in the required volumes, we
would have to identify and qualify a substitute supplier. Introducing new products or transferring existing products to a new third party manufacturer
or process may result in unforeseen product specification and operating problems. These problems may affect our shipments and may be costly to correct.
Silicon fabrication capacity may also change, or the costs per silicon wafer may increase. Manufacturing-related problems may have a material adverse
effect on our business.
Our acquisitions may not be successful.
Our previous and potential future acquisitions could result
in the following:
|
large one-time write-offs; |
|
the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner; |
|
the challenges in achieving strategic objectives, cost savings, and other benefits from acquisitions as anticipated; |
|
the risk of diverting the attention of senior management from other business concerns; |
|
risks of entering geographic and business markets in which we have no or limited prior experience and potential loss of key employees of acquired organizations; |
|
the risk that our markets do not evolve as anticipated and that the technologies and capabilities acquired do not prove to be those needed to be successful in those markets; |
|
potentially dilutive issuances of equity securities; |
|
excessive usages of cash; |
|
the incurrence of debt and contingent liabilities or amortization expenses related to intangible assets; |
|
difficulties in the assimilation of operations, personnel, technologies, products and the information systems of the acquired companies; and |
|
difficulties in integrating or expanding information technology systems and other financial or business processes that may lead to financial reporting issues. |
In the first quarter of fiscal 2011, we completed the
acquisition of outstanding PTI shares not owned by us, as described in Note 6 of Notes to Condensed Consolidated Financial Statements. We are in the
process of integrating PTI as a wholly-owned subsidiary and may experience one or more of the risks summarized above in the process of completing that
integration.
As part of our business strategy, we may seek acquisition
prospects that would complement our existing product offerings, improve our market coverage or enhance our technological capabilities. In addition,
from time to time, we invest in other companies, without actually acquiring them, and such investments involve many of the same risks as are involved
with acquisitions.
The trading price of our common stock and our operating
results are likely to fluctuate substantially in the future.
The trading price of our common stock has been and is
likely to continue to be highly volatile. Our stock price could fluctuate widely in response to factors some of which are not within our control,
including:
|
general conditions in the semiconductor and electronic systems industries; |
|
quarter-to-quarter variations in operating results; |
|
announcements of technological innovations or new products by us or our competitors; |
|
changes in earnings estimates by analysts; and |
|
price and volume fluctuations in the overall stock market, which have particularly affected the market prices of many high technology companies. |
38
Implementation of new Financial Accounting Standards
Board (FASB) rules and the issuance of new laws or other accounting regulations, or reinterpretation of existing laws or regulations, could materially
impact our business or stated results.
In general, from time to time, the government, courts and
the financial accounting boards may issue new laws or accounting regulations, or modify or reinterpret existing ones. There may be future changes in
laws, interpretations or regulations that would affect our financial results or the way in which we present them. Additionally, changes in the laws or
regulations could have adverse effects on hiring and many other aspects of our business that would affect our ability to compete, both nationally and
internationally.
In the past, we and our independent registered public
accounting firm determined that we had material weaknesses in our internal control over financial reporting. There can be no assurance that a material
weakness will not arise in the future. As a result, current and potential stockholders could lose confidence in our financial reporting, which would
harm our business and the trading price of our stock.
Under SEC rules, we are required to maintain, and evaluate
the effectiveness of, our internal control over financial reporting and disclosure controls and procedures. In our annual reports on Form 10-K for the
years ended July 3, 2010, June 27, 2009, June 30, 2007 and July 2, 2005, we reported material weaknesses in our internal control over financial
reporting. We have since remediated these deficiencies and continue to spend a significant amount of time and resources to ensure compliance with
Section 404 of the Sarbanes-Oxley Act of 2002. However, we have and will continue to evolve our business in a changing marketplace. In addition, we are
expanding our overseas operations, and as we grow in these locations, we may have difficulty in recruiting and retaining a complement of personnel with
an appropriate level of accounting knowledge, experience and training in the application of U.S. generally accepted accounting principles commensurate
with our financial reporting requirements. Due to these factors, there can be no assurance that other material weaknesses or significant deficiencies
will not arise in the future. Should we or our independent registered public accounting firm determine in future periods that we have a material
weakness in our internal control over financial reporting, the reliability of our financial reports may be impacted, and investors could lose
confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price and we could suffer other
materially adverse consequences.
Our finance department has undergone, and continues to
undergo, significant changes.
In the past three years, we have undergone significant
turnover of personnel in the finance department, including in significant positions. During fiscal 2010, we hired a new Chief Financial Officer and
Corporate Controller. During fiscal 2011, we hired a new Accounting Manager and outsourced internal auditing activities to an independent consultant.
There can be no assurance that these changes will improve our finance functions, or that the finance personnel turnover we have experienced will not
continue. In either event, the reliability of our financial reports may be impacted, and investors may lose confidence in the accuracy or completeness
of our financial reports, which could have an adverse impact on our stock price.
Changes to environmental laws and regulations applicable
to manufacturers of electrical and electronic equipment are causing us to redesign our products, and may increase our costs and expose us to
liability.
The implementation of new environmental regulatory legal
requirements, such as lead free initiatives, may affect our product designs and manufacturing processes. The impact of such regulations on our product
designs and manufacturing processes could affect the timing of compliant product introductions as well as their commercial success. Redesigning our
products to comply with new regulations may result in increased research and development and manufacturing and quality control costs. In addition, the
products we manufacture that comply with new regulatory standards may not perform as well as our current products. Moreover, if we are unable to
successfully and timely redesign existing products and introduce new products that meet new standards set by environmental regulation and our
customers, sales of our products could decline, which could materially adversely affect our business, financial condition and results of
operations.
39
We compete with others to attract and retain key
personnel, and any loss of or inability to attract key personnel would harm us.
To a greater degree than non-technology companies, our
future success will depend on the continued contributions of our executive officers and other key management and technical personnel. None of these
individuals has an employment agreement with us and each one would be difficult to replace. We do not maintain any key person life insurance policies
on any of these individuals. The loss of the services of one or more of our executive officers or key personnel or the inability to continue to attract
qualified personnel could delay product development cycles or otherwise harm our business, financial condition and results of
operations.
Our future success also will depend on our ability to
attract and retain qualified technical, marketing and management personnel, particularly highly skilled design, process and test engineers, for whom
competition can be intense. During strong business cycles, we expect to experience difficulty in filling our needs for qualified engineers and other
personnel.
Our limited ability to protect our intellectual property
and proprietary rights could harm our competitive position.
Our success depends in part on our ability to obtain
patents and licenses and preserve other intellectual property rights covering our products and development and testing tools. In the United States, we
currently hold 106 patents covering certain aspects of our product designs and have seven additional patent applications pending. Copyrights, mask work
protection, trade secrets and confidential technological know-how are also key to our business. Additional patents may not be issued to us or our
patents or other intellectual property may not provide meaningful protection. We may be subject to, or initiate, interference proceedings in the U.S.
Patent and Trademark Office. These proceedings can consume significant financial and management resources. We may become involved in litigation
relating to alleged infringement by us of others patents or other intellectual property rights. This type of litigation is frequently expensive
to both the winning party and the losing party and takes up significant amounts of managements time and attention. In addition, if we lose such a
lawsuit, a court could require us to pay substantial damages and/or royalties or prohibit us from using essential technologies. For these and other
reasons, this type of litigation could seriously harm our business. Also, although we may seek to obtain a license under a third partys
intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on
reasonable terms or at all.
Because it is important to our success that we are able to
prevent competitors from copying our innovations, we intend to continue to seek patent, trade secret and mask work protection for our technologies. The
process of seeking patent protection can be long and expensive, and we cannot be certain that any currently pending or future applications will
actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection
or any commercial advantage to us. Furthermore, others may develop technologies that are similar or superior to our technology or design around the
patents we own.
We also rely on trade secret protection for our technology,
in part through confidentiality agreements with our employees, consultants and third parties. However, these parties may breach these agreements. In
addition, the laws of some territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the
same extent as do the laws of the United States.
Our independent foundries use a process technology that may
include technology we helped develop with them, that may generally be used by those foundries to produce their own products or to manufacture products
for other companies, including our competitors. In addition, we may not have the right to implement key process technologies used to manufacture some
of our products with foundries other than our present foundries.
We may not provide adequate allowances for exchanges,
returns and concessions.
We recognize revenue from the sale of products when
shipped, less an allowance based on future authorized and historical patterns of returns, price protection, exchanges and other concessions. We believe
our methodology and approach are appropriate. However, if the actual amounts we incur exceed the allowances, it could decrease our revenue and
corresponding gross profit.
40
We are subject to risks related to
taxes.
A number of factors, including unanticipated changes in the
mix of earnings in countries with differing statutory tax rates or by unexpected changes in existing tax laws or our interpretation of them, could
unfavorably affect our future effective tax rate. In the event our management determines it is no longer more likely than not that we will realize a
portion of our deferred tax assets we will be required to increase our valuation allowance which will result in an increase in our effective tax rate.
Furthermore, our tax returns are subject to examination in all the jurisdictions in which we operate which subjects us to potential increases in our
tax liabilities. All of these factors could have an adverse effect on our financial condition and results of operations.
A large portion of our revenues is derived from sales to
a few customers, who may cease purchasing from us at any time.
A relatively small number of customers have accounted for a
significant portion of our net revenues in each of the past several fiscal years. In general we expect this to continue for the foreseeable future. We
had two direct customers who each accounted for more than 10% of net revenues during the nine months ended March 31, 2012. As a percentage of net
revenues, sales to our top five direct customers during the nine months ended March 31, 2012 totaled 47%.
We do not have long-term sales agreements with any of our
customers. Our customers are not subject to minimum purchase requirements, may reduce or delay orders periodically due to excess inventory and may
discontinue purchasing our products at any time. Our distributors typically offer competing products in addition to ours. For the nine months ended
March 31, 2012 and the fiscal year ended July 2, 2011, sales to our distributors were approximately 67% and 69% of net revenues, respectively, as
compared to approximately 62% of net revenues in the fiscal year ended July 3, 2010 and approximately 56% of net revenues in the fiscal year ended June
27, 2009. The increase in the percentage of sales to our distributors as compared with the prior periods was due to growth in sales to Asian
distributor customers. The loss of one or more significant customers, or the decision by a significant distributor to carry additional product lines of
our competitors could decrease our revenues.
Almost all of our wafer suppliers and assembly
subcontractors are located in Southeast Asia, as are our FCP manufacturing facilities, which exposes us to the problems associated with international
operations.
Risks associated with international business operations
include the following:
|
disruptions or delays in shipments; |
|
changes in economic conditions in the countries where these subcontractors are located; |
|
currency fluctuations; |
|
changes in political conditions; |
|
potentially reduced protection for intellectual property; |
|
foreign governmental regulations; |
|
import and export controls; and |
|
changes in tax laws, tariffs and freight rates. |
Although most of our products are sold in U.S. dollars, we
incur a significant amount of certain types of expenses, such as payroll, utilities, capital equipment purchases and taxes in local currencies. The
impact of currency exchange rate movements could harm our results and financial condition. In addition, changes in tariff and import regulations and in
U.S. and non-U.S. monetary policies could harm our results and financial condition by increasing our expenses and reducing our revenue. Varying tax
rates in different jurisdictions could harm our results of operations and financial condition by increasing our overall tax rate.
In addition, there is a potential risk of conflict and
further instability in the relationship between Taiwan and the Peoples Republic of China (PRC). Conflict or instability could disrupt the
operations of one of our principal wafer suppliers, several of our assembly subcontractors located in Taiwan, and our FCP manufacturing operations in
Taiwan and the PRC.
41
We are expanding our presence in China with manufacturing
and research and development activities. We will be subject to increased risks relating to foreign currency exchange rate fluctuations that could have
a material adverse affect on our business, financial condition and operating results. The value of the Chinese renminbi against the United States
dollar and other currencies may fluctuate and is affected by, among other things, changes in Chinas political and economic conditions.
Significant future appreciation of the renminbi could increase our component and other raw material costs as well as our labor costs, and could
adversely affect our financial results. To the extent that we need to convert United States dollars into renminbi for our operations, appreciation of
renminbi against the United States dollar could have a material adverse effect on our business, financial condition and results of operations.
Conversely, if we decide to convert our renminbi into United States dollars for other business purposes and the United States dollar appreciates
against the renminbi, the United States dollar equivalent of the renminbi we convert would be reduced. The Chinese government recently announced that
it is pegging the exchange rate of the renminbi against a number of currencies, rather than just the United States dollar. Fluctuations in the renminbi
exchange rate could increase and could adversely affect our ability to operate our business.
Because we sell products in foreign markets and have
operations outside of the United States, we face foreign business, political, economic and currency risks that could seriously harm
us.
In the nine months ended March 31, 2012, we generated
approximately 90% of our net revenues from sales in Asia and approximately 4% from sales outside of Asia and the United States. In fiscal year 2011, we
generated approximately 90% of our net revenues from sales in Asia and approximately 4% from sales outside of Asia and the United States. In fiscal
year 2010, we generated approximately 87% of our net revenues from sales in Asia and approximately 4% from sales outside of Asia and the United States.
We expect that export sales will continue to represent the majority of net revenues. We intend to continue the expansion of our sales efforts outside
the United States. This expansion will require significant management attention and financial resources and further subject us to international
operating risks. These risks include:
|
tariffs and other barriers and restrictions; |
|
unexpected changes in regulatory requirements; |
|
the burdens of complying with a variety of foreign laws; and |
|
delays resulting from difficulty in obtaining export licenses for technology. |
We have subsidiaries located in Asia. We manufacture
certain of our frequency control products in Taiwan as well as a recently completed factory in the Jinan Development Zone in the Shandong Province of
the PRC. We are also in the process of developing a research and development and manufacturing center in Yangzhou, PRC. The development of these
facilities depends upon various tax concessions, tax rebates and other support from the local governmental bodies in the areas where the facilities are
located. There can be no assurance that these local governmental bodies will not change their position regarding such tax and other support and such a
change might adversely affect the successful completion and profitability of these projects.
Regulatory, geopolitical and other factors could seriously
harm our business or require us to modify our current business practices. We are subject to general geopolitical risks in connection with our
international operations, such as political and economic instability and changes in diplomatic and trade relationships.
In addition, because our international sales are often
denominated in U.S. dollars, fluctuations between the value of the U.S. dollar and local currencies can negatively affect our financial
results.
Our shareholder rights plan may adversely affect
existing shareholders.
On March 6, 2012, we adopted a shareholder rights plan that
may have the effect of deterring, delaying, or preventing a change in control that otherwise might be in the best interests of our shareholders. Under
the rights plan, we declared a dividend of one preferred share purchase right for each share of our common stock held by shareholders of record as of
March 6, 2012. Each right entitles shareholders, after the rights become exercisable, to purchase one one-thousandth of a share of our Series D Junior
Participating Preferred Stock.
In general, the rights become exercisable when a person or
group acquires 15% or more of our common stock or a tender offer for 15% or more of our common stock is announced or commenced. After
such
42
event, our other stockholders may purchase from us
additional shares of our common stock at a 50% discount to the then-current market price. The rights will cause substantial dilution to a person or
group that attempts to acquire us on terms not approved by our Board of Directors. The rights should not interfere with any merger or other business
combination approved by our Board of Directors since the rights may be redeemed by us at $0.001 per right at any time before any person or group
acquires 15% or more of our outstanding common stock. These rights expire in March 2022.
Our operations and financial results could be severely
harmed by natural disasters.
Our headquarters and some of our major suppliers
manufacturing facilities are located near major earthquake faults. One of the foundries we use is located in Taiwan, which suffered a severe earthquake
during fiscal 2000. We did not experience significant disruption to our operations as a result of that earthquake. Taiwan is also exposed to typhoons
and tsunamis, which can affect not only foundries we rely upon but also our PSE-TW subsidiary. Thailand experienced floods in the quarter ended
December 31, 2012, which interrupted the industrys supply chain for storage products and impacted our sales as well. If a major earthquake,
flood, typhoon, tsunami or other natural disaster were to affect our operations or those of our suppliers, our product supply could be interrupted,
which would seriously harm our business. Natural disasters could also affect the operations of the distributors and contract manufacturers we sell to,
as well as the operations of our end use customers, which would adversely affect our operations and financial results. Natural disasters anywhere in
the world may potentially adversely affect us by harming or causing interruptions to our supply chain or the supply chains of our suppliers, direct
customers or end use customers.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
On April 29, 2008, the Board authorized the repurchase of
$30 million worth of common stock. We were authorized to repurchase the shares from time to time in the open market or private transactions, at the
discretion of our management. The following table summarizes the stock repurchase activity during the three months ended March 31,
2012.
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum $ Value That May Yet be Purchased Under the Plans or Programs |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
January,
2012 |
| | 4,852,446 | $ | 6,522,901 | |||||||||||||
February,
2012 |
152,598 | 8.16 | 5,005,044 | 5,277,021 | ||||||||||||||
March,
2012 |
273,168 | 7.95 | 5,278,212 | 3,103,977 | ||||||||||||||
Total |
425,766 | $ | 8.03 | 5,278,212 | $ | 3,103,977 |
Current cash balances and the proceeds from stock option exercises and purchases in the stock purchase plan have funded stock repurchases in
the past, and we expect to fund future stock repurchases from these same sources.
43
Item 6. Exhibits.
Exhibit Number |
Exhibit Description |
|||||
---|---|---|---|---|---|---|
3.1 |
Amended and Restated Certificate of Determination of Series D Junior Participating Preferred Stock of Pericom Semiconductor Corporation,
classifying and designating the Series D Junior Participating Preferred Stock, as filed March 6, 2012 with the Secretary of State of the State of
California, filed as Exhibit 3.1 to the Companys 8-K filed March 8, 2012 and incorporated herein by reference. |
|||||
4.1 |
Rights Agreement, dated as of March 6, 2012, between Pericom Semiconductor Corporation and Computershare Trust Company, N.A., as Rights Agent,
which includes the form of Amended and Restated Certificate of Determination of the Series D Junior Participating Preferred Stock of Pericom
Semiconductor Corporation as Exhibit A and the form of Right Certificate as Exhibit B, filed as Exhibit 4.1 to the Companys 8-K filed March 8,
2012 and incorporated herein by reference. |
|||||
31.1 |
Certification of Alex C. Hui, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||||
31.2 |
Certification of Aaron Tachibana, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||||
32.1 |
Certification of Alex C. Hui, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||||
32.2 |
Certification of Aaron Tachibana, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||||
101.INS* |
XBRL
Instance Document |
|||||
101.SCH* |
XBRL
Taxonomy Extension Schema Document |
|||||
101.CAL* |
XBRL
Taxonomy Extension Calculation Linkbase Document |
|||||
101.DEF* |
XBRL
Taxonomy Extension Definition Linkbase Document |
|||||
101.LAB* |
XBRL
Taxonomy Extension Label Linkbase Document |
|||||
101.PRE* |
XBRL
Taxonomy Extension Presentation Linkbase Document |
* |
XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
44
SIGNATURES
Pursuant to the requirements of
the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Pericom Semiconductor Corporation
(Registrant)
(Registrant)
Date: May 4, 2012
By:
|
/s/ Alex C. Hui Alex C. Hui Chief Executive Officer |
By:
|
/s/ Aaron
Tachibana Aaron Tachibana Chief Financial Officer |
45