Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - ATMEL CORP | Financial_Report.xls |
| EX-31.2 - EXHIBIT 31.2 - ATMEL CORP | ex312-q115.htm |
| EX-32.1 - EXHIBIT 32.1 - ATMEL CORP | ex321-q115.htm |
| EX-32.2 - EXHIBIT 32.2 - ATMEL CORP | ex322-q115.htm |
| EX-31.1 - EXHIBIT 31.1 - ATMEL CORP | ex311-q115.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2015
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-19032
ATMEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 77-0051991 (I.R.S. Employer Identification Number) | |
1600 Technology Drive, San Jose, California 95110
(Address of principal executive offices)
(408) 441-0311
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting filer o | |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
On April 30, 2015, the Registrant had 417,378,300 outstanding shares of Common Stock.
ATMEL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 2015
Page | |
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Atmel Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands, except for per share data) | |||||||
Net revenue | $ | 318,288 | $ | 337,361 | |||
Operating expenses | |||||||
Cost of revenue | 170,991 | 197,371 | |||||
Research and development | 59,129 | 69,752 | |||||
Selling, general and administrative | 62,073 | 64,079 | |||||
Acquisition-related charges | 4,403 | 1,628 | |||||
Restructuring charges (credits) | 1,147 | (224 | ) | ||||
Total operating expenses | 297,743 | 332,606 | |||||
Income from operations | 20,545 | 4,755 | |||||
Interest and other income, net | 3,700 | 77 | |||||
Income before income taxes | 24,245 | 4,832 | |||||
Provision for income taxes | (7,699 | ) | (2,666 | ) | |||
Net income | 16,546 | 2,166 | |||||
Less: net income attributable to noncontrolling interest, net of taxes | (51 | ) | — | ||||
Net income attributable to Atmel | $ | 16,495 | $ | 2,166 | |||
Basic net income per share attributable to Atmel: | |||||||
Net income per share | $ | 0.04 | $ | 0.01 | |||
Weighted-average shares used in basic net income per share calculations | 417,038 | 425,390 | |||||
Diluted net income per share attributable to Atmel: | |||||||
Net income per share | $ | 0.04 | $ | 0.01 | |||
Weighted-average shares used in diluted net income per share calculations | 418,462 | 427,276 | |||||
Cash dividends declared and paid per share | $ | 0.04 | $ | — | |||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
Atmel Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands) | |||||||
Net income | $ | 16,546 | $ | 2,166 | |||
Other comprehensive (loss) income, net of tax: | |||||||
Foreign currency translation adjustments | (11,730 | ) | 323 | ||||
Actuarial losses related to defined benefit pension plans | (325 | ) | (19 | ) | |||
Reclassification adjustment from sale of investment | — | 328 | |||||
Total other comprehensive (loss) income | (12,055 | ) | 632 | ||||
Total comprehensive income | $ | 4,491 | $ | 2,798 | |||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
Atmel Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, 2015 | December 31, 2014 | ||||||
(in thousands, except for par value) | |||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 200,847 | $ | 206,937 | |||
Accounts receivable, net of allowance for doubtful accounts of $5,924 and $5,945, respectively | 196,653 | 222,021 | |||||
Inventories | 274,192 | 278,242 | |||||
Prepaids and other current assets | 81,553 | 89,101 | |||||
Total current assets | 753,245 | 796,301 | |||||
Fixed assets, net of accumulated depreciation of $1,334,858 and $1,333,103, respectively | 154,809 | 158,281 | |||||
Goodwill | 188,554 | 191,088 | |||||
Intangible assets, net of accumulated amortization of $61,857 and $58,471, respectively | 46,900 | 50,286 | |||||
Other assets | 164,839 | 166,348 | |||||
Total assets | $ | 1,308,347 | $ | 1,362,304 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities | |||||||
Trade accounts payable | $ | 83,538 | $ | 97,467 | |||
Accrued and other liabilities | 119,915 | 139,696 | |||||
Deferred income on shipments to distributors | 47,913 | 49,059 | |||||
Current portion of long-term debt | 6,821 | 7,413 | |||||
Total current liabilities | 258,187 | 293,635 | |||||
Other long-term liabilities | 186,364 | 198,670 | |||||
Total liabilities | 444,551 | 492,305 | |||||
Commitments and contingencies (Note 8) | |||||||
Stockholders’ equity | |||||||
Preferred stock; par value $0.001; Authorized: 5,000 shares; no shares issued and outstanding | — | — | |||||
Common stock; par value $0.001; Authorized: 1,600,000 shares; Shares issued and outstanding: 417,378 at March 31, 2015 and 416,178 at December 31, 2014, respectively | 417 | 416 | |||||
Additional paid-in capital | 762,757 | 756,760 | |||||
Accumulated other comprehensive loss | (20,237 | ) | (8,182 | ) | |||
Retained earnings | 117,795 | 117,992 | |||||
Total Atmel stockholders’ equity | 860,732 | 866,986 | |||||
Noncontrolling interest | 3,064 | 3,013 | |||||
Total stockholders' equity | 863,796 | 869,999 | |||||
Total liabilities and stockholders’ equity | $ | 1,308,347 | $ | 1,362,304 | |||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
Atmel Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands) | |||||||
Cash flows from operating activities | |||||||
Net income | $ | 16,546 | $ | 2,166 | |||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||
Depreciation and amortization | 14,290 | 13,405 | |||||
Deferred income taxes | 2,034 | (2,242 | ) | ||||
Write-off of equipment deposit | — | 1,730 | |||||
Realized gain on sales of marketable securities | — | (385 | ) | ||||
Accretion of interest on long-term debt | 427 | 321 | |||||
Share-based compensation expense | 13,687 | 15,617 | |||||
Excess tax benefit on share-based compensation | (526 | ) | (572 | ) | |||
Non-cash acquisition-related and other charges, net | (7,384 | ) | 323 | ||||
Changes in operating assets and liabilities, net of acquisitions | |||||||
Accounts receivable | 25,403 | 11,858 | |||||
Inventories | 4,657 | 27,814 | |||||
Current and other assets | 1,384 | 16,720 | |||||
Trade accounts payable | (11,614 | ) | (1,171 | ) | |||
Accrued and other liabilities | (17,412 | ) | (32,465 | ) | |||
Income taxes payable | (211 | ) | (3,054 | ) | |||
Deferred income on shipments to distributors | (1,146 | ) | (3,828 | ) | |||
Net cash provided by operating activities | 40,135 | 46,237 | |||||
Cash flows from investing activities | |||||||
Acquisitions of fixed assets | (10,427 | ) | (17,025 | ) | |||
Sales of marketable securities | — | 3,071 | |||||
Acquisitions of intangible assets | (481 | ) | (784 | ) | |||
Net cash used in investing activities | (10,908 | ) | (14,738 | ) | |||
Cash flows from financing activities | |||||||
Principal repayments on debt | (10,008 | ) | — | ||||
Repurchases of common stock | (9,095 | ) | (54,946 | ) | |||
Payment of dividends | (16,692 | ) | — | ||||
Proceeds from issuance of common stock | 5,996 | 6,711 | |||||
Tax payments related to shares withheld for vested restricted stock units | (5,198 | ) | (4,889 | ) | |||
Excess tax benefit on share-based compensation | 526 | 572 | |||||
Net cash used in financing activities | (34,471 | ) | (52,552 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (846 | ) | (351 | ) | |||
Net decrease in cash and cash equivalents | (6,090 | ) | (21,404 | ) | |||
Cash and cash equivalents at beginning of the period | 206,937 | 276,881 | |||||
Cash and cash equivalents at end of the period | $ | 200,847 | $ | 255,477 | |||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
Atmel Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to state fairly, in all material respects, the financial position of Atmel Corporation (the “Company” or “Atmel”) and its subsidiaries as of March 31, 2015 and the results of operations and comprehensive income for the three months ended March 31, 2015 and 2014 and cash flows for the three months ended March 31, 2015 and 2014. All intercompany balances have been eliminated. Because all of the annual disclosures required by U.S. generally accepted accounting principles ("GAAP") are not included, as permitted by the rules of the Securities and Exchange Commission (the “SEC”), these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The December 31, 2014 year-end balance sheet data was derived from the Company’s audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The condensed consolidated statements of operations for the periods presented are not necessarily indicative of results to be expected for any future period, or for the entire year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates in these financial statements include provisions for excess and obsolete inventory, sales reserves and allowances, share-based compensation expense, allowances for doubtful accounts receivable, estimates for useful lives associated with long-lived assets, recoverability of goodwill and intangible assets, restructuring charges, liabilities for uncertain tax positions and deferred tax asset valuation allowances. Actual results could differ materially from those estimates.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Market is based on estimated net realizable value. Determining market value of inventories involves numerous judgments, including estimating average selling prices and sales volumes for future periods. The Company establishes provisions for lower of cost or market and excess and obsolescence write-downs, which are charged to cost of revenue. The Company makes a determination regarding excess and obsolete inventory on a quarterly basis. This determination requires an estimate of the future demand for the Company’s products and involves an analysis of historical and forecasted sales levels by product, competitiveness of product offerings, market conditions, product lifecycles, as well as other factors. Excess and obsolete inventory write-downs are recorded when the inventory on hand exceeds management’s estimate of future demand for each product and are charged to cost of revenue.
The Company’s inventories include parts that have a potential for rapid technological obsolescence and are sold in a highly competitive industry. The Company writes down inventory that is considered excess or obsolete. When the Company recognizes a loss on such inventory, it establishes a new, lower-cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis. If inventory with a lower-cost basis is subsequently sold, it will result in higher gross margin for the products making up that inventory.
Inventories are comprised of the following:
March 31, 2015 | December 31, 2014 | ||||||
(in thousands) | |||||||
Raw materials and purchased parts | $ | 9,668 | $ | 12,633 | |||
Work-in-progress | 185,915 | 192,206 | |||||
Finished goods | 78,609 | 73,403 | |||||
$ | 274,192 | $ | 278,242 | ||||
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standard Board (the "FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. On April 1, 2015, the FASB voted to
7
propose a one-year deferral to the effective date, but to permit entities to adopt one year earlier if they choose (i.e., the original effective date). The proposal will be subject to the FASB’s due process requirement, which includes a period for public comments. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
Note 2 BUSINESS COMBINATIONS
Newport Media, Inc.
On July 31, 2014, the Company acquired 100% of the equity interest in privately-held Newport Media, Inc. (“NMI”), a provider of low power Wi-Fi and Bluetooth solutions that are expected to enhance the Company’s portfolio of wireless products.
The purchase consideration, net of cash acquired, consisted of $139.6 million payable in cash at the closing of the acquisition, subject to working capital adjustments and deductions for specified closing expenses. In addition, the acquisition agreement provides for an aggregate cash earn-out payment of up to $30.0 million payable if specified revenue targets are achieved over the two years following the acquisition date. The Company recorded a liability of $0.4 million as of July 31, 2014, representing the estimated fair value of the earn-out based on the probability of achievement as of the acquisition date.
The total purchase price, before working capital adjustments and deduction for specified closing expenses, of the acquisition equaled:
July 31, 2014 | |||
(in thousands) | |||
Cash, including cash acquired of $3.0 million | $ | 142,639 | |
Fair value of earn-out | 420 | ||
Total purchase price | $ | 143,059 | |
The purchase price was allocated to the identifiable assets and liabilities of NMI based on their estimated fair value at the acquisition date. The Company engaged an independent third party to assist with the determination of the fair value of certain identifiable intangible assets and the earn-out. In determining the fair value of the purchased intangible assets and earn-out, management made various estimates and assumptions from significant unobservable inputs (Level 3). The fair value of purchased identifiable intangible assets was determined using discounted cash flow models from projections prepared by management. The fair value of the earn-out was derived using an option pricing model that includes significant unobservable inputs.
The purchase price was allocated as of the date of the acquisition as follows:
July 31, 2014 | |||
(in thousands) | |||
Current assets | $ | 12,287 | |
Fixed assets | 983 | ||
Intangible assets acquired: | |||
Distributor and end-customer relationships | 3,910 | ||
Backlog | 1,670 | ||
Non-compete agreements | 1,000 | ||
Trade name | 300 | ||
Developed technology | 10,910 | ||
In-process technology | 13,690 | ||
Goodwill | 86,123 | ||
Deferred tax assets | 17,863 | ||
Other long-term assets | 945 | ||
Current liabilities | (5,216 | ) | |
Other liabilities assumed | (1,406 | ) | |
$ | 143,059 | ||
The Company prepared an initial determination of the fair value of the assets acquired and liabilities assumed as of the acquisition date using preliminary information. The Company recognized measurement period adjustments made during the fourth quarter of 2014 to the fair value of certain assets acquired and liabilities assumed as a result of further refinements in the Company’s
8
estimates. These adjustments were retrospectively applied to the July 31, 2014 acquisition date balance sheet. The effect of these adjustments on the preliminary purchase price allocation was a decrease in goodwill and income tax payable of $1.9 million and $0.3 million, respectively, and an increase in deferred tax assets of $1.6 million.
The excess of the fair value of consideration paid over the fair value of the net assets acquired,liabilities assumed and the identifiable intangible assets acquired resulted in recognition of goodwill of approximately $86.1 million, including workforce, of which $55.2 million is expected to be deductible for tax purposes. The recognition of goodwill primarily related to the expected synergies between the product offerings of NMI and the Company. All goodwill recorded was assigned to the Company's Microcontroller segment.
The following table sets forth the components of the identifiable intangible assets subject to amortization which are being amortized on a straight-line basis over their estimated useful lives:
Intangible assets acquired: | Method of Valuation | Discount Rate Used | Estimated Useful Lives | |||
Distributor and end-customer relationships | Income approach | 19% - 24% | 0.5 - 3 years | |||
Backlog | Income approach | 19% | 0.5 years | |||
Non-compete agreements | Income approach | 24% | 1 - 2 years | |||
Trade name | Income approach | 24% | 1 year | |||
Developed technology | Income approach | 22% - 23% | 1 - 5 years | |||
In-process technology | Income approach | 25% | 5 years (1) | |||
(1) In-process technology is not amortized until the associated project has been completed. Alternatively, if the associated project is determined not to be viable, it will be expensed. | ||||||
The Company expensed $2.5 million of advisory, legal, and consulting fees and other costs directly related to the acquisition, which were recorded as acquisition-related charges in the Consolidated Statements of Operations for the year ended December 31, 2014. The Company incurred $5.3 million of one-time bonus expense, subject to claw-back and other employment-related terms, for certain employees, which will be recorded ratably through the date on which the bonus is no longer recoverable by the Company. For the three months ended March 31, 2015, the Company recorded $1.6 million of one-time bonus expense as acquisition-related charges and $1.7 million of amortization expense related to identifiable intangible assets in the Condensed Consolidated Statements of Operations.
Note 3 INVESTMENTS
Investments at March 31, 2015 and December 31, 2014 consist of auction-rate securities. During the three months ended March 31, 2014, the Company sold its investment in a corporate equity security, which resulted in a realized gain of $0.4 million recorded under interest and other income, net in the Condensed Consolidated Statements of Operations.
For the three months ended March 31, 2015, auctions for the Company's sole auction-rate security continued to fail and as a result this security continues to be illiquid. The Company concluded that the remaining 1.0 million (adjusted cost) of auction-rate security is unlikely to be liquidated within the next twelve months and classified this security as a long-term investment, which is included in other assets in the Condensed Consolidated Balance Sheets. This auction-rate security had a contractual maturity greater than 10 years and totaled $1.0 million (at adjusted cost) as of March 31, 2015.
Note 4 FAIR VALUE OF ASSETS AND LIABILITIES
Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price)”. The accounting standard establishes a consistent framework for measuring fair value and expands disclosure requirements regarding fair value measurements. This accounting standard, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The tables below present the balances of investments measured at fair value on a recurring basis:
9
March 31, 2015 | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(in thousands) | |||||||||||||||
Assets | |||||||||||||||
Cash | |||||||||||||||
Money market funds | $ | 1,272 | $ | 1,272 | $ | — | $ | — | |||||||
Other assets | |||||||||||||||
Auction-rate security | 1,066 | — | — | 1,066 | |||||||||||
Investment funds - Deferred compensation plan assets | |||||||||||||||
Institutional money market funds | 2,197 | 2,197 | — | — | |||||||||||
Fixed income | 1,092 | 1,092 | — | — | |||||||||||
Marketable equity securities | 3,819 | 3,819 | — | — | |||||||||||
Total institutional funds - Deferred compensation plan | 7,108 | 7,108 | — | — | |||||||||||
Total other assets | 8,174 | 7,108 | — | 1,066 | |||||||||||
Total | $ | 9,446 | $ | 8,380 | $ | — | $ | 1,066 | |||||||
December 31, 2014 | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(in thousands) | |||||||||||||||
Assets | |||||||||||||||
Cash | |||||||||||||||
Money market funds | $ | 1,267 | $ | 1,267 | $ | — | $ | — | |||||||
Other assets | |||||||||||||||
Auction-rate security | 1,066 | — | — | 1,066 | |||||||||||
Investment funds - Deferred compensation plan assets | |||||||||||||||
Institutional money market funds | 2,039 | 2,039 | — | — | |||||||||||
Fixed income | 984 | 984 | — | — | |||||||||||
Marketable equity securities | 3,576 | 3,576 | — | — | |||||||||||
Total institutional funds - Deferred compensation plan | 6,599 | 6,599 | — | — | |||||||||||
Total other assets | 7,665 | 6,599 | — | 1,066 | |||||||||||
Total | $ | 8,932 | $ | 7,866 | $ | — | $ | 1,066 | |||||||
The Company’s investments, with the exception of its auction-rate security, are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, or broker or dealer quotations. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
Auction-rate securities are classified within Level 3 because significant assumptions for such securities are not observable in the market. The total amount of assets measured using Level 3 valuation methodologies represented less than 1% of the Company's total assets as of March 31, 2015 and December 31, 2014.
There were no changes in Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2015 and year ended December 31, 2014. There were no transfers between Level 1 and 2 hierarchies for the three months ended March 31, 2015 and the year ended December 31, 2014.
Note 5 BORROWING ARRANGEMENTS
Senior Secured Revolving Credit Facility
10
On December 6, 2013, the Company entered into a five-year $300.0 million, senior secured revolving credit facility (the “Facility”), the terms of which are set forth in a Credit Agreement (the “Credit Agreement”) among the Company, a group of lenders led by Morgan Stanley Senior Funding, Inc., as administrative agent, and Union Bank N.A., BNP Paribas and SunTrust Bank, as co-syndication agents. The Company may increase the aggregate availability under the Facility through a customary “accordion” feature in an amount not to exceed $250.0 million. The Company recorded debt issuance costs of $2.1 million associated with the Facility which are being amortized over the expected life of the Facility.
Borrowings under the Facility are available for general corporate purposes, including working capital, stock repurchases, acquisitions and other purposes. Amounts outstanding under the Facility are due on the earlier of December 6, 2018 or 180 days prior to the maturity date of any Permitted Convertible Notes (as defined in the Credit Agreement) if, in the latter case, the Company does not otherwise have available sufficient unrestricted cash and other investments to redeem the Permitted Convertible Notes.
The Company may prepay loans under the Credit Agreement at any time, in whole or in part, upon payment of accrued interest and break funding payments, if applicable. The Company may terminate or reduce the Facility at any time without penalty. The obligations under the Facility are guaranteed by certain domestic subsidiaries of the Company, are secured by a pledge of substantially all of the assets of the Company and the guarantors, and include affirmative, negative and financial covenants. Affirmative covenants include, among other things, the delivery of financial statements and other information. Negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, investments and transactions with affiliates. The financial covenants require the Company to maintain compliance with a maximum total leverage ratio, a maximum senior secured leverage ratio and a minimum fixed charge coverage ratio. The Credit Agreement includes customary events of default that include, among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of default could result in an acceleration of obligations under the Credit Agreement.
On July 29, 2014, the Company borrowed $90.0 million under the Facility to assist with the acquisition of NMI. Interest on the borrowed amounts equals the applicable periodic LIBOR rate, plus 1.25% per annum, and was $0.4 million for the three months ended March 31, 2015.
As of March 31, 2015, after principal repayments, the Company had $65.0 million of outstanding borrowings under the Facility and was in compliance with all financial covenants under the Credit Agreement. The Facility matures on December 6, 2018.
Other Debt Obligations
The Company had a short-term debt obligation amounting to $6.7 million and $7.3 million as of March 31, 2015 and December 31, 2014, respectively, relating to an amount previously advanced from a foreign government which is repayable in 2015. The balance is increased on a quarterly basis as a result of interest accretion. As the loan is denominated in Euro, the balance is re-measured into U.S dollars at current rates during each reporting period. The repayment amount is expected to be approximately $7.5 million in 2015.
Note 6 STOCKHOLDERS’ EQUITY
Share-Based Compensation
The following table summarizes share-based compensation, net of the amount capitalized in inventory, included in operating results:
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands) | |||||||
Cost of revenue | $ | 1,115 | $ | 1,316 | |||
Research and development | 3,578 | 4,729 | |||||
Selling, general and administrative | 8,994 | 9,572 | |||||
Total share-based compensation expense, before income taxes | 13,687 | 15,617 | |||||
Tax benefit | (2,867 | ) | (2,924 | ) | |||
Total share-based compensation expense, net of income taxes | $ | 10,820 | $ | 12,693 | |||
Restricted Stock Units, Employee Stock Purchase Plan and Stock Options
11
In May 2005, Atmel’s stockholders initially approved Atmel’s 2005 Stock Plan (as amended, the “2005 Stock Plan”). As of March 31, 2015, 158.0 million shares had been cumulatively authorized for issuance under the 2005 Stock Plan, and 13.8 million shares remained available for issuance without giving effect to any adjustment that may be required by the terms of the 2005 Stock Plan in respect of shares underlying restricted stock or restricted stock units. Under the 2005 Stock Plan, Atmel may issue common stock directly, grant options to purchase common stock or grant restricted stock units payable in common stock to employees, consultants and directors of Atmel. Restricted stock units generally vest on a quarterly basis over a service period of up to four years from the grant date, although restricted stock unit grants to newly-hired employees generally have a one-year cliff vest equal to one-quarter of the total grant. Options, which generally vest over four years, are granted at fair market value on the date of the grant and generally expire ten years from that date.
Activity under Atmel’s 2005 Stock Plan is set forth below:
Outstanding Options | Weighted- | ||||||||||||
Exercise | Average | ||||||||||||
Available for Grant | Number of Options | Price per Share | Exercise Price per Share | ||||||||||
(in thousands, except for per share data) | |||||||||||||
Balances, December 31, 2014 | 13,611 | 3,059 | $2.13-$10.01 | $ | 4.57 | ||||||||
Restricted stock units issued | (479 | ) | — | — | — | ||||||||
Plan adjustment for restricted stock units issued | (273 | ) | — | — | — | ||||||||
Restricted stock units cancelled | 363 | — | — | — | |||||||||
Plan adjustment for restricted stock units cancelled | 210 | — | — | — | |||||||||
Performance-based restricted stock units cancelled | 253 | — | — | — | |||||||||
Plan adjustment for performance-based restricted stock units cancelled | 144 | — | — | — | |||||||||
Options cancelled/expired/forfeited | 2 | (2 | ) | $ | 3.26 | $ | 3.26 | ||||||
Options exercised | (198 | ) | $2.66-$6.28 | $ | 3.51 | ||||||||
Balances, March 31, 2015 | 13,831 | 2,859 | |||||||||||
Options vested and expected to vest at March 31, 2015 | 2,859 | ||||||||||||
Restricted stock units are granted from the pool of options available for grant. Every share underlying restricted stock, restricted stock units (including performance-based restricted stock units), or stock purchase rights issued on or after May 9, 2013 is counted against the numerical limit for options available for grant as 1.57 shares, as reflected in the table above in the line items for "Plan adjustments", except that restricted stock units (including performance-based restricted stock units), or stock purchase rights issued prior to May 9, 2013 but on or after May 18, 2011, is counted against the numerical limit for options available for grant as 1.61 shares, and restricted stock units (including performance-based restricted stock units), or stock purchase rights issued prior to May 18, 2011 and on or after May 14, 2008, is counted against the numerical limit for options available for grant as 1.78 shares. If shares issued pursuant to any restricted stock, restricted stock unit, and stock purchase right agreements are cancelled, forfeited or repurchased by the Company, the number of shares returned to the 2005 Stock Plan will be multiplied by the same ratios above under which such shares were issued and will again become available for issuance.
As of March 31, 2015, there were 13.8 million shares available for issuance under the 2005 Stock Plan, or 8.8 million shares after giving effect to the applicable ratios under the 2005 Stock Plan for issuances of restricted stock units, as described above.
Restricted Stock Units
Activity related to restricted stock units is set forth below:
Number of Units | Weighted-Average Grant Date Fair Value | |||||
(in thousands, except for per share data) | ||||||
Balances, December 31, 2014 | 18,163 | $ | 8.40 | |||
Restricted stock units issued | 479 | 8.45 | ||||
Restricted stock units vested | (1,898 | ) | 8.43 | |||
Restricted stock units cancelled | (363 | ) | 7.71 | |||
Performance-based restricted stock units cancelled | (253 | ) | 7.35 | |||
Balances, March 31, 2015 | 16,128 | $ | 8.43 | |||
12
As of March 31, 2015, total unearned share-based compensation related to unvested restricted stock units previously granted (including performance-based restricted stock units) was approximately $92.1 million, including estimated forfeitures, and is expected to be recognized over a weighted-average period of 2.54 years.
Until restricted stock units are vested, they do not have the voting rights of common stock and the shares underlying such restricted stock units are not considered issued and outstanding. Upon vesting of restricted stock units, shares withheld by the Company to pay taxes are retired.
Performance-Based Restricted Stock Units
On December 11, 2014, the Company adopted the Atmel 2015 Long-Term Performance-Based Incentive Plan (the “2015 Plan”), which provides for the grant of performance-based restricted stock units to Company participants. The Company issued 2.6 million shares under the 2015 Plan for the year ended December 31, 2014. The Company records performance-based restricted stock units issued under the 2015 Plan based on achievement of the “target” performance metrics, which will result in a participant being credited with 100% of the performance-based shares awarded to that participant under the 2015 Plan. Achievement at the “maximum” performance metrics will result in a participant being credited with 200% of the performance-based shares awarded to that participant under the 2015 Plan.
Performance metrics for the 2015 Plan are based on the Company’s publicly-reported non-GAAP earnings per share growth rate from 2014 to 2015 (calculated for the fiscal years ended 2014 and 2015, respectively) to the adjusted earnings per share growth rates of companies included within the well-established Philadelphia Semiconductor Sector IndexSM (SOX Index) during the same period. The SOX Index is a modified market capitalization-weighted index composed of companies primarily involved in the design, distribution, manufacture, and sale of semiconductors. For purposes of the 2015 Plan, “adjusted earnings per share” for the applicable measurement period for any company included within the SOX Index means that company’s non-GAAP earnings per share, as publicly reported by that company (which, in the case of the Company, will be its non-GAAP earnings per share), adjusted to exclude for the measurement period (to the extent such adjustments are publicly disclosed) each of the following: share-based compensation expense; restructuring and impairment charges (credits); loss (gain) on sale; acquisition and divestiture related expenses; intellectual property related settlement charges; non-cash tax expenses; other non-recurring tax items; to make equivalent comparisons between the Company’s non-GAAP earnings per share and the adjusted earnings per share for other companies included within the SOX Index. The Company recorded total share-based compensation expense related to the 2015 Plan of $1.3 million in the three months ended March 31, 2015.
For participants who are included within the 2015 Plan at any time after January 1, 2015, awards will be pro-rated to reflect the actual time a participant has been an employee of, or a service provider to, the Company.
On December 17, 2013, the Company adopted the Atmel 2014 Long-Term Performance-Based Incentive Plan (the “2014 Plan”), which ended on December 31, 2014. The Company recorded total share-based compensation expense related to the 2014 Plan of $1.0 million and $1.1 million in the three months ended March 31, 2015 and 2014, respectively.
Employee Stock Purchase Plan
Under the 2010 Employee Stock Purchase Plan (“2010 ESPP”), qualified employees are entitled to purchase shares of Atmel’s common stock at the lower of 85% of the fair market value of the common stock at the date of commencement of the six-month offering period or 85% of the fair market value on the last day of the offering period. Purchases are limited to 10% of an employee’s eligible compensation subject to a maximum annual employee contribution limit of $25,000 of the market value of the shares (determined at the commencement of the six month offering period) per calendar year. There were 0.8 million shares purchased under the 2010 ESPP for each of the three months ended March 31, 2015 and 2014 at an average price per share of $6.97 and $6.43, respectively. Of the 25.0 million shares authorized for issuance under the 2010 ESPP, 18.2 million shares were available for issuance at March 31, 2015.
The fair value of each purchase under the 2010 ESPP is estimated on the date of the beginning of the offering period using the Black-Scholes option-pricing model. The following assumptions were utilized to determine the fair value of the 2010 ESPP shares:
Three Months Ended | |||||
March 31, 2015 | March 31, 2014 | ||||
Risk-free interest rate | 0.07 | % | 0.07 | % | |
Expected life (years) | 0.50 | 0.50 | |||
Expected volatility | 36 | % | 32 | % | |
Expected dividend yield | 1.91 | % | — | % | |
13
The weighted-average fair value per share under the 2010 ESPP for purchase periods beginning in the three months ended March 31, 2015 and 2014 were $1.68 and $1.64, respectively. Cash proceeds from the issuance of shares under the Company’s 2010 ESPP were $5.3 million and $5.4 million for the three months ended March 31, 2015 and 2014, respectively.
Common Stock Repurchase Program
Atmel’s Board of Directors has authorized an aggregate of $1.0 billion of funding for the Company’s common stock repurchase program since 2011. The repurchase program does not have an expiration date, and the number of shares repurchased and the timing of repurchases are based on the level of the Company’s cash balances, general business and market conditions, regulatory requirements, and other factors, including alternative investment opportunities. As of March 31, 2015, $200.0 million remained available for the repurchase of common stock under this program.
During the three months ended March 31, 2015 and 2014, Atmel repurchased 1.1 million and 6.9 million shares, respectively, of its common stock in the open market at an average repurchase price of $8.24 and $7.97 per share, respectively, excluding commission, and subsequently retired those shares. Common stock and additional paid-in capital were reduced by $9.1 million and $54.9 million, excluding commission, for the three months ended March 31, 2015 and 2014, respectively, as a result of the stock repurchases.
Dividends
On March 26, 2015, the Company paid a cash dividend of $0.04 per common share, the aggregate cost of which was $16.7 million.
Note 7 ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive income is defined as a change in equity of a company during a period, from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The primary difference between net income and comprehensive income for the Company arises from foreign currency translation adjustments, actuarial loss related to defined benefit pension plans and net unrealized loss on investments. The following table summarizes the changes in accumulated balances of other comprehensive loss, net of tax:
Foreign currency translation adjustments | Defined benefit pension plans | Change in unrealized loss on investments | Total | ||||||||||||
(in thousands) | |||||||||||||||
Balance as of December 31, 2014 | $ | 1,053 | $ | (8,462 | ) | $ | (773 | ) | $ | (8,182 | ) | ||||
Other comprehensive income before reclassifications | (11,730 | ) | (325 | ) | — | (12,055 | ) | ||||||||
Balance as of March 31, 2015 | $ | (10,677 | ) | $ | (8,787 | ) | $ | (773 | ) | $ | (20,237 | ) | |||
Note 8 COMMITMENTS AND CONTINGENCIES
Commitments
Indemnification
As is customary in the Company’s industry, the Company’s standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of the Company’s products. From time to time, the Company will indemnify customers against combinations of loss, expense, or liability arising from various trigger events related to the sale and the use of the Company’s products and services, usually up to a specified maximum amount. In addition, as permitted under state laws in the United States, the Company has entered into indemnification agreements with its officers and directors and certain employees, and the Company’s bylaws permit the indemnification of the Company’s agents. The estimated fair value of the liability is not material.
Purchase Commitments
As of March 31, 2015, the Company, or its affiliates, had certain non-cancellable commitments which were not included in the Condensed Consolidated Balance Sheets. These include outstanding capital purchase commitments of approximately $11.0 million and wafer purchase commitments of approximately $38.9 million.
Contingencies
Legal Proceedings
14
The Company is party to various legal proceedings. Management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, results of operations and statements of cash flows. If an unfavorable ruling were to occur in any of the legal proceedings described below or other legal proceedings that were not deemed material as of March 31, 2015, there exists the possibility of a material adverse effect on the Company's financial position, results of operations and cash flows. The Company has accrued for losses related to litigation that it considers probable and for which the loss can be reasonably estimated. In the event that a probable loss cannot be reasonably estimated, it has not accrued for such losses. Management makes a determination as to when a potential loss is reasonably possible based on relevant accounting literature and then includes appropriate disclosure of the contingency. As the Company continues to monitor litigation matters, whether deemed material as of March 31, 2015 or not, its determination could change, and the Company may decide, at some future date, to establish an appropriate reserve.
Southern District of New York Action by LFoundry Rousset (“LFR”) and LFR Employees. On March 4, 2014, LFR and Jean-Yves Guerrini, on behalf of himself and a putative class of LFR employees, filed an action in the United States District Court for the Southern District of New York against the Company, our French subsidiary, Atmel Rousset S.A.S. (“Atmel Rousset”) and LFoundry GmbH (“LF”), LFR’s German parent. The case purports to relate to Atmel Rousset’s June 2010 sale of its wafer manufacturing facility in Rousset, France to LF (the “Sale”), and LFR’s subsequent insolvency more than three years later. The complaint seeks significant damages in connection with claims for violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), RICO conspiracy, fraud, tortious interference with contract and trespass to chattels. On November 25, 2014, the Company moved to dismiss the complaint. Complaints filed in Paris against the Company, Atmel Rousset and another Company affiliate, arising from the Sale, were previously dismissed. The Company and Atmel Rousset consider the claims in this matter entirely devoid of merit and specious, and will continue to defend vigorously against them, assert counterclaims, and seek other relief, as appropriate.
Individual Labor Actions by former LFR Employees. Over 500 former employees of LFR have filed individual labor actions against Atmel Rousset in the labor court in Aix-en-Provence, France. As of March 31, 2015, the claimants had not yet provided the legal arguments underpinning their claims, although management believes each will argue that Atmel Rousset, together with LFR, was their co-employer. Atmel Rousset believes each of these actions is entirely devoid of merit and based substantially on the same specious arguments that the Paris Commercial Court summarily rejected in 2014 in related proceedings. Atmel Rousset therefore intends to defend vigorously each of these claims.
Other Contingencies
From time to time, the Company is notified of claims that its products may infringe patents, or other intellectual property, issued to or owned by other parties. The Company periodically receives demands for indemnification from its customers with respect to intellectual property matters. The Company also periodically receives claims relating to the quality of its products, including claims for additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting defective products, costs for product recalls or other damages. Receipt of these claims and requests occurs in the ordinary course of the Company's business, and the Company responds based on the specific circumstances of each event. The Company undertakes an accrual for losses relating to those types of claims when it considers those losses “probable” and when a reasonable estimate of loss can be determined.
Product Warranties
The Company accrues for warranty costs based on historical trends of product failure rates and the expected material and labor costs to provide warranty services. The Company’s products are generally covered by a warranty typically ranging from 30 days to three years. Product warranty liability is included in accrued and other liabilities in the Condensed Consolidated Balance Sheets.
Guarantees
In the ordinary course of business, the Company may provide standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by either the Company or its subsidiaries. The Company has not recorded any liability in connection with these guarantee arrangements. Based on historical experience and information currently available, the Company believes it will not be required to make any payments under these guarantee arrangements.
Note 9 INCOME TAXES
The Company estimates its annual effective tax rate at the end of each quarter. In making these estimates, the Company considers, among other things, annual pre-tax income, the geographic mix of pre-tax income and the application and interpretations of tax laws, treaties and judicial developments, as well as possible outcomes of tax audits.
15
The following table presents the provision for income taxes and the effective tax rates:
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands, except for percentages) | |||||||
Income before income taxes | $ | 24,245 | $ | 4,832 | |||
Provision for income taxes | $ | (7,699 | ) | $ | (2,666 | ) | |
Effective tax rate | 31.76 | % | 55.17 | % | |||
For the three months ended March 31, 2015, the Company’s effective tax rate was lower than the U.S statutory federal income tax rate of 35%, primarily due to income recognized in lower tax rate foreign jurisdictions. For the three months ended March 31, 2014, the Company's effective tax rate was higher than the U.S. statutory federal income tax rate of 35%, primarily due to discrete interest charges related to foreign audit and withholding tax reserves, and the ratio of these items to worldwide operating income.
At March 31, 2015 and December 31, 2014, the Company had $86.2 million and $88.1 million of unrecognized tax benefits, respectively, which, if recognized, would affect the effective tax rate.
The timing for the resolution and closure of tax audits is highly unpredictable. Given the uncertainty, it is reasonably possible that certain tax audits may be concluded within the next 12 months that could materially impact the balance of our gross unrecognized tax benefits. An estimate of the range of increase or decrease that could occur in the next twelve months cannot be made. However, the estimated impact to tax expense and net income from the resolution and closure of tax exams is not expected to be significant within the next 12 months.
Note 10 PENSION PLANS
The Company sponsors defined benefit pension plans that cover substantially all of its French and German employees. Plan benefits are provided in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. The plans are unfunded. Pension liabilities and charges are based upon various assumptions, updated annually, including discount rates, future salary increases, employee turnover, and mortality rates.
The Company’s French pension plan provides for termination benefits paid to covered French employees only at retirement, and consists of approximately one to five months of salary. The Company’s German pension plan provides for defined benefit payouts for covered German employees following retirement.
The aggregate net pension expense relating to these two plans are as follows:
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands) | |||||||
Service costs | $ | 318 | $ | 389 | |||
Interest costs | 334 | 385 | |||||
Amortization of actuarial loss | 152 | 19 | |||||
Net pension period cost | $ | 804 | $ | 793 | |||
The Company’s net pension period cost for 2015 is expected to be approximately $3.4 million. Cash funding for benefits paid was $0.1 million for the three months ended March 31, 2015. The Company expects total contributions to these plans to be approximately $0.5 million in 2015.
Note 11 OPERATING AND GEOGRAPHICAL SEGMENTS
The Company designs, develops, manufactures and sells semiconductor integrated circuit products. The Company’s operating segments represent management’s view of the Company’s businesses and how it allocates Company resources and measures performance of its major components. Each segment consists of product families with similar requirements for design, development and marketing. Each segment requires different design, development and marketing resources to produce and sell products.
16
A summary of each reportable segment follows:
• | Microcontroller. This segment includes Atmel's general purpose microcontroller and microprocessor families, AVR® 8-bit and 32-bit products, Atmel®| SMARTTM ARM® based products, Atmel's 8051 8-bit products, designated commercial wireless products, including low power radio and SOC products that meet Bluetooth, Bluetooth Low Energy, Zigbee and Wi-Fi specifications, Atmel's maXTouch capacitive touch product families and optimized products for smart energy, touch button, and mobile sensor hub and LED lighting applications. |
• | Nonvolatile Memory. This segment includes electrically erasable programmable read-only ("EEPROM"), erasable programmable read-only memory (“EPROM”) devices, secure cryptographic products and other advanced security solutions. |
• | Automotive. This segment includes devices for automotive electronics, including products using radio frequency technology. |
• | Multi-Market and Other. This segment includes application specific and standard products for aerospace applications and legacy products. On April 16, 2015, the Company completed the sale of its XSense touch sensor manufacturing assets and separately licensed to UniPixel, Inc. its XSense intellectual property assets, which the Company is retaining. See Note 14 for further information. |
The Company continually evaluates operating segment performance based on revenue and income or loss from operations excluding share-based compensation and other non-recurring items. Because the Company’s operating segments reflect the manner in which management reviews its business, they necessarily involve subjective judgments that management believes are reasonable in light of the circumstances under which they are made. These judgments may change over time or may be modified to reflect new facts or circumstances. Operating segments may also be changed or modified to reflect products, technologies or applications that are newly created, or that change over time, or other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments.
Operating segments are defined by the products they design and sell. They do not sell to each other. The Company’s net revenue and segment (loss) income from operations for each reportable segment is as follows:
Information about Reportable Segments
Micro- Controller | Nonvolatile Memory | Automotive | Multi-Market and Other | Total | |||||||||||||||
(in thousands) | |||||||||||||||||||
Three months ended March 31, 2015 | |||||||||||||||||||
Net revenue from external customers | $ | 218,786 | $ | 43,748 | $ | 35,745 | $ | 20,009 | $ | 318,288 | |||||||||
Segment income from operations | $ | 23,756 | $ | 11,670 | $ | 3,297 | $ | 1,963 | $ | 40,686 | |||||||||
Three months ended March 31, 2014 | |||||||||||||||||||
Net revenue from external customers | $ | 235,141 | $ | 35,651 | $ | 40,971 | $ | 25,598 | $ | 337,361 | |||||||||
Segment income (loss) from operations | $ | 18,826 | $ | 5,047 | $ | 6,754 | $ | (557 | ) | $ | 30,070 | ||||||||
The Company's primary products are semiconductor integrated circuits, which constitute a group of similar products. Therefore, it is impracticable to differentiate the revenue from external customers for each product sold. The Company does not allocate assets by segment, as management does not use asset information to measure or evaluate a segment’s performance.
17
Reconciliation of Segment Information to Condensed Consolidated Statements of Operations
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands) | |||||||
Total segment income from operations | $ | 40,686 | $ | 30,070 | |||
Unallocated amounts: | |||||||
Share-based compensation expense | (13,687 | ) | (15,617 | ) | |||
Loss from manufacturing facility damage and shutdown | — | (7,056 | ) | ||||
Acquisition-related charges | (4,403 | ) | (1,628 | ) | |||
French building (underutilization) and other credits | 288 | (1,296 | ) | ||||
Restructuring (charges) credits | (1,147 | ) | 224 | ||||
(Loss) gain related to foundry arrangements | (1,192 | ) | 58 | ||||
Consolidated income from operations | $ | 20,545 | $ | 4,755 | |||
Geographic sources of revenue were as follows:
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands) | |||||||
China, including Hong Kong | $ | 93,408 | $ | 93,201 | |||
United States | 57,998 | 52,910 | |||||
Germany | 41,810 | 59,261 | |||||
South Korea | 26,175 | 33,032 | |||||
Japan | 15,013 | 5,540 | |||||
Taiwan | 10,166 | 10,718 | |||||
Singapore | 9,961 | 11,590 | |||||
France | 3,142 | 3,080 | |||||
Rest of Europe | 31,549 | 38,353 | |||||
Rest of Asia-Pacific | 23,125 | 24,022 | |||||
Rest of the World | 5,941 | 5,654 | |||||
Total net revenue | $ | 318,288 | $ | 337,361 | |||
Net revenue is attributed to regions based on ship-to locations.
The Company had one distributor that accounted for 14% of net revenue in the three months ended March 31, 2015. No end customer accounted for 10% or more of net revenue in the three months ended March 31, 2015 and 2014. The Company had two distributors that accounted for 16% and 13%, respectively, of net revenue in the three months ended March 31, 2014.
One distributor accounted for 13% of accounts receivable at March 31, 2015 and no end customer accounted for 10% or more of accounts receivable at March 31, 2015. Two distributors accounted for 17% and 14%, respectively, of accounts receivable at March 31, 2014 and no end customer accounted for 10% or more of accounts receivable at March 31, 2014.
Physical locations of tangible long-lived assets were as follows:
18
March 31, 2015 | December 31, 2014 | ||||||
(in thousands) | |||||||
United States | $ | 88,965 | $ | 92,466 | |||
Philippines | 56,866 | 56,094 | |||||
Germany | 17,119 | 17,920 | |||||
France | 12,591 | 13,714 | |||||
Rest of Asia-Pacific | 20,338 | 20,237 | |||||
Rest of Europe | 5,324 | 5,854 | |||||
Total | $ | 201,203 | $ | 206,285 | |||
Excluded from the table above are auction-rate securities of $1.1 million at March 31, 2015 and December 31, 2014, which are included in other assets on the Condensed Consolidated Balance Sheets. Also excluded from the table above as of March 31, 2015 and December 31, 2014 are goodwill of $188.6 million and $191.1 million, respectively, intangible assets, net, of $46.9 million and $50.3 million, respectively, and deferred income tax assets of $117.4 million and $117.3 million, respectively.
Note 12 RESTRUCTURING CHARGES
The following table summarizes the activity related to the accrual for restructuring charges detailed by event:
Q2'10 | Q2'12 | Q1'13 | Q3'13 | Q3'14 | Q4'14 | Q1'15 | Total | ||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||
Balance at January 1, 2015 - Restructuring Accrual | $ | 281 | $ | 19 | $ | 3,988 | $ | 9 | $ | 920 | $ | 14,508 | $ | — | $ | 19,725 | |||||||||||||||
(Credits) charges – Employee termination costs, net of change in estimate | — | — | (49 | ) | — | 488 | 6 | 702 | 1,147 | ||||||||||||||||||||||
Non-cash - Other | — | — | — | — | (175 | ) | (6 | ) | — | (181 | ) | ||||||||||||||||||||
Payments – Employee termination costs | — | — | (524 | ) | — | (540 | ) | (14 | ) | (196 | ) | (1,274 | ) | ||||||||||||||||||
Foreign exchange gain | — | — | (31 | ) | — | (59 | ) | (1 | ) | (7 | ) | (98 | ) | ||||||||||||||||||
Balance at March 31, 2015 - Restructuring Accrual | $ | 281 | $ | 19 | $ | 3,384 | $ | 9 | $ | 634 | $ | 14,493 | $ | 499 | $ | 19,319 | |||||||||||||||
The Company records restructuring liabilities related to workforce reductions when the accounting recognition criteria are met and consistent with management's approval and commitment to the restructuring plans in each particular quarter. The restructuring plans identify the number of employees to be terminated, job classifications and functions, location and the date the plan is expected to be completed.
2015 Restructuring Charges
Restructuring charges recorded in 2015 were related to workforce reductions, primarily in the U.S., in connection with the Company's decision to exit the XSense business and workforce reductions and other costs in connection with the Company's decision to shut down an assembly operations plant in the Philippines. These actions were intended to align operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. The restructuring liability was recorded in the first quarter of 2015, consistent with management's approval of the restructuring plan and the communication to affected employees within that quarter. The restructuring charges recorded during the three months ended March 31, 2015 were $1.1 million.
The Company anticipates all employees affected by the XSense and Philippines restructurings will cease active service before the end of the fourth quarter of 2015.
2014 Restructuring Charges
Restructuring charges were recorded in the third and fourth quarters of 2014. The charges primarily related to workforce reductions in France. These actions were intended to align operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. In connection with formulating this restructuring plan, during the third and fourth quarters of 2014, the Company confidentially negotiated and developed a “social plan”
19
in coordination and consultation with the local Works Council. This social plan, which is subject to French law, set forth general parameters, terms and benefits for both voluntary and involuntary employee dismissals.
2013 Restructuring Charges
Restructuring charges were recorded in the first and third quarters of 2013. The charge in the first quarter of 2013 was primarily related to workforce reductions at our subsidiaries in Rousset, France ("Rousset"), Nantes, France (“Nantes”), and Heilbronn, Germany ("Heilbronn"). The charge in the third quarter of 2013 related primarily to workforce reductions in the U.S. and Norway.
Note 13 NET INCOME PER SHARE ATTRIBUTABLE TO ATMEL COMMON STOCKHOLDERS
A reconciliation of the numerator and denominator of basic and diluted net income per share is as follows:
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands, except per share data) | |||||||
Net income attributable to Atmel | $ | 16,495 | $ | 2,166 | |||
Weighted-average shares - basic | 417,038 | 425,390 | |||||
Dilutive effect of incremental shares and share equivalents | 1,424 | 1,886 | |||||
Weighted-average shares - diluted | 418,462 | 427,276 | |||||
Net income per share: | |||||||
Basic | |||||||
Net income per share attributable to Atmel common stockholders - basic | $ | 0.04 | $ | 0.01 | |||
Diluted | |||||||
Net income per share attributable to Atmel common stockholders - diluted | $ | 0.04 | $ | 0.01 | |||
The following table summarizes securities that were not included in the “Weighted-average shares - diluted” used for calculation of diluted net income per share, as their effect would have been anti-dilutive:
Three Months Ended | |||||
March 31, 2015 | March 31, 2014 | ||||
(in thousands) | |||||
Employee stock options and restricted stock units outstanding | 4,578 | 4,788 | |||
Note 14 SUBSEQUENT EVENTS
On April 16, 2015, the Company completed the sale of XSense touch sensor assets to UniPixel, Inc. In connection with the transaction, the Company transferred its XSense related manufacturing assets to UniPixel, which is also assuming related costs, and separately licensed to UniPixel its XSense patent portfolio and other intellectual property, which the Company is retaining. The intellectual property licenses have an initial five year term, renewable by UniPixel for an additional ten years. The Company will receive minimum royalties during the initial five year term equal to $16.3 million, of which $9.3 million was prepaid in cash at the close of the transaction. The Company also agreed to lease facilities and provide transitional support to UniPixel for a limited period of time.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our Condensed Consolidated Financial Statements and the related Notes included in this Form 10-Q. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to review and consider carefully the various disclosures made by us in this Form 10-Q and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2014. Atmel’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports are available, free of charge, through the “Investors” section of www.atmel.com. We make these reports available as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website located at www.sec.gov that contains Atmel’s reports filed with, or furnished to, the SEC. The information disclosed on our website is not incorporated herein and does not form a part of this Form 10-Q.
20
This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2015 and beyond. Such forward looking statements include, but are not limited to, statements about: the expansion of the market for microcontrollers, including in the “Internet of Things” and wearables markets, revenue for our maXTouch products, our gross margin expectations and trends, anticipated revenue by geographic area and the ongoing transition of our revenue base to Asia, expectations or trends involving our operating expenses, capital expenditures, cash flow and liquidity, our factory utilization rates, the effect and timing of new product introductions, our ability to access independent foundry capacity and the corresponding financial condition and operational performance of those foundry partners, including insolvencies of, and litigation related to European foundry suppliers, the effects of our strategic transactions and restructuring efforts, consolidation occurring within the semiconductor industry through mergers and acquisitions, the estimates we use in respect of the amount and/or timing for expensing unearned share-based compensation and similar estimates related to our performance-based restricted stock units, our expectations regarding tax matters and related tax audits, the outcome of litigation (including intellectual property litigation in which we may be involved or in which our customers may be involved, especially in the mobile device sector), and the effects of exchange rates and our ongoing efforts to manage exposure to exchange rate fluctuation and significant devaluation beginning at the end of 2014 of the Euro against the U.S. dollar. Our actual results could differ materially from those projected in any forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion and in Item 1A - Risk Factors, and elsewhere in this Form 10-Q. Generally, the words “may,” “will,” “could,” “should,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-Q is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. We undertake no obligation to update any forward-looking statements in this Form 10-Q.
OVERVIEW
We are one of the world’s leading designers, developers and suppliers of general purpose microcontrollers, which are self-contained computers-on-a-chip. Microcontrollers are generally less expensive, consume less power and offer enhanced programming capabilities compared to traditional microprocessors. That product focus has enabled us to develop and maintain a diversified, global customer base that incorporates our semiconductors into industrial and automotive systems, smart energy meters, LED-based lighting systems, digital consumer products, mobile computing devices, communications networks, and other electronics in which our products provide embedded processing and critical interface functions. Leveraging our core microcontroller technologies and competencies, and combining those strengths with our advanced security, wireless and software solutions, we are able to offer one of the market’s most complete, compelling and easy-to-use product portfolios for the rapidly evolving “Internet of Things,” where smart, connected devices and appliances seamlessly and securely interact and share information and provide the underpinnings for new and enhanced industrial, consumer and automotive applications. Extending this portfolio into the “wearables” sector, which crosses multiple segments such as health care, fitness and athletics, our solutions can manage multiple accelerometers and other sensors within devices, transmit data from those devices, and provide the ability to track or monitor various activities. We believe the market for microcontrollers that integrate advanced security and wireless functions, or that offer those functions, for example, in stand-alone encryption, authentication or wireless chipsets, as our microcontrollers do, will continue to grow and that our ability to deliver integrated solutions in an easy-to-use, readily deployable manner helps to differentiate our products for the “Internet of Things,” “wearables” and automotive sectors. As we focus resources on those expanding markets, we also continue to serve our extensive historical base of industrial, consumer, aerospace, military and communications customers. Our broad portfolio of touch products and technologies, our ability to integrate silicon and firmware, and our significant experience within the field of human machine interaction (“HMI”), allow us to deliver solutions for industrial, consumer and automotive applications that seek to leverage a “touch” interface, require proximity sensing, demand hover capabilities or implement new methods for improving human computer interaction. We see these solutions used in touch panels for industrial control systems, household appliances and home automation systems, as well as touch screens integrated within point of sale terminals, automotive consoles, gaming systems and mobile devices that range from handsets and tablets to laptops and other personal computers. In addition to those sectors, we continue to design and sell semiconductor products that complement our general microcontroller business, including nonvolatile memory, radio frequency and mixed-signal components and application specific integrated circuits. This expansive product portfolio, sold through our global distribution channels to a broad customer base, allows us, we believe, to address a wider range of potential applications than many other companies within our sector and to target market segments in which we expect semiconductor content to continue to increase in the future.
On April 16, 2015, in a further effort to focus on our core business, we completed the sale of our XSense manufacturing assets and separately licensed to the buyer our XSense intellectual property assets, which we retained. See Note 14 of Notes to Condensed Consolidated Financial Statements for a further discussion.
On March 26, 2015, we paid our stockholders the first quarterly cash dividend payment, in the amount of $0.04 per common share, in our 30-year history.
21
RESULTS OF OPERATIONS
Three Months Ended | |||||||||||
March 31, 2015 | March 31, 2014 | ||||||||||
(in thousands, except for percentage of net revenue) | |||||||||||
Net revenue | $ | 318,288 | 100 | % | $ | 337,361 | 100 | % | |||
Gross margin | 147,297 | 46 | % | 139,990 | 41 | % | |||||
Research and development | 59,129 | 19 | % | 69,752 | 21 | % | |||||
Selling, general and administrative | 62,073 | 20 | % | 64,079 | 19 | % | |||||
Acquisition-related charges | 4,403 | 1 | % | 1,628 | — | % | |||||
Restructuring (credits) charges | 1,147 | — | % | (224 | ) | — | % | ||||
Income from operations | $ | 20,545 | 6 | % | $ | 4,755 | 1 | % | |||
Net Revenue
Our net revenue totaled $318.3 million for the three months ended March 31, 2015, a decrease of 6%, or $19.1 million, from $337.4 million in net revenue for the three months ended March 31, 2014. Our revenue for the three months ended March 31, 2015 was lower than the three months ended March 31, 2014 due principally to the adverse effects of foreign currency translation associated with the decline of the Euro against the U.S. dollar and reduced revenue related to commodity sensor hub and end-of-life products, partially offset by growth in our nonvolatile memory segment and stronger demand in the communications and automotive end markets.
Net Revenue — By Operating Segment
Our net revenue by operating segment is summarized as follows:
Three Months Ended | ||||||||||||||
March 31, 2015 | March 31, 2014 | Change | % Change | |||||||||||
(in thousands, except for percentages) | ||||||||||||||
Microcontroller | $ | 218,786 | $ | 235,141 | $ | (16,355 | ) | (7 | )% | |||||
Nonvolatile Memory | 43,748 | 35,651 | 8,097 | 23 | % | |||||||||
Automotive | 35,745 | 40,971 | (5,226 | ) | (13 | )% | ||||||||
Multi-Market and Other | 20,009 | 25,598 | (5,589 | ) | (22 | )% | ||||||||
Total net revenue | $ | 318,288 | $ | 337,361 | $ | (19,073 | ) | (6 | )% | |||||
Microcontroller
Microcontroller segment net revenue decreased 7% to $218.8 million for the three months ended March 31, 2015 compared to $235.1 million for the three months ended March 31, 2014. Microcontroller net revenue represented 69% and 70% of total net revenue for the three months ended March 31, 2015 and 2014, respectively. Revenue decreased primarily as a result of the adverse effect of foreign currency translation associated with the decline of the Euro against the U.S. dollar, reduced revenue related to commodity sensor hub and mobile end market, which was partially offset by stronger demand in the communications and automotive end markets.
Nonvolatile Memory
Nonvolatile Memory segment net revenue increased 23% to $43.7 million for the three months ended March 31, 2015 compared to $35.7 million for the three months ended March 31, 2014. The increase was mainly due to stronger demand for our secure cryptographic products, partially offset by a decline in standard memory products.
Automotive
Automotive segment net revenue decreased 13% to $35.7 million for the three months ended March 31, 2015 compared to $41.0 million for the three months ended March 31, 2014. This decrease was primarily related to the adverse effect of foreign currency translation associated with the decline of the Euro against the U.S. dollar and reduced revenue related to our end-of-life legacy products, partially offset by an increase in demand for our RF automotive products, including in-vehicle networking products.
22
Multi-Market and Other
Multi-Market and Other segment net revenue decreased 22% to $20.0 million for the three months ended March 31, 2015 compared to $25.6 million for the three months ended March 31, 2014. The decrease resulted primarily from a decline in our Aerospace business and the adverse effect of foreign currency translation associated with the decline of the Euro against the U.S. dollar. On April 16, 2015, we completed the sale of our XSense manufacturing assets and the related license of our XSense intellectual property assets, which have been included in this reporting segment. See Note 14 of Notes to Condensed Consolidated Financial Statements for further discussion.
Net Revenue by Geographic Area
Our net revenue by geographic area for the three months ended March 31, 2015, compared to the three months ended March 31, 2014, is summarized in the table below. Revenue is attributed to regions based on the location to which we ship. See Note 11 of Notes to Condensed Consolidated Financial Statements for further discussion.
Three Months Ended | ||||||||||||||
March 31, 2015 | March 31, 2014 | Change | % Change | |||||||||||
(in thousands, except for percentages) | ||||||||||||||
Asia | $ | 177,848 | $ | 178,103 | $ | (255 | ) | — | % | |||||
Europe | 76,501 | 100,694 | (24,193 | ) | (24 | )% | ||||||||
United States | 57,998 | 52,910 | 5,088 | 10 | % | |||||||||
Other* | 5,941 | 5,654 | 287 | 5 | % | |||||||||
Total net revenue | $ | 318,288 | $ | 337,361 | $ | (19,073 | ) | (6 | )% | |||||
________________________________________
* Primarily includes South Africa, and Central and South America
Net revenue outside the United States accounted for 82% and 84% of our net revenue for the three months ended March 31, 2015 and 2014, respectively.
Our net revenue in Asia was relatively flat for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. The change resulted primarily from a decline in revenue from the consumer and mobile end markets offset by stronger demand in the industrial and automotive markets in Asia. Net revenue for the Asia region was 56% and 53% of total net revenue for three months ended March 31, 2015 and 2014, respectively.
Our net revenue in Europe decreased by $24.2 million, or 24% for the three months ended March 31, 2015, compared to the three months ended March 31, 2014. The revenue decrease resulted primarily from adverse movements of the Euro against the U.S. dollar exchange rate and declining demand in the industrial and automotive end markets. Net revenue for the Europe region was 24% and 30% of total net revenue for the three months ended March 31, 2015 and 2014, respectively.
Our net revenue in the United States increased by $5.1 million, or 10%, for the three months ended March 31, 2015, compared to the three months ended March 31, 2014 primarily due to increased demand in the consumer end market offset by declining demand in the industrial end market. Net revenue for the U.S. region was 18% and 16% of total net revenue for the three months ended March 31, 2015 and 2014, respectively.
Revenue and Costs — Impact from Changes to Foreign Exchange Rates
Changes in foreign exchange rates have historically had an effect on our net revenue and operating costs. Net revenue denominated in foreign currencies, primarily Euros, were 18% and 24% of our total net revenue for the three months ended March 31, 2015 and 2014, respectively.
Costs denominated in foreign currencies were 18% and 19% of our total costs for the three months ended March 31, 2015 and 2014, respectively.
Average exchange rates utilized to translate foreign currency revenue and expenses denominated in Euros were approximately 1.15 and 1.37 Euros to the dollar for the three months ended March 31, 2015 and 2014, respectively.
Our net revenue for the three months ended March 31, 2015 would have been approximately $10.6 million higher had the average exchange rate in the three months ended March 31, 2015 remained the same as the average exchange rate in effect for the three months ended March 31, 2014. Our income from operations would have been approximately $2.4 million higher had the
23
average exchange rate in the three months ended March 31, 2015 remained the same as the average exchange rate in the three months ended March 31, 2014.
The exchange rate for the Euro against the U.S. dollar declined from 1.22 Euros to the dollar at January 1, 2015 to 1.07 Euros to the dollar at March 31, 2015. “Quantitative easing” undertaken by the European Central Bank could cause a further decline in the Euro against the U.S. dollar or could introduce other unusual volatility into the foreign currency markets. As a result of these foreign currency exchange rate fluctuations, it may also be more difficult to detect underlying trends in our business and results of operations. We do not currently maintain a program to hedge transactional exposures in foreign currencies. See "Item 1A - Risk Factors".
Gross Margin
Gross margin was 46.3% for the three months ended March 31, 2015 compared to 41.5% for the three months ended March 31, 2014, respectively, primarily due to manufacturing cost improvements and improved margins on new products partially offset by the adverse effect of foreign currency translation associated with the decline of the Euro against the U.S. dollar. The improvement in gross margin, compared to the same period in 2014, was partially due to a $7.1 million loss related to the manufacturing facility damage and unplanned shutdown at our Colorado Springs plant that occurred in December 2013 and continued into early 2014. We expect to realize further gross margin benefit through 2015 from ongoing cost reductions.
Inventory decreased to $274.2 million at March 31, 2015 from $278.2 million at December 31, 2014, primarily from improved alignment between customer demand and inventory on hand.
For the three months ended March 31, 2015, we manufactured approximately 60% of our products in our own wafer fabrication facility compared to 54% for the three months ended March 31, 2014.
Our cost of revenue includes the costs of wafer fabrication, assembly and test operations, inventory write-downs, royalty expense, freight costs and share-based compensation expense. Our gross margin as a percentage of net revenue fluctuates depending on product mix, manufacturing yields, utilization of manufacturing capacity, reserves for excess and obsolete inventory, and average selling prices, among other factors.
Research and Development
Research and development ("R&D") expenses decreased 15%, or $10.6 million, to $59.1 million for the three months ended March 31, 2015 from $69.8 million for the three months ended March 31, 2014. R&D expenses decreased, compared to the same period in 2014, primarily due to a reduction in XSense R&D expense, favorable exchange rate movements and enhanced cost controls. As a percentage of net revenue, R&D expenses totaled 19% and 21% for the three months ended March 31, 2015 and 2014, respectively.
We believe that continued strategic investments in R&D, primarily related to new product development are essential for us to remain competitive in the markets we serve.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses decreased 3%, or $2.0 million, to $62.1 million for the three months ended March 31, 2015 from $64.1 million for the three months ended March 31, 2014. As a percentage of net revenue, SG&A expenses totaled 20% and 19% for the three months ended March 31, 2015 and 2014, respectively.
Share-Based Compensation
We primarily issue restricted stock units to our employees as equity compensation. Employees may also participate in an Employee Stock Purchase Program ("ESPP") that offers the ability to purchase stock through payroll withholdings at a discount to the market price. We did not issue stock options to our employees as equity compensation during the three months ended March 31, 2015 and 2014. Share-based compensation expense for any stock options and ESPP shares is based on the fair value of the award at the measurement date (grant date). The compensation amount for those options is calculated using a Black-Scholes option valuation model.
For restricted stock unit awards, the compensation amount is determined based upon the market price of our common stock on the grant date discounted for expected future dividends. Share-based compensation for restricted stock units, other than performance-based units described below, is recognized as an expense over the applicable vesting term for each employee receiving restricted stock units.
The recognition as expense of the fair value of performance-related share-based awards is determined based upon management’s estimate of the probability and timing for achieving the associated performance criteria, utilizing the fair value of the common stock on the grant date. Share-based compensation for performance-related awards is recognized over the estimated performance period, which may vary from period to period based upon management’s estimates of achievement and the timing to
24
achieve the related performance goals. These awards vest once the performance criteria are met.
See Note 6 of Notes to Condensed Consolidated Financial Statements for the summary of share-based compensation included in operating results.
In December 2014, we adopted the Atmel 2015 Long-Term Performance-Based Incentive Plan (the “2015 Plan”), which provides for the grant of performance-based restricted stock units to certain participants. Performance metrics for the 2015 Plan are based on our publicly-reported non-GAAP earnings per share growth rate from 2014 to 2015 (calculated for the fiscal years ended 2014 and 2015, respectively) compared to the adjusted earnings per share growth rates of companies included within the Philadelphia Semiconductor Sector Index during the same period. Vesting of performance-based restricted stock units under the 2015 Plan is expected to commence, assuming achievement of the underlying performance metrics, in the first calendar quarter of 2016.
In December 2013, we adopted the Atmel 2014 Long-Term Performance-Based Incentive Plan (the “2014 Plan”), which provides for the grant of performance-based restricted stock units to Company participants. We recorded total share-based compensation expense related to performance-based restricted stock units of $1.0 million and $1.1 million under the 2014 Plan in the three months ended March 31, 2015 and 2014, respectively.
Until restricted stock units are vested, they do not have the voting or dividend participation rights of common stock and the shares underlying the awards are not considered issued and outstanding.
Acquisition-Related Charges
We recorded total acquisition-related charges of $4.4 million and $1.6 million for the three months ended March 31, 2015 and 2014, respectively.
Included in those acquisition-related charges is amortization of $2.8 million and $1.3 million for the three months ended March 31, 2015 and 2014, respectively, associated with customer relationships, developed technology, trade name, non-compete agreements and backlog. We estimate that charges related to amortization of intangible assets will be approximately $6.7 million for the remainder of 2015.
We also recorded other compensation related charges for these acquisitions of $1.6 million and $0.3 million for the three months ended March 31, 2015 and 2014, respectively.
Restructuring Charges
See Note 12 of Notes to Condensed Consolidated Financial Statements for the summary of activity related to the accrual for restructuring charges detailed by event.
We record restructuring liabilities related to workforce reductions when the accounting recognition criteria are met and consistent with management's approval and commitment to the restructuring plans in each particular quarter. The restructuring plans identify the number of employees to be terminated, job classifications and functions, location and the date the plan is expected to be completed.
2015 Restructuring Charges
Restructuring charges recorded in 2015 related to workforce reductions, primarily in the U.S., in connection with our decision to exit the XSense business and workforce reductions and other costs in connection with our decision to shut down an assembly operations plant in the Philippines. These actions were intended to align operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. The restructuring liability was recorded in the first quarter of 2015, consistent with management's approval to the restructuring plan and the communication to affected employees within that quarter. The restructuring charges recorded during the three months ended March 31, 2015 were $1.1 million.
We anticipate all employees affected by the XSense and Philippines restructurings will cease active service before the end of the fourth quarter of 2015.
2014 Restructuring Charges
Restructuring charges were recorded in the third and fourth quarters of 2014. The charges primarily related to workforce reductions in France. These actions were intended to align operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. In connection with formulating this restructuring plan, during the third and fourth quarters of 2014, we confidentially negotiated and developed a “social plan” in coordination and consultation with the local Works Council. This social plan, which is subject to French law, set forth general parameters, terms and benefits for both voluntary and involuntary employee dismissals.
25
2013 Restructuring Charges
Restructuring charges were recorded in the first and third quarters of 2013. The charge in the first quarter of 2013 was primarily related to workforce reductions at our subsidiaries in Rousset, France ("Rousset"), Nantes, France (“Nantes”), and Heilbronn, Germany ("Heilbronn"). The charge in the third quarter of 2013 related primarily to workforce reductions in the U.S. and Norway.
Based on the information available to us as of the date of this Form 10-Q, the dates on which employees affected by the restructurings in 2013, 2014 and 2015 as described above ceased or are currently expected to cease their service with us, and assuming the absence of material labor discord, litigation or other unforeseen issues arising with respect to those matters, we believe that the estimated annual savings from the restructuring actions described above will be approximately $72.0 million, comprising approximately $22.0 million from cost of sales, approximately $41.0 million from research and development expense and approximately $9.0 million from selling, general and administrative expense. Actual savings realized may differ, however, if our assumptions are incorrect or if other unanticipated events occur. Savings may also be offset, or additional expenses incurred, if, and when, we make additional investments in labor, materials or capital in our business in the future. Savings achieved in connection with one series of restructuring activities may not necessarily be indicative of savings that may be realized in other restructuring activities nor may the timing of savings realized in connection with our restructuring actions be similar to, or consistent with, the timing of benefits realized in other restructuring activities that we may undertake at any time.
Interest and Other Income, Net
Three Months Ended | |||||||
March 31, 2015 | March 31, 2014 | ||||||
(in thousands) | |||||||
Interest and other income | $ | 130 | $ | 394 | |||
Interest expense | (723 | ) | (505 | ) | |||
Foreign exchange transaction gains | 4,293 | 188 | |||||
Total | $ | 3,700 | $ | 77 | |||
Interest and other income, net, resulted in income of $3.7 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively, primarily due to higher net foreign exchange gains. We continue to have balance sheet exposures in foreign currencies subject to exchange rate fluctuations and may incur further gains or losses in the future as a result of such foreign exchange exposures.
Provision for Income Taxes
For the three months ended March 31, 2015 and 2014, we recorded an income tax provision of $7.7 million and $2.7 million, respectively. For the three months ended March 31, 2015, our effective tax rate was lower than the U.S. statutory federal income tax rate of 35%, primarily due to income recognized in lower tax rate foreign jurisdictions. For the three months ended March 31, 2014, our effective tax rate was higher than the U.S. statutory federal income tax rate of 35%, primarily due to discrete interest charges related to foreign audit and withholding tax reserves, and the ratio of these items to worldwide operating income.
We regularly assess our tax provision in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which we do business. We have tax audits in progress in various non-U.S. jurisdictions, including jurisdictions where we have or have had significant operations. To the extent the final tax liabilities are different from the amounts accrued, the increases or decreases will be recorded as income tax expense or benefit in the period of final or effective resolution.
For further discussion of our income tax provision, see Note 9 of Notes to Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
At March 31, 2015, we had $200.8 million of cash and cash equivalents, compared to $206.9 million at December 31, 2014. The decrease in cash balances in the three months ended March 31, 2015 resulted primarily from the timing of vendor payables and customer receivables, capital purchases of fixed assets, payment of cash dividends, principal repayments under our credit facility, common stock repurchases, and tax payments related to vested restricted stock units. Our current asset to liability ratio, calculated as total current assets divided by total current liabilities, was 2.92 at March 31, 2015 compared to 2.71 at December 31, 2014. Working capital, calculated as total current assets less total current liabilities, decreased to $495.1 million at March 31, 2015, compared to $502.7 million at December 31, 2014. Cash provided by operating activities was $40.1 million for the three months ended March 31, 2015 compared to cash provided by operating activities of $46.2 million for the three months ended March 31, 2014, and capital expenditures totaled $10.4 million and $17.0 million for the three months ended March 31, 2015 and 2014, respectively.
26
As of March 31, 2015, of the $200.8 million aggregate cash and cash equivalents held by us, the amount of cash and cash equivalents held by our foreign subsidiaries was $162.3 million. If the funds held by our foreign subsidiaries were needed for our operations in the United States, the repatriation of some of these funds to the United States could require payment of additional U.S. taxes.
Senior Secured Revolving Credit Facility
On July 29, 2014, we borrowed $90.0 million under the Facility to assist with the acquisition of NMI. Interest on the borrowed amount equals the applicable periodic LIBOR rate, plus 1.25% per annum, and was $0.4 million for the three months ended March 31, 2015. The Facility matures on December 6, 2018. At March 31, 2015, after repayments, we had $65.0 million of outstanding borrowings under the Facility and we were in compliance with all our financial covenants under the Credit Agreement.
Operating Activities
Net cash provided by operating activities was $40.1 million for the three months ended March 31, 2015, compared to net cash provided by operating activities of $46.2 million for the three months ended March 31, 2014. Net cash provided by operating activities for the three months ended March 31, 2015 was determined primarily by adjusting net income of $16.5 million for non-cash depreciation and amortization charges of $14.3 million, and share-based compensation charges of $13.7 million.
Accounts receivable decreased by 11% or $25.4 million to $196.7 million at March 31, 2015, from $222.0 million at December 31, 2014. The average number of days of accounts receivable outstanding decreased to 56 days for the three months ended March 31, 2015 compared to 58 days for the three months ended December 31, 2014.
Inventories decreased to $274.2 million at March 31, 2015 from $278.2 million at December 31, 2014. Inventories consist of raw wafers, purchased foundry wafers, work-in-progress and finished units. Our number of days of inventory increased to 146 days for the three months ended March 31, 2015 from 123 days for the three months ended December 31, 2014 as a result of revenue declines during the quarter.
Investing Activities
Net cash used in investing activities was $10.9 million and $14.7 million for the three months ended March 31, 2015 and 2014, respectively. For the three months ended March 31, 2015, we paid $10.4 million for acquisitions of fixed assets as compared to $17.0 million in the three months ended March 31, 2014.
We anticipate 2015 expenditures for capital purchases to be approximately $45.0 million to be used principally to maintain existing manufacturing operations and improve our information technology systems.
Financing Activities
Net cash used in financing activities was $34.5 million and $52.6 million for the three months ended March 31, 2015 and 2014, respectively. The cash used was primarily related to common stock repurchases of $9.1 million in the three months ended March 31, 2015, compared to $54.9 million in the three months ended March 31, 2014 and tax payments related to shares withheld for vested restricted stock units of $5.2 million for the three months ended March 31, 2015, compared to $4.9 million for the three months ended March 31, 2014. During the three months ended March 31, 2015, we repaid $10.0 million in outstanding principal under the Facility and paid cash dividends aggregating $16.7 million. As of March 31, 2015, we had $200.0 million available for repurchases remaining under our existing stock repurchase program. Proceeds from the issuance of common stock related to exercises of stock options and our employee stock purchase plan totaled $6.0 million and $6.7 million for the three months ended March 31, 2015 and 2014, respectively.
We believe our existing balances of cash and cash equivalents, together with anticipated cash flow from operations, and borrowing availability under our credit facility will be sufficient to meet our liquidity and capital requirements over the next twelve months. We also expect our operations to generate positive cash flow over that twelve month period.
Since a substantial portion of our operations is conducted through our foreign subsidiaries, our cash flow, ability to service debt, and payments to vendors are partially dependent upon the liquidity and earnings of our subsidiaries as well as the distribution of those earnings, or repayment of loans or other payments of funds by those subsidiaries, to us. Our foreign subsidiaries are separate and distinct legal entities and may be subject to local legal or tax requirements, or other restrictions that may limit their ability to transfer funds to other group entities including the U.S. parent entity, whether by dividends, distributions, loans or other payments.
During 2015 and in future years, our ability to make necessary capital investments or strategic acquisitions, or to pay cash dividends, will depend on our ability to continue to generate sufficient cash flow from operations and to obtain adequate financing if necessary. We believe we have sufficient working capital to fund our future operations, with $200.8 million in cash and cash equivalents as of March 31, 2015, expected future cash flows from operations and borrowing availability under our credit facility or other financing arrangements.
27
Off-Balance Sheet Arrangements (Including Guarantees)
See the paragraph under the heading “Guarantees” in Note 8 of Notes to Condensed Consolidated Financial Statements for a discussion of off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Condensed Consolidated Financial Statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the estimates, assumptions and judgments involved in provisions for revenue, excess and obsolete inventory, sales reserves and allowances, share-based compensation expense, allowances for doubtful accounts receivable, estimates for useful lives associated with long-lived assets, recoverability of goodwill and intangible assets, restructuring charges, liabilities for uncertain tax positions, deferred tax asset valuation allowances and litigation have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting policies. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results, although there can be no assurance that results will not differ in the future. The critical accounting estimates associated with these policies are described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of our Annual Report on Form 10-K filed with the SEC on February 26, 2015.
Recent Accounting Pronouncements
See Note 1 of Notes to Condensed Consolidated Financial Statements for information regarding recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We generally classify securities as available-for-sale, and consequently record them in the Condensed Consolidated Balance Sheets at fair value with unrealized gains and losses being recorded as a separate part of stockholders’ equity. We do not currently hedge these interest rate exposures. Given our current profile of interest rate exposures and the maturities of our investment holdings, we believe that an unfavorable change in interest rates would not have a significant negative impact on our statements of operations through March 31, 2015.
Foreign Currency Risk
The U.S. dollar experienced substantial appreciation against the Euro during the three months ended March 31, 2015. Changes in foreign exchange rates have historically had an effect on our net revenue and operating costs. We expect further volatility to affect, and possible further declines in the value of the Euro in 2015. That volatility and those declines, if substantial, may adversely affect our reported revenue and gross margin. Those same decreases may also cause reductions in our operating costs, although those decreases may not fully offset decreases in gross margin.
When we take an order denominated in a foreign currency we will receive fewer dollars, and lower revenue, than we initially anticipated if that local currency weakens against the dollar before we ship our product. Conversely, revenue will be positively impacted if the local currency strengthens against the dollar before we ship our product. Costs may also be affected by foreign currency fluctuation. For example, in Europe, where we have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, all costs will increase if the local currency strengthens against the dollar. This impact is determined assuming that all foreign currency denominated transactions that occurred for the three months ended March 31, 2015 were recorded using the average foreign currency exchange rates in the three months ended March 31, 2014. We do not use derivative instruments to hedge our foreign currency risk.
Changes in foreign exchange rates have historically had an effect on our net revenue and operating costs. Net revenue denominated in foreign currencies, primarily Euros, was 18% and 24% of our total net revenue for the three months ended March 31, 2015 and 2014, respectively.
Costs denominated in foreign currencies were 18% and 19% of our total costs for the three months ended March 31, 2015 and 2014, respectively.
28
Average exchange rates utilized to translate foreign currency revenue and expenses denominated in Euros were approximately 1.15 and 1.37 Euros to the dollar for the three months ended March 31, 2015 and 2014, respectively. Our net revenue for the three months ended March 31, 2015 would have been approximately $10.6 million higher had the average exchange rate in the three months ended March 31, 2015 remained the same as the average exchange rate in effect for the three months ended March 31, 2014. Our income from operations would have been approximately $2.4 million higher had the average exchange rate in the three months ended March 31, 2015 remained the same as the average exchange rate in the three months ended March 31, 2014.
We also face the risk that our accounts receivable denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Approximately 18% of our accounts receivable were denominated in foreign currency as of March 31, 2015 and December 31, 2014.
Similarly, we face the risk that our accounts payable and debt obligations denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. Approximately 5% of our accounts payable were denominated in foreign currencies at March 31, 2015 and December 31, 2014. We have not historically sought to hedge our foreign currency exposure, although we may determine to do so in the future.
Our most significant currency exposures generally relate to the Euro, Norwegian Krone and British Pound and to a lesser extent, the Chinese Yuan and Malaysian Ringgit. To provide an assessment of the foreign currency exchange risk associated with our foreign currency exposures within revenue, cost and operating expense, we performed a sensitivity analysis to determine the impact that an adverse change in exchange rates of the U.S. dollar against each of those currencies
would have on our financial statements. A hypothetical weighted-average change of 10% in the exchange rates of all currencies to which we have exposure would have changed our operating income before taxes by approximately $0.4 million for the three months ended March 31, 2015, assuming no offsetting hedge positions. We may experience exposure, over time, to currencies other than those referred to in this paragraph, which may also affect our sensitivity analysis.
There remains ongoing uncertainty regarding the future of the Euro as a common currency and the Eurozone. While we continue to monitor the situation, the elimination of the Euro as a common currency, the withdrawal of member states from the Eurozone, or other events affecting the liquidity, volatility or use of the Euro could have a significant effect on our revenue and operations. In addition, “quantitative easing” undertaken by the European Central Bank could cause a further decline in the Euro against the U.S. dollar or could introduce other unusual volatility into the foreign currency markets. As a result of these foreign currency exchange rate fluctuations, it may also be more difficult to detect underlying trends in our business and results of operations. We do not currently maintain a program to hedge transactional exposures in foreign currencies. See "Item 1A - Risk Factors".
Liquidity and Valuation Risk
Approximately $1.1 million of our investment portfolio was invested in an auction-rate security at both March 31, 2015 and December 31, 2014.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, under the supervision of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934. Based on this evaluation our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Atmel have been detected.
Changes in Internal Control over Financial Reporting
29
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to various legal proceedings. Our management currently believes, based on information and facts currently known, that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operations and statement of cash flows. If an unfavorable ruling were to occur in any of the legal proceedings described in Note 8 of Notes to Condensed Consolidated Financial Statements, there exists the possibility of a material adverse effect on our financial position, results of operations and cash flows. For more information regarding certain details of these proceedings, see Note 8 of Notes to Condensed Consolidated Financial Statements, which is incorporated by reference into this Item. We accrue for losses related to litigation described in Note 8 of Notes to Condensed Consolidated Financial Statements that we consider probable and for which the loss can be reasonably estimated. We make a determination as to when a potential loss is reasonably probable based on relevant accounting literature and then include appropriate disclosure of the contingency. As we continue to monitor litigation matters, whether deemed material as of March 31, 2015 or not, our determination could change, and we may decide, at some future date, to establish an appropriate reserve.
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Form 10-Q, we have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operations. Investors should carefully consider the risks described below before making an investment decision. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment. In addition, these risks and uncertainties may affect the “forward-looking” statements described elsewhere in this Form 10-Q and in the documents incorporated herein by reference. They could also affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.
OUR REVENUE AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO A VARIETY OF FACTORS.
Our future operating results are subject to quarterly variations based upon a variety of factors, many of which are not within our control. As further discussed in this “Risk Factors” section, factors that could affect our operating results include, without limitation:
• | uncertain or unstable global macroeconomic, geo-political and social conditions, including those in Europe (where deflationary pressures and high unemployment continue to exist and concerns about the financial stability of Greece remain unresolved), the Middle East (where U.S. military action remains ongoing), and Asia (where economic activity in China has slowed and unrest has arisen in Hong Kong). |
• | the effect of fluctuations in currency exchange rates or continued political and monetary uncertainties within the European Union; |
• | restrictions in our revolving credit facility that may limit our flexibility in operating our business; |
• | the success of our customers’ end products, our ability to introduce new products into the market and to ramp production of new products, and our ability to improve and implement new manufacturing technologies, reduce manufacturing costs and achieve acceptable manufacturing yields; |
• | the cyclical nature of, and consolidation occurring within, the semiconductor industry; |
• | disruption to our business caused by our dependence on outside foundries, and the insolvency and liquidation proceedings, and associated litigation, of those foundries in some cases; |
• | our dependence on selling through independent distributors and our ability to obtain accurate and timely sell-through information from these distributors; |
• | the complexity of our revenue reporting and dependence on our management’s ability to make judgments and estimates regarding inventory write-downs, future claims for returns and other matters affecting our financial statements; |
• | our reliance on non-binding customer forecasts and the effect of customer changes to forecasts and actual demand; |
• | the increasing complexity and added costs, compliance and otherwise, associated with laws and regulations around the world that affect our businesses and activities, including, for example, trade, export control, foreign corrupt practices, and bribery regulations; |
30
• | compliance with new regulations regarding the use of “conflict minerals” and the potential increased cost of certain metals used in manufacturing our products resulting therefrom; |
• | the effect of fluctuations in currency exchange rates or continued political and monetary uncertainties within the European Union; |
• | the capacity constraints of our independent assembly contractors; |
• | the effect of intellectual property and other litigation on us and our customers, and our ability to protect our intellectual property rights; |
• | the highly competitive nature of our markets and our ability to keep pace with technological change; |
• | our dependence on international sales and operations and the added complexity and compliance costs associated therewith; |
• | information technology system failures or network disruptions and disruptions caused by our system integration efforts; |
• | business interruptions, natural disasters, terrorist acts or similar unforeseen events or circumstances; |
• | our ability to maintain relationships with our key customers, the absence of long-term supply contracts with most of our customers, and product liability claims our customers may bring; |
• | unanticipated changes to environmental, health and safety regulations or related compliance issues; |
• | our dependence on certain key personnel; |
• | uneven expense recognition related to our issuance of performance-based restricted stock units or expectations related to cash-based executive incentive plans; |
• | the anti-takeover effects of provisions in our certificate of incorporation and bylaws; |
• | the unfunded nature of our foreign pension plans; |
• | the effect of acquisitions we may undertake, including our ability to effectively integrate acquisitions into our operations; |
• | disruptions in the availability of raw materials used in our products; |
• | the complexity of our global legal entity structure, the effect of intercompany loans within this structure, and the occurrence and outcome of income tax audits for these entities; and |
• | our receipt of economic grants in various jurisdictions, which may require repayment if we are unable to comply with the terms of such grants. |
Any unfavorable changes in any of these or other factors could harm our operating results and may result in volatility or a decline in our stock price.
A VOLATILE, OR FALLING, EURO, OR VOLATILITY IN OTHER NON-U.S. CURRENCIES, MAY ADVERSELY AFFECT OUR REVENUE OR OPERATING RESULTS
Although we conduct transactions principally in the U.S. dollar, approximately 18% of our revenue for the three months ended March 31, 2015 were generated in the Euro currency and approximately 18% of our operating expenses for the three months ended March 31, 2015 were incurred in Euro and other non-U.S. currencies. The exchange rate for the Euro against the U.S. dollar declined from 1.22 Euros to the dollar at January 1, 2015 to 1.07 Euros to the dollar at March 31, 2015. “Quantitative easing” undertaken by the European Central Bank could cause a further decline in the Euro against the U.S. dollar or could introduce other unusual volatility into the foreign currency markets. Changes in the value of foreign currencies, including, in particular, the Euro, relative to the U.S. dollar can affect our revenue and operating results due to transactional and translational re-measurements that are reflected in our earnings, which are reported in U.S. dollars. A decrease in the value of the Euro against the U.S. dollar may cause a reduction in our reported revenue. That same decrease may also cause a reduction in our operating costs. Decreases in revenue, and decreases in operating costs, resulting from these foreign currency valuation events may not move in lock-step. Variations in the exchange rate of other foreign currencies may have similar effects, although those variations would not currently be expected to have the same significance as changes in the value of the Euro to our company. As a result of these foreign currency exchange rate fluctuations, it may also be more difficult to detect underlying trends in our business and results of operations. Significant volatility in currency exchange rates may also cause our results of operations to differ from our expectations or the
31
expectations of our investors, which could also cause the trading price of our common stock to be adversely affected. We do not currently maintain a program to hedge transactional exposures in foreign currencies. As of the date of this Form 10-Q, we manage our exchange rate risk by matching foreign currency cash balances with expenses accrued in those foreign currencies.
UNCERTAIN OR UNSTABLE GLOBAL MACRO-ECONOMIC, GEO-POLITICAL AND SOCIAL CONDITIONS MAY AFFECT OUR BUSINESS.
Global macro-economic and geo-political conditions affecting the global economy or social order could adversely affect demand for our products and our business prospects from time to time. These conditions could include:
• | slow, uneven economic growth throughout the world; |
• | continued uncertainty regarding macroeconomic conditions in Europe (including potential deflationary pressures and continuing high unemployment and the financial stability of Greece) and Asia (including an economic slowdown in China); |
• | geo-political events throughout the world, including, for example, in the Middle East (which has witnessed increased military activities in Iraq and Syria, including renewed U.S. involvement), Eastern Europe (involving Russian and Ukrainian territorial claims), and Hong Kong (where civil unrest arose in 2014); and |
• | social unrest or disorder arising from the threat of global pandemics. |
OUR REVOLVING CREDIT FACILITY IS SECURED BY SUBSTANTIALLY ALL OF OUR ASSETS AND MAY LIMIT OUR FLEXIBILITY IN OPERATING OUR BUSINESS. A DEFAULT UNDER THE CREDIT FACILITY COULD SIGNIFICANTLY HARM OUR BUSINESS AND FINANCIAL POSITION.
In December 2013, we entered into a five-year senior secured revolving credit facility for up to $300 million with a group of lenders. Our credit facility is secured by substantially all of our assets. It also imposes restrictions that may limit our ability to engage in certain business activities, including limitations on asset sales, mergers and acquisitions, the incurrence of indebtedness and liens, the making of restricted payments or investments and transactions with affiliates. In addition, the credit facility contains customary financial covenants, including a maximum total-leverage ratio, a maximum senior-secured-leverage ratio, and a minimum fixed-charge-coverage ratio. Our ability to comply with these financial covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control. If we breach any of the covenants under our credit facility and do not obtain appropriate waivers, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable, which could result in a foreclosure on the assets securing the credit facility, adversely affect our ability to operate our business or otherwise significantly harm our financial position. At March 31, 2015, we had $65 million in outstanding borrowings under the Facility.
WE DEPEND SUBSTANTIALLY ON THE SUCCESS OF OUR CUSTOMERS' END PRODUCTS, OUR INTRODUCTION OF NEW PRODUCTS INTO THE MARKET AND OUR ABILITY TO REDUCE MANUFACTURING COSTS OVER TIME.
We believe that our future sales will depend substantially on the success of our customers' end products, our ability to introduce new products into the market, and our ability to reduce the manufacturing costs of our products over time. Our new products are generally incorporated into our customers' products or systems at their design stage. However, design wins can precede volume sales by a year or more. In addition, we may not be successful in achieving design wins or design wins may not result in future revenue, which depends in large part on our customers' ability to sell their end products or systems within their respective markets.
Rapid innovation within the semiconductor industry also continually increases pricing pressure, especially on products containing older technologies. We experience continuous pricing pressure, just as many of our competitors do. Product life cycles in our industry are relatively short, and as a result, products tend to be replaced by more technologically advanced substitutes on a regular basis. In turn, demand for older technology falls, causing the price at which such products can be sold to drop, often quickly. As a result, the average selling price of each of our products usually declines as individual products mature and competitors enter the market. To offset average selling price decreases and to continue profitably supplying our products, we rely primarily on reducing costs to manufacture our products, improving our process technologies and production efficiency, increasing product sales to absorb fixed costs and introducing new, higher-priced products that incorporate advanced features or integrated technologies to address new or emerging markets. Our operating results could be harmed if such cost reductions, production improvements, increased product sales and new product introductions do not occur in a timely manner or do not result in new customer demand.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY CREATES FLUCTUATIONS IN OUR OPERATING RESULTS AND MAY ALSO AFFECT THE JUDGMENTS, ESTIMATES AND ASSUMPTIONS WE APPLY IN PREPARING OUR FINANCIAL STATEMENTS.
32
The semiconductor industry has historically been cyclical, characterized by annual seasonality and wide fluctuations in product supply and demand. The semiconductor industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions.
Our operating results have been adversely affected in the past by industry-wide fluctuations in the demand for semiconductors, which resulted in under-utilization of our manufacturing capacity and a related decline in gross margin. Our business may be harmed in the future by cyclical conditions in the semiconductor industry as a whole and by conditions within specific markets served by our products. These fluctuations in demand may also affect inventory write-downs we take or other items in our financial statements. Our inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Determining market value for our inventories involves numerous judgments, estimates and assumptions, including assessing average selling prices and sales volumes for each of our products in future periods. The competitiveness of each product, market conditions and product lifecycles often change over time, resulting in a change in the judgments, estimates and assumptions we apply to establish inventory write-downs. The judgments, estimates and assumptions we apply in evaluating our inventory write-downs, including, for example, shortening or extending the anticipated life of our products, may have a material effect on our financial statements. If we overestimate demand, we may experience excess inventory levels. Inventory adjustments, based on the judgments, estimates and assumptions we make, may affect our results of operations, including our gross margin, in a positive or negative manner, depending on the nature of the adjustment.
A significant portion of our revenue comes from sales to customers supplying consumer markets and from international sales. As a result, our business may be subject to seasonally lower revenue in particular quarters of our fiscal year. The semiconductor industry has also been affected by significant shifts in consumer demand due to economic downturns or other factors, which can exacerbate the cyclicality within the industry and result in further diminished product demand and production over-capacity. We have, in the past, experienced substantial quarter-to-quarter fluctuations in revenue and operating results and expect in the future to continue to experience short-term period-to-period fluctuations in operating results due to general industry and economic conditions.
WE COULD EXPERIENCE DISRUPTION OF OUR BUSINESS DUE TO OUR DEPENDENCE ON OUTSIDE FOUNDRIES OR MANUFACTURING DISRUPTIONS AT OUR OWN WAFER FABRICATION FACILITY.
We rely substantially on independent third-party foundry manufacturing partners to manufacture products for us. As part of our fab-lite strategy, we have expanded and will continue to expand our foundry relationships by entering into new agreements with third-party foundries. If we cannot obtain sufficient capacity commitments, if our foundry partners suffer financial instability, liquidity issues, or insolvency proceedings affecting their ability to manufacture our products, or if our foundry partners experience production delays or quality issues for other reasons, the supply of our products could be disrupted, which could adversely affect our business.
Disruptions at our own wafer manufacturing facility in Colorado Springs, Colorado could also adversely affect our business. For the three months ended March 31, 2015, we manufactured approximately 60% of our products in our own wafer fabrication facility compared to 54% for the three months ended March 31, 2014. In December 2013, we experienced an incident in the nitrogen plant at that facility, which disrupted manufacturing for several weeks and affected our ability to fully meet demand in the first quarter of 2014. Because we rely on our Colorado facility for a significant percentage of our wafer supply, disruptions of the kind we experienced in December 2013, or others, could have an adverse effect on our business.
In addition, with respect to the use of external foundries, difficulties in production yields are more likely to occur when transitioning manufacturing processes to new third-party foundries or when qualifying new products at third-party foundries. If our foundry partners fail to deliver quality products and components on a timely basis, our business could be harmed.
We expect over time that an increasing portion of our wafer fabrication will be undertaken by third-party foundries.
Our fab-lite strategy exposes us to the following risks:
• | reduced control over delivery schedules and product costs; |
• | financial instability, liquidity issues, or insolvency proceedings, and related litigation, affecting our foundry partners; |
• | manufacturing disruptions at our Colorado Springs wafer fabrication facility or at those of our third-party foundries; |
• | higher than anticipated manufacturing costs; |
• | inability of our manufacturing subcontractors to develop manufacturing methods appropriate for our products and their unwillingness to devote adequate capacity to produce our products; |
• | possible abandonment of key fabrication processes by our foundry subcontractors used in products that are strategically important to us; |
• | reduced control over or decline in product quality and reliability; |
33
• | inability to maintain continuing relationships with our foundries; |
• | restricted ability to meet customer demand when faced with product shortages or order increases; and |
• | increased risk of potential misappropriation of our intellectual property. |
If any of the above risks occur, we could experience an interruption in our supply chain, an increase in costs or a reduction in our product quality and reliability, which could delay or decrease our revenue and adversely affect our reputation and our business.
We attempt to mitigate these risks with a strategy of qualifying multiple foundry subcontractors. However, there can be no guarantee that this or any other strategy will eliminate or significantly reduce these risks. Additionally, since most independent foundries are located in foreign countries, we are subject to risks generally associated with contracting with foreign manufacturers, including currency exchange fluctuations, political and economic instability, trade restrictions, changes in tariff and freight rates, and import and export regulations. Accordingly, we may experience problems maintaining expected timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.
We closely monitor the financial condition of our foundry partners, and although we do not believe that any of our current foundry partners are experiencing financial instability, we have in the past contracted with foundries that did, in fact, encounter material financial instability. Such instability, including potentially, insolvency proceedings, requires an investment of significant management time, may require additional changes in operational planning as conditions develop, may involve litigation, and could have other unexpected adverse effects on our business.
The terms on which we will be able to obtain wafer production for our products, and the timing and volume of such production will be substantially dependent on future agreements to be negotiated with independent foundries. We cannot be certain that the agreements we reach with such foundries will be on favorable terms. For example, any future agreements with independent foundries may be short-term in duration, may not be renewable, and may provide inadequate certainty regarding the future supply and pricing of wafers for our products.
If demand for our products increases significantly, we have no assurances that our third-party foundries will be able to increase their manufacturing capacity to a level that meets our requirements, potentially preventing us from meeting our customer demand and harming our business, reputation and customer relationships. Also, even if our independent foundries are able to meet our increased demand, those foundries may decide to charge significantly higher wafer prices to us, which could reduce our gross margin or require us to offset the increased prices by increasing prices to our customers, either of which could harm our business and operating results.
OUR REVENUE IS DEPENDENT TO A LARGE EXTENT ON SELLING TO END CUSTOMERS THROUGH INDEPENDENT DISTRIBUTORS. THESE DISTRIBUTORS MAY HAVE LIMITED FINANCIAL RESOURCES TO CONDUCT THEIR BUSINESS OR TO REPRESENT OUR INTERESTS EFFECTIVELY, MAY RAISE CREDIT RISKS FOR US, AND MAY TERMINATE OR MODIFY THEIR RELATIONSHIPS WITH US IN A MANNER THAT ADVERSELY AFFECTS OUR SALES.
Sales to distributors accounted for 59% of our net revenue for the three months ended March 31, 2015, and 57% of our net revenue for the three months ended March 31, 2014 respectively. We are dependent on our distributors to supplement our direct marketing and sales efforts. Our agreements with independent distributors can generally be terminated for convenience by either party upon relatively short notice. Generally, these agreements are non-exclusive and also permit our distributors to offer and promote our competitors’ products.
If any significant distributor or a substantial number of our distributors terminated their relationship with us, decided to market our competitors’ products in preference to our products, were unable or unwilling to sell our products, or were unable to pay us for products sold for any reason, our ability to bring our products to market could be adversely affected, we could have difficulty in collecting outstanding receivable balances, or we could incur other loss of revenue, charges or other adjustments, any of which could have a material adverse effect on our revenue and operating results. In some cases, certain of our distributors in Asia may also have more limited financial resources and constrained balance sheets than distributors in other geographic areas. If these distributors are unable effectively to finance their operations, or to represent our interests effectively because of financial limitations, our business could also be adversely affected.
OUR REVENUE REPORTING IS HIGHLY DEPENDENT ON RECEIVING ACCURATE AND TIMELY SELL-THROUGH INFORMATION FROM OUR DISTRIBUTORS. IF WE RECEIVE INACCURATE OR LATE INFORMATION FROM OUR DISTRIBUTORS, OUR FINANCIAL REPORTING COULD BE MISSTATED.
Our revenue reporting is highly dependent on receiving pertinent, accurate and timely data from our distributors. As our distributors resell products, they provide us with periodic data regarding the products sold, including prices, quantities, end customers, and the amount of our products they still have in stock. Because the data set is large and complex, and because there may be errors or delays in the reported data, we may use estimates and apply judgments to reconcile distributors’ reported inventories to their end customer sales transactions. Actual results could vary unfavorably from our estimates, which could affect our operating results and adversely affect our business.
34
OUR REVENUE REPORTING IS COMPLEX AND DEPENDENT, IN PART, ON OUR MANAGEMENT’S ABILITY TO MAKE JUDGMENTS AND ESTIMATES REGARDING FUTURE CLAIMS FOR RETURNS. IF OUR JUDGMENTS OR ESTIMATES ABOUT THESE MATTERS ARE INCORRECT OR INACCURATE, OUR REVENUE REPORTING COULD BE ADVERSELY AFFECTED.
Our revenue reporting is highly dependent on judgments and estimates that our management is required to make when preparing our financial statements. We currently recognize revenue for our distributors based in the U.S. and Europe in a different manner from the method we use for our distributors based in Asia (excluding Japan).
For sales to certain distributors (primarily based in the U.S. and Europe) with agreements allowing for price protection and product returns, we have not historically had the ability to estimate future claims at the point of shipment, and given that price is not fixed or determinable at that time, revenue is not recognized until the distributor sells the product to its end customer.
For sales to independent distributors in Asia, excluding Japan, we invoice these distributors at full list price upon shipment and issue a rebate, or “credit,” once product has been sold to the end customer and the distributor has met certain reporting requirements. After reviewing the pricing, rebate and quotation-related terms, we concluded that we could reliably estimate future claims; therefore, we recognize revenue at the point of shipment for these Asian distributors, assuming all of the other revenue recognition criteria are met, utilizing amounts invoiced, less estimated future claims. To the extent the percentage of our sales to Asia (excluding Japan) increases, a larger portion of our revenue reporting will be based on this methodology.
If our judgments or estimates are incorrect or inaccurate regarding future claims, our revenue reporting could be adversely affected. In addition, the fact that we recognize revenue differently in the U.S. and Europe than in Asia (excluding Japan) adds further complexity to the preparation of our financial statements, making them potentially more susceptible to inaccuracies or errors over time.
In May 2014, the Financial Accounting Standard Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers. When it becomes effective, ASU 2014-09 will supersede and replace virtually all existing GAAP revenue recognition guidance, including industry-specific guidance, and it will affect almost every revenue-generating entity that applies GAAP. ASU 2014-09 creates a single, principle-based revenue recognition framework, as opposed to the existing rules-based framework, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The shift from primarily rules-based GAAP will require entities to apply significantly more judgment and expanded disclosures surrounding revenue recognition. We are required to adopt ASU No. 2014-09 on January 1, 2017, and early adoption is not permitted. This new standard permits us to use either the retrospective or cumulative effect transition method. On April 1, 2015, the FASB voted to propose a one-year deferral to the effective date, but to permit entities to adopt one year earlier if they choose (i.e., the original effective date). The proposal will be subject to the FASB’s due process requirement, which includes a period for public comments. We have not yet selected a transition method and we are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. Our adoption of ASU 2014-09 and selection of a transition method could have an adverse effect on our revenue reporting.
OUR STOCK PRICE MAY BE MORE VOLATILE BASED ON OUR EXPOSURE TO THE MOBILE DEVICE AND CONSUMER MARKET SEGMENTS, WHICH TEND TO EXHIBIT MORE DYNAMIC CHANGE THAN DO INDUSTRIAL OR AUTOMOTIVE MARKETS.
Our exposure to, and the percentage of revenue we derive from, the mobile device and consumer market segments change over time. To the extent that these segments exhibit greater cyclicality, or change, than the industrial or automotive markets in which we also participate, our stock price may be more volatile. Product life cycles in the mobile device and consumer markets are typically shorter than product life cycles in industrial or automotive markets. Significant change continues to occur in the personal computer market as, for example, tablet devices gain additional market share. Mobile devices, as a further example, may undergo product refreshes on an annual basis or on even shorter time frames in some instances. As a result, our market share in those markets may increase or decrease more frequently than might be the case in other market segments in which we participate. The mobile device segment has also become dominated, to a large extent, by Apple and Samsung; other manufacturers have had difficulty retaining market share in recent years, with some well-known brands, including Nokia, Motorola, Blackberry and HTC, being sold or facing significant financial distress. Those market dynamics necessarily affect our business, and if our products are not used in models sold by the dominant device manufacturers, our financial results may be adversely affected or be subject to greater volatility.
If our market share decreases in the mobile and consumer market segments, our revenue may also decline for a period of time until new devices are launched, or a product refresh occurs, incorporating our products. For those reasons, and due to the shorter product life-cycles generally occurring in the mobile and consumer-oriented markets, our stock price may be more volatile than might be the case if we had less exposure to those sectors or if we focused our investments principally on industrial, automotive and similar markets that generally do not experience the same rapid product change.
WE BUILD SEMICONDUCTORS BASED, FOR THE MOST PART, ON NON-BINDING FORECASTS FROM OUR CUSTOMERS. AS A RESULT, CHANGES TO FORECASTS FROM ACTUAL DEMAND MAY RESULT IN EXCESS INVENTORY OR OUR INABILITY TO FILL CUSTOMER ORDERS ON A TIMELY BASIS, WHICH MAY HARM OUR BUSINESS.
35
We schedule production and build semiconductor devices based primarily on non-binding forecasts from customers and our own internal forecasts. Typically, customer orders, consistent with general industry practices, may be cancelled or rescheduled with short notice to us, often with no significant penalty to the customer. In addition, our customers frequently place orders requesting product delivery in a much shorter period than our lead time to fully fabricate and test devices, requiring us to build a buffer stock of certain products in order to anticipate demand. Because the markets we serve are volatile and subject to rapid technological, price and end-user demand changes, our forecasts of required unit quantities to build may be significantly incorrect. Changes to forecasted demand from actual demand may result in us producing unit quantities in excess of orders from customers, which could result in additional expense for the write-down of excess inventory and negatively affect our gross margin and results of operations.
Our forecasting risks may increase as a result of our fab-lite strategy because we have less control over modifying production schedules with our independent third-party manufacturing partners to match changes in forecasted demand and orders by our end customers. If we commit to order foundry wafers and cannot cancel or reschedule our commitment without significant costs or cancellation penalties, we may be forced to purchase inventory in excess of demand, which could result in a write-down of inventories and negatively affect our gross margin and results of operations.
Conversely, failure to produce or obtain sufficient wafers for increased demand could cause us to miss revenue opportunities and could affect our customers’ ability to sell products or meet downstream commitments, which could adversely affect our customer relationships and reputation and thereby materially adversely affect our business, financial condition and results of operations.
OUR INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO COMPLEX LAWS RELATING TO TRADE, EXPORT CONTROLS, FOREIGN CORRUPT PRACTICES AND BRIBERY, AMONG MANY OTHER SUBJECTS. ADDED COMPLIANCE COSTS, VIOLATIONS OF OR CHANGES IN THESE LAWS AND REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
For hardware, software or technology exported from, or otherwise subject to the jurisdiction of, the U.S., we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to, the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and U.S. economic and trade sanctions against embargoed countries and destinations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) and other regulatory agencies. Hardware, software and technology exported from, or otherwise subject to the jurisdiction of, other countries may also be subject to non-U.S. laws and regulations governing international trade and exports. Under these laws and regulations, we are responsible for obtaining all necessary licenses and approvals for exports of controlled hardware, software and technology, as well as the provision of technical assistance. In many cases, a determination of the applicable export-control laws and related licensing requirements depends on the design intent of a product, the source and origin of a specific technology, the specific technical contributions made by individuals to that technology, the destination of the product, and other matters of an intensely factual nature. We are also required to obtain all necessary export licenses prior to transferring controlled technology or technical data to non-U.S. persons. The U.S. and the European Union have recently imposed sanctions on Russia. The imposition of new sanctions, or changes in the nature of existing sanctions or other embargoes, may affect our ability to deliver products to specified countries from time to time, sometimes with little or no advance warning. In those events, if our products are implicated under newly imposed or modified sanctions, those regulatory or administrative actions could have an adverse effect on our business.
In addition, we are required to obtain necessary export licenses prior to the export or re-export of hardware, software or technology to any person or entity identified on government restricted-party lists, including the U.S. Department of Commerce's Denied Persons or Entity or Unverified Lists, the U.S. Department of the Treasury’s Specially Designated Nationals or Blocked Persons List, or the U.S. Department of State’s Debarred List, or on similar lists in jurisdictions outside the United States. Products for use in certain space, satellite, military, nuclear, chemical/biological weapons, rocket systems or unmanned air vehicle applications may also require export licenses and involve many of the same complexities and risks of non-compliance in the U.S. and elsewhere. Due to U.S. economic and trade sanctions, we do not pursue business activities, directly or indirectly, in countries designated by the U.S. as a state sponsor of terrorism or otherwise subject to a U.S. trade embargo, including, as of the date of this Form 10-Q, Cuba, Iran, North Korea, Sudan and Syria.
We continually seek to enhance our export-compliance program, including ongoing analysis of historical and current product shipments and technology transfers. We also work with, and assist, government officials, when requested, to ensure compliance with applicable export laws and regulations, and we continue to develop additional operational procedures to improve our compliance efforts. However, export laws and regulations are highly complex and vary from jurisdiction to jurisdiction; a determination by U.S. or other governments that we have failed to comply with any export-control laws or trade sanctions, including failure to properly restrict an export to the persons or entities set forth on government restricted-party lists, could result in significant civil or criminal penalties, including the imposition of significant fines, denial of export privileges, loss of revenue from certain customers or damages claims from any customers adversely affected by such penalties, and exclusion from participation in U.S. or foreign government contracts. As we review or audit our import and export practices, from time to time, we may discover previously unknown errors in our compliance practices that require corrective actions; these actions could include voluntary disclosures of those matters to appropriate government agencies, discontinuance or suspension of product sales pending a resolution of any reviews, or other adverse interim or final actions. Further, a change in these laws and regulations could restrict our ability to export to previously permitted countries, customers, distributors, foundries or other third parties. For example, in the past, one of our distributors was added to the U.S. Department of Commerce Entity List, resulting in the termination of our relationship with that
36
distributor. Any one or more of these compliance errors, sanctions or a change in law or regulations could have a material adverse effect on our business, financial condition and results of operations. We monitor closely those types of proposed rules and potential changes as they progress through the regulatory process and seek to assess their likely effect on us.
We are also subject to complex laws that seek to regulate the payment of bribes or other forms of compensation to foreign officials or persons affiliated with companies or organizations in which foreign governments may own an interest or exercise control. The U.S. Foreign Corrupt Practices Act requires U.S. companies to comply with an extensive legal framework to prevent bribery of foreign officials. The laws are complex and require that we closely monitor local practices of our overseas offices and distributors. The United States Department of Justice has recently heightened enforcement of these laws. In addition, other countries continue to implement similar laws that may have extraterritorial effect. The United Kingdom, for example, where we have operations, has enacted the U.K. Bribery Act, which could impose significant oversight obligations on us and could be applicable to our operations outside of the United Kingdom. The costs for complying with these and similar laws may be substantial and could reasonably be expected to require significant management time and focus. Any violation of these or similar laws, intentional or unintentional, could have a material adverse effect on our business, financial condition or results of operations. See also “Compliance With New Regulations Regarding the Use of ‘Conflict Minerals’ Requires Us to Incur Additional Oversight Expense and Could Limit the Supply and Increase the Cost of Certain Metals Used in Manufacturing Our Products.”
COMPLIANCE WITH NEW REGULATIONS REGARDING THE USE OF "CONFLICT MINERALS" REQUIRES US TO INCUR ADDITIONAL OVERSIGHT EXPENSE AND COULD LIMIT THE SUPPLY AND INCREASE THE COST OF CERTAIN METALS USED IN MANUFACTURING OUR PRODUCTS.
Conflict minerals are commonly found in metals used in the manufacture of semiconductors and other products we manufacture. In June 2014, we filed our initial Report on Form SD to report that our products were “DRC Conflict Undeterminable” based on our diligence review. We expect to undertake further diligence of our supply chain in 2015 and beyond to evaluate the use of conflict minerals. Although the implementation of these new requirements did not materially affect our business in 2014, there can be no assurance that the costs associated with ongoing compliance will not increase or that the sourcing, availability and pricing of minerals required for use in our products do not increase as a result of these regulations or changes in the supply chain caused by these regulations. In addition, since our supply chain is complex, if we are not, in the future, able to sufficiently verify the origins of these minerals and metals used in our products, our customers could elect to disqualify us as a future supplier, which could negatively affect our business and results of operations.
WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES THAT COULD NEGATIVELY AFFECT OUR FINANCIAL RESULTS AND CASH FLOWS, AND REVENUE AND COSTS DENOMINATED IN FOREIGN CURRENCIES COULD ADVERSELY AFFECT OUR OPERATING RESULTS DUE TO FOREIGN CURRENCY MOVES AGAINST THE DOLLAR.
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse effect on our financial results and cash flows. Our primary foreign currency exposure relates to revenue and operating expenses in Europe, which are denominated in Euros. See also “A Volatile, or Falling, Euro, or Volatility in Other non-U.S. Currencies, May Adversely Affect Our Revenue or Operating Results.”
When we take an order denominated in a foreign currency, we will receive fewer dollars, and lower revenue, than we initially anticipated if that local currency weakens against the dollar before we ship our product. Conversely, revenue will be positively affected if the local currency strengthens against the dollar before we ship our product. Costs may also be affected by foreign currency fluctuations. For example, in Europe, where we have costs denominated in European currencies, costs will decrease if the local currency weakens against the dollar. Conversely, costs will increase if the local currency strengthens against the dollar.
We also face the risk that our accounts receivable denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Similarly, we face the risk that our accounts payable and debt obligations denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. We have not historically utilized hedging instruments to offset our foreign currency exposure, although we may determine to do so in the future, and there can be no assurance that these or other measures will successfully limit our exposure to changes in foreign currency exchange rates.
WE DEPEND ON INDEPENDENT ASSEMBLY CONTRACTORS THAT MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS OR TO MEET OUR QUALITY AND DELIVERY REQUIREMENTS.
After wafer testing, we ship wafers to various independent assembly contractors, where the wafers are separated into die, packaged and, in some cases, further tested. Our reliance on independent contractors to assemble, package and test our products may expose us to significant risks, including the following:
• | reduced control over quality and delivery schedules; |
• | the potential lack of adequate capacity of independent assembly contractors; |
37
• | discontinuance or phase-out of our contractors’ assembly processes; |
• | inability of our contractors to develop and maintain assembly and test methods and equipment that are appropriate for our products; |
• | lack of long-term contracts and the potential inability to secure strategically important service contracts on favorable terms, if at all; |
• | increased opportunities for potential misappropriation of our intellectual property; and |
• | financial instability, or liquidity issues, affecting our subcontractors. |
In addition, independent contractors could stop, suspend or delay the assembly, packaging or testing of our products for unforeseen reasons. Moreover, because most of our independent assembly contractors are located in foreign countries, we are subject to certain risks generally associated with contracting with foreign suppliers, including currency exchange fluctuations, political and economic instability, trade restrictions, including export controls, and changes in tariff and freight rates. Accordingly, we may experience problems with the timing, adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.
WE MAY FACE BUSINESS DISRUPTION RISKS, AS WELL AS THE RISK OF SIGNIFICANT UNANTICIPATED COSTS, AS WE CONSIDER, OR AS A RESULT OF, CHANGES IN OUR BUSINESS AND ASSET PORTFOLIO.
We are continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations in order to enhance our overall competitiveness and viability. Disposal and restructuring activities that we have undertaken, and may undertake in the future, can divert significant time and resources, involve substantial costs and lead to production and product development delays and may fail to enhance our overall competitiveness and viability as intended, any of which can negatively impact our business. Our disposal activities have in the past and may, in the future, trigger restructuring, impairment and other accounting charges and/or result in a loss on sale of assets. Any of these charges or losses could cause the price of our common stock to decline.
We have in the past and may, in the future, experience labor union or workers’ council objections, or labor unrest actions (including possible strikes), when we seek to reduce our workforces in Europe and other regions. Many of our operations are located in countries and regions that have extensive employment regulations that we must comply with in order to reduce our workforce, and we may incur significant costs to complete such exercises. Any of those events could have an adverse effect on our business and operating results.
We continue to evaluate existing restructuring accruals related to restructuring plans previously implemented. As a result, there may be additional restructuring charges or reversals or recoveries of previous charges. We may incur additional restructuring and asset impairment charges in connection with additional restructuring plans adopted in the future. Any such restructuring or asset impairment charges recorded in the future could significantly harm our business and operating results. As of March 31, 2015, accrued restructuring charges amounted to $19.3 million, and we expect to substantially complete the cash severance payments in respect of those accruals within the next twenty-four months.
IF WE ARE UNABLE TO IMPLEMENT NEW MANUFACTURING TECHNOLOGIES OR FAIL TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS, OUR BUSINESS WOULD BE HARMED.
Whether demand for semiconductors is rising or falling, we are constantly required by competitive pressures in the industry to implement new manufacturing technologies in order to reduce the geometries of our semiconductors, produce more integrated circuits per wafer and improve our production yields.
Fabrication of our integrated circuits is a highly complex and precise process, requiring production in a tightly-controlled, clean environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. Whether through the use of our foundries or third-party manufacturers, we may experience problems in achieving acceptable yields in the manufacture of wafers, particularly during a transition in the manufacturing process technology for our existing products or with respect to the manufacture of new products.
We have previously experienced production delays and yield difficulties in connection with earlier expansions of our wafer fabrication capacity or transitions in manufacturing process technology, including in connection with the introduction of new products. Production delays or difficulties in achieving acceptable yields at our fabrication facility or at the fabrication facilities of our third party manufacturers could materially and adversely affect our operating results. We may not be able to obtain the additional cash from operations or external financing necessary to fund the implementation of new manufacturing technologies, which could materially affect our results of operations.
38
WE MAY, DIRECTLY OR INDIRECTLY, FACE THIRD-PARTY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO DEFEND, DISTRACT OUR MANAGEMENT TEAM AND EMPLOYEES, AND RESULT IN LOSS OF SIGNIFICANT RIGHTS.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have on occasion resulted in significant and often protracted and expensive litigation. From time to time we receive communications from third parties asserting patent or other intellectual property rights covering our products or processes. In order to avoid the significant costs associated with our defense in litigation involving such claims, we may license the use of the technologies that are the subject of these claims from such companies and make regular corresponding royalty payments, which may harm our cash position and operating results.
We have in the past been involved in intellectual property infringement lawsuits, which, because of the significant expense associated with the defense of those types of lawsuits, adversely affected our operating results, and we may continue to be subjected to similar suits in the future. In addition to patent infringement lawsuits in which we may be directly involved and named as a defendant, we also may assist our customers, in many cases at our own cost, in defending intellectual property lawsuits involving technologies that are combined with our technologies. See Note 8 of Notes to Condensed Consolidated Financial Statements. The cost of defending against intellectual property lawsuits, responding to subpoenas, preparing our employees to testify, or assisting our customers in defending against such lawsuits, in terms of management time and attention, legal fees and product delays, can be substantial. If such infringement lawsuits are successful, we may be prohibited from using the technologies at issue in the lawsuits, and if we are unable to obtain a license on acceptable terms, license a substitute technology or design new technology to avoid infringement, our business and operating results may be significantly harmed.
Many of our new and existing products and technologies are intended to address needs in specialized and emerging markets. Given the aggressive pursuit and defense of intellectual property rights that are typical in the semiconductor industry, we expect to see an increase in intellectual property litigation in many of the key markets that our products and technologies serve. An increase in infringement lawsuits within these markets generally, even if they do not involve us, may divert management’s attention and resources, which may seriously harm our business, results of operations and financial condition.
As is customary in the semiconductor industry, our standard contracts provide remedies to our customers, such as defense, settlement, or payment of judgments for intellectual property claims related to the use of our products. From time to time, we will indemnify customers against combinations of loss, expense, or liability related to the sale and the use of our products and services. Even if claims or litigation against us are not valid or successfully asserted, defending these claims could result in significant costs and diversion of the attention of management and other key employees.
IF WE ARE UNABLE TO PROTECT OR ASSERT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE HARMED.
Our future success will depend, in part, upon our ability to protect and assert our intellectual property rights. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our proprietary technologies and processes, despite our efforts to protect them, which would affect the value of our intellectual rights.
We hold numerous U.S. and foreign patents. We can provide no assurance, however, that these, or any of our future patents, will not be challenged, invalidated or circumvented in ways that detract from their value. Changes in laws may also result in us having less intellectual property protection than we may have experienced historically.
If our patents do not adequately protect our technology, competitors may more easily be able to offer products similar to our products. Our competitors may also be able to design around our patents, which would harm our business, financial position and results of operations.
SIGNIFICANT PATENT LITIGATION IN THE MOBILE-DEVICE SECTOR MAY ADVERSELY AFFECT SOME OF OUR CUSTOMERS. UNFAVORABLE OUTCOMES IN SUCH PATENT LITIGATION COULD AFFECT OUR CUSTOMERS’ ABILITY TO SELL THEIR PRODUCTS AND, AS A RESULT, COULD ULTIMATELY AFFECT THEIR ABILITY TO PURCHASE OUR PRODUCTS IF THEIR MOBILE DEVICE BUSINESS DECLINES.
There is significant ongoing patent litigation throughout the world involving many of our customers, especially in the mobile-device sector. The outcome of these disputes is uncertain. While we may not have a direct involvement in these matters, an adverse outcome that affects the ability of our customers to ship or sell their products could ultimately have an adverse effect on our business. That could happen if these customers reduce their business exposure in the mobile-device sector, are prevented from selling their products in certain markets, including in the U.S. through import bans imposed by the International Trade Commission, seek to reduce their cost structures to help fund the payment of unanticipated licensing fees, or are required to take other actions that slow or hinder their market penetration.
39
OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE ARE NOT ABLE TO COMPETE EFFECTIVELY FOR REASONS THAT MAY INCLUDE TECHNOLOGY OR PRODUCT DEVELOPMENT OR INADEQUATE SCALE, WE MAY SUFFERLOSS OF MARKET SHARE OR OTHER ADVERSE FINANCIAL CONSEQUENCES.
We operate in markets that are intensely competitive and characterized by rapid technological change, product obsolescence and price decline. Throughout our product line, we compete with a number of large semiconductor manufacturers, such as Cypress, Freescale, Fujitsu, Hitachi, Infineon, Intel, Microchip, NXP Semiconductors, ON Semiconductor, Renesas, Samsung, STMicroelectronics, Synaptics, and Texas Instruments. Many of these competitors have substantially greater financial, technical, marketing and management resources than we do. Since the beginning of 2014, we have also seen a significant increase in mergers and acquisitions within the semiconductor industry, including, for example, large acquisitions announced by Cypress, Infineon and NXP Semiconductors. These transactions may increase the scale and resources, financial and otherwise, of our competitors and make it more difficult for us to compete.
We also compete with emerging companies that are attempting to sell products in specialized markets that our products address. We compete principally on the basis of the technical innovation and performance of our products, including their speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. During the last several years, we have experienced significant price competition in several business segments, especially in our nonvolatile memory segment for EPROM and Serial EEPROM products, as well as in our commodity microcontrollers. Competitive pressures in the semiconductor market from existing competitors, new entrants, new technology and cyclical demand, among other factors, can result in declining average selling prices for our products which could cause our revenue and gross margin to decline.
In addition to the factors described above, our ability to compete successfully depends on a number of factors, including the following:
• | our success in designing and manufacturing new products that implement new technologies and processes; |
• | our ability to offer integrated solutions using our advanced nonvolatile memory process with other technologies; |
• | the rate at which customers incorporate our products into their systems; |
• | product introductions by our competitors; |
• | the number and nature of our competitors in a given market; |
• | our ability to minimize production costs by outsourcing our manufacturing, assembly and testing functions; |
• | our ability to improve our process technologies and production efficiency; and |
• | general market and economic conditions. |
Many of these factors are outside of our control, and may cause us to be unable to compete successfully in the future, which would materially harm our business.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.
Our future success substantially depends on our ability to develop and introduce new products that compete effectively on the basis of price and performance and that address customer requirements. We are continually designing and commercializing new and improved products to maintain our competitive position. These new products typically are more technologically complex than their predecessors and have increased risk of deployment delays and quality and yield issues, among other risks.
The success of new product introductions is dependent upon several factors, including timely completion and introduction of new product designs, achievement of acceptable fabrication yields and market acceptance. Our development of new products and our customers’ decisions to design them into their systems can take as long as three years, depending upon the complexity of the device and the application. Accordingly, new product development requires a long-term forecast of market trends and customer needs, and the successful introduction of our products may be adversely affected by competing products or other technologies serving the markets addressed by our products. Our qualification process involves multiple cycles of testing and improving a product’s functionality to ensure that our products operate in accordance with design specifications. If we experience delays in the introduction of new products, our future operating results could be adversely affected.
In addition, new product introductions frequently depend on our development and implementation of new process technologies, and our future growth will depend in part upon the successful development and market acceptance of these process technologies. Our integrated solution products require more technically sophisticated sales and marketing personnel to market these products successfully to customers. We are developing new products with smaller feature sizes and increased functionality, the fabrication of which will be substantially more complex than fabrication of our current products. If we are unable to design, develop, manufacture, market and sell new products successfully, our operating results will be harmed. Our new product
40
development, process development or marketing and sales efforts may not be successful, our new products may not achieve market acceptance, and price expectations for our new products may not be achieved, any of which could significantly harm our business.
OUR OPERATING RESULTS ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO VARIOUS RISKS.
Our revenue outside the United States accounted for 82% and 84% for the three months ended March 31, 2015 and 2014, respectively. We expect that revenue derived from international sales will continue to represent a significant portion of net revenue. International sales and operations are subject to a variety of risks, including:
• | greater difficulty in protecting intellectual property; |
• | reduced flexibility and increased cost of effecting staffing adjustments; |
• | foreign labor conditions and practices; |
• | adverse changes in tax laws; |
• | credit and collectibility risks on our trade receivables with customers in certain jurisdictions; |
• | longer collection cycles; |
• | legal and regulatory requirements, including antitrust laws, import and export regulations, trade barriers, tariffs and tax laws, and environmental and privacy regulations and changes to those laws and regulations; |
• | negative effects from fluctuations in foreign currency exchange rates; |
• | cash repatriation restrictions; |
• | impact of natural disasters on local infrastructures, including those of our distributors and end customers; and |
• | general economic and political conditions in these foreign markets. |
Some of our distributors, independent foundries, independent assembly, packaging and test contractors and other business partners also have international operations and are subject to the risks described above. Even if we are able to manage the risks of international operations successfully, our business may be adversely affected if our distributors, independent foundries and contractors, and other business partners are not able to manage these risks successfully.
WE MAY BE SUBJECT TO INFORMATION TECHNOLOGY SYSTEM FAILURES, NETWORK DISRUPTIONS OR OTHER SECURITY RISKS, INCLUDING CYBER-ATTACKS, WHICH COULD DAMAGE OUR BUSINESS OPERATIONS, FINANCIAL CONDITION OR REPUTATION. MANAGING THESE RISKS MAY ALSO REQUIRE ADDITIONAL INVESTMENTS AND EXPENDITURES AND INCREASED OPERATING COSTS.
We rely on our information technology, or IT, infrastructure and certain critical information systems for the effective operation of our business, including the reporting of our financial results. These IT systems may be subject to damage or interruption from a number of potential sources, including natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, cyber-attacks, sabotage, vandalism, or similar events or disruptions. In addition, our IT infrastructure continues to evolve as we review and introduce new systems to share and store data and communicate internally and externally, including “cloud-based” systems and social networking technologies. While we believe that this type of IT evolution can enhance our operational and business efficiencies, we may not be able to adapt our business practices and internal security controls quickly enough to address all of the risks, known and unknown, that these changes create.
Technology companies such as ours also continue to face increased global security threats. Hackers may develop and deploy viruses, worms, and other malicious software programs that attack our products or seek to gain access to our networks and proprietary information. We may be required to allocate significant resources, financial and otherwise, to the oversight of these threats and the implementation of effective countermeasures, which could increase our operating expenses.
Our inability to use or access our IT systems at critical points in time could unfavorably affect our business. These disruptions, for example, could adversely affect our ability to access critical business applications, coordinate product development and testing, ship or distribute products, or timely report our financial results. Breaches of our IT system by unauthorized parties could also result in the theft or misuse of our intellectual property, the unauthorized release of customer or employee data, or a violation of privacy or other laws that may lead to significant reputation or other damage to our business.
SYSTEM INTEGRATION DISRUPTIONS COULD HARM OUR BUSINESS.
We periodically make enhancements to our integrated financial and supply chain management systems. The enhancement process is complex, time-consuming and expensive. Operational disruptions during the course of such processes or delays in the
41
implementation of such enhancements could adversely affect our operations. Our ability to forecast sales demand, ship products, manage our product inventory and record and report financial and management information on a timely and accurate basis could be impaired while we are making these enhancements.
OUR OPERATIONS AND FINANCIAL RESULTS COULD BE HARMED BY BUSINESS INTERRUPTIONS, NATURAL DISASTERS, TERRORIST ACTS OR OTHER EVENTS BEYOND OUR CONTROL.
Our operations are vulnerable to interruption by fire, earthquake, floods and other natural disasters, power loss, public health issues, geopolitical uncertainties, telecommunications failures, terrorist acts and other events beyond our control. Our headquarters, some of our manufacturing facilities, the manufacturing facilities of some of our third-party foundries and some of our major suppliers’ and customers’ facilities are located near major earthquake faults and in potential terrorist target areas. We do not have a comprehensive disaster recovery plan.
In the event of a major earthquake, other natural or manmade disaster or terrorist act, we could experience loss of life of our employees, destruction of facilities or other business interruptions. The operations of our suppliers could also be affected by natural disasters and other disruptions, which could cause shortages and price increases in various essential materials. We use third-party freight firms for nearly all our shipments from vendors and our manufacturing facilities and for shipments to customers of our final product. We maintain property and business interruption insurance; however, there is no guarantee that such insurance will be available or adequate to protect against all costs associated with such disasters and disruptions.
In recent years, based on insurance market conditions, we have relied to a greater degree on self-insurance. If a major earthquake, other disaster, or a terrorist act affects us and insurance coverage is unavailable for any reason, we may need to spend significant amounts to repair or replace our facilities and equipment, we may suffer a temporary halt in our ability to manufacture and transport products, and we could suffer damages that could materially adversely harm our business, financial condition and results of operations.
WE MAY EXPERIENCE PROBLEMS WITH KEY CUSTOMERS THAT COULD HARM OUR BUSINESS.
Our ability to maintain close, satisfactory relationships with large customers is important to our business. A reduction, delay, or cancellation of orders from our large customers would harm our business. Similarly, the loss of one or more of our key customers, reduced orders by any of our key customers, or significant variations in the timing of orders, could adversely affect our business and results of operations.
WE ARE NOT PROTECTED BY LONG-TERM SUPPLY CONTRACTS WITH OUR CUSTOMERS.
We do not typically enter into long-term supply contracts with our customers, and we cannot be certain as to future order levels from our customers. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. In the event of an early termination by one of our major customers, it is unlikely that we would be able to replace that revenue source in a timely manner or at all, which would harm our financial results.
WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY REGULATIONS, WHICH COULD IMPOSE UNANTICIPATED REQUIREMENTS ON OUR BUSINESS IN THE FUTURE. ANY FAILURE TO COMPLY WITH CURRENT OR FUTURE ENVIRONMENTAL REGULATIONS MAY SUBJECT US TO LIABILITY OR SUSPENSION OF OUR MANUFACTURING OPERATIONS.
We are subject to a variety of environmental laws and regulations in each of the jurisdictions in which we operate governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous substances and wastes, soil and groundwater contamination, and employee health and safety. We could incur significant costs as a result of any failure by us to comply with, or any liability we may incur under, environmental, health, and safety laws and regulations, including the limitation or suspension of production, monetary fines or civil or criminal sanctions, clean-up costs or other future liabilities in excess of our reserves. We are also subject to laws and regulations governing the recycling of our products, the materials that may be included in our products, and our obligation to dispose of our products at the end of their useful lives. For example, the European Directive 2002/95/EC on restriction of hazardous substances (RoHS Directive) bans the placing on the European Union market of new electrical and electronic equipment containing more than specified levels of lead and other hazardous compounds. As more countries enact requirements like the RoHS Directive, and as exemptions are phased out, we could incur substantial additional costs to convert the remainder of our portfolio to comply with such requirements, conduct required research and development, alter manufacturing processes, or adjust our supply-chain management. Such changes could also result in significant inventory obsolescence. In addition, compliance with environmental, health and safety requirements could restrict our ability to expand our facilities or require us to acquire costly pollution-control equipment, incur other significant expenses or modify our manufacturing processes. We also are subject to cleanup obligations at properties that we currently own or at facilities that we may have owned in the past or at which we conducted operations. In the event of the discovery of new or previously unknown contamination, additional requirements with respect to existing contamination, or the imposition of other cleanup obligations at these or other sites for which we are responsible, we may be required to take remedial or other measures that could have a material adverse effect on our business, financial condition and results of operations.
42
THE LOSS OF ANY KEY PERSONNEL ON WHOM WE DEPEND MAY SERIOUSLY HARM OUR BUSINESS.
Our future success depends in large part on the continued service of our key technical and management personnel and on our ability to continue to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and in the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could harm our business.
ACCOUNTING FOR OUR PERFORMANCE-BASED RESTRICTED STOCK UNITS IS SUBJECT TO JUDGMENTS AND ESTIMATES AND MAY LEAD TO UNPREDICTABLE SHARE-BASED EXPENSE RECOGNITION. THE IMPLEMENTATION PLANS UNDER WHICH OUR PERFORMANCE-BASED RESTRICTED STOCK UNITS ARE ISSUED MAY ALSO AFFECT THE DEDUCTIBILITY OF SOME COMPENSATION PAID TO OUR NAMED EXECUTIVE OFFICERS.
We have issued, and may in the future continue to issue, performance-based restricted stock units to eligible employees, entitling those employees to receive restricted stock if they, and we, meet designated performance criteria established by our compensation committee. We are required to reassess the probability of vesting at each reporting date under any performance-based incentive plan, and any change in our forecasts may result in an increase or decrease to the expense recognized. As a result and as described in this paragraph, the expense recognition for performance-based restricted stock units could change over time, requiring adjustments to our financial statements to reflect changes in our judgment regarding the probability of achieving the performance goals. We recognize the share-based compensation expense in respect of performance-based restricted stock units when we believe it is probable that we will achieve the specified performance criteria. If the performance goals are not achieved, no compensation expense is recognized and any previously recognized compensation expense is reversed. The fair value of each award is recognized over the service period and is reduced for estimated forfeitures. In December 2014, we adopted the 2015 Long-Term Performance-Based Incentive Plan, which provided for the grant of restricted stock units to eligible employees and the possible vesting of those restricted stock units based on achievement of specified performance criteria. Compensation expense for these performance-based restricted stock units will be determined, and may require adjustments from time to time, based on the exercise of management’s judgment as discussed in this paragraph.
The implementation of our performance-based incentive plans may also affect our ability to receive federal income tax deductions for compensation in excess of $1.0 million paid, during any fiscal year, to our named executive officers. To the extent that aspects of performance-based compensation plans such as the ones we have typically adopted are adjusted in the discretion of the compensation committee, the exercise of that discretion, notwithstanding that it is expressly permitted by the terms of a plan, may result in plan compensation awarded to named executive officers not being deductible. Our compensation committee has retained the discretion to implement our performance-based incentive plans, including our 2015 Plan, notwithstanding any potential loss of deductibility, in the manner that it believes most effectively achieves the objectives of our compensation philosophies and the terms of these plans.
PROVISIONS IN OUR RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS MAY HAVE ANTI-TAKEOVER EFFECTS.
Certain provisions of our Restated Certificate of Incorporation, our Bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. Our Board of Directors has the authority to issue up to five million shares of preferred stock and to determine the price, voting rights, preferences and privileges, and restrictions of those shares without the approval of our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, by making it more difficult for a third party to acquire a majority of our stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders. We have no present plans to issue shares of preferred stock.
WE ARE, AND MAY IN THE FUTURE BE, ENGAGED IN LITIGATION THAT IS COSTLY, TIME CONSUMING TO DEFEND OR PROSECUTE AND, IF AN ADVERSE DECISION WERE TO OCCUR, COULD HAVE A HARMFUL EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION OR LIQUIDITY DEPENDING ON THE OUTCOME.
We are subject to legal proceedings and claims that arise in the ordinary course of business. See Note 8 of Notes to Condensed Consolidated Financial Statements. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.
We are or recently have been engaged, directly and indirectly through our subsidiaries Atmel Rousset S.A.S. (“Atmel Rousset”) and Atmel B.V., in legal proceedings, in France and in the United States, related to the June 2013 insolvency of the owner of our former manufacturing facility in Rousset, France. Atmel Rousset sold that manufacturing facility, through an arms-length process, in June 2010. The Company and Atmel Rousset are defendants in a case pending, in the United States District Court for the Southern District of New York (the “New York Action”), in which LFoundry Rousset S.A.S. (“LFR”) (through its judicially-appointed representative) and a putative class of LFR employees are seeking substantial damages. On November 25, 2014, we moved to dismiss the New York Action. In parallel, over 500 former employees of LFR have filed individual labor actions against Atmel Rousset in the labor court in Aix-en-Provence, France (the “Individual Labor Actions”) based on similar allegations to other proceedings, including proceedings that previously were dismissed with prejudice. We believe the claims in the New York Action and the Individual
43
Labor Actions are entirely devoid of merit, specious and defamatory. Nonetheless, if LFR or the LFR employees (whether individually or as a class) were successful in their attempt to recover substantial damages against us, payment of those damages, if payment were ever required or if any damages award were ever capable of enforcement, could have a material adverse effect on our results of operations, financial condition and liquidity.
OUR FOREIGN PENSION PLANS ARE UNFUNDED, AND ANY REQUIREMENT TO FUND THESE PLANS IN THE FUTURE COULD NEGATIVELY AFFECT OUR CASH POSITION AND OPERATING CAPITAL.
We sponsor defined benefit pension plans that cover substantially all of our French and German employees. Plan benefits are managed in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. The projected benefit obligation totaled $50.4 million at March 31, 2015 and $49.8 million at December 31, 2014. The plans are unfunded, in compliance with local statutory regulations, and we have no immediate intention of funding these plans. Benefits are paid when amounts become due, commencing when participants retire. We expect to pay approximately $0.5 million in 2015 for benefits earned. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively affect our cash position and operating capital.
FUTURE ACQUISITIONS MAY RESULT IN UNANTICIPATED ACCOUNTING CHARGES OR MAY OTHERWISE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND RESULT IN DIFFICULTIES IN INTEGRATING THE OPERATIONS, PERSONNEL, TECHNOLOGIES, PRODUCTS AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES OR BUSINESSES, OR BE DILUTIVE TO EXISTING STOCKHOLDERS.
A key element of our business strategy includes expansion through the acquisition of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our skilled engineering workforce or enhance our technological capabilities. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets, including tangible and intangible assets such as intellectual property.
Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses. We have in the past experienced and may in the future experience delays in the timing and successful integration of an acquired company’s technologies, products and product development plans as a result of unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, difficulties ramping up volume production, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to stay with us post-acquisition. The acquisition of another company or its products and technologies may also require us to enter into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation and increase our expenses. These challenges are magnified as the size of the acquisition increases. Furthermore, these challenges would be even greater if we acquired a business or entered into a business combination transaction with a company that was larger and more difficult to integrate than the companies we have historically acquired.
Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional share-based compensation expense and the recording and later amortization of amounts related to certain purchased intangible assets, any of which could adversely affect our results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our common stock to decline.
Acquisitions or asset purchases made entirely or partially for cash may reduce our cash reserves. We may seek to obtain additional cash to fund an acquisition by selling equity or debt securities. Any issuance of equity or convertible debt securities may be dilutive to our existing stockholders.
We cannot assure you that we will be able to consummate any pending or future acquisitions or that we will realize any anticipated benefits or synergies from any of our historic or future acquisitions. We may not be able to find suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of our common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions.
We are required under U.S. GAAP to test goodwill for possible impairment on an annual basis and at any other time that circumstances arise indicating the carrying value of our goodwill may not be recoverable. At March 31, 2015, we had $189 million of goodwill. We completed our annual test of goodwill impairment in the fourth quarter of 2014 and concluded that we did not have any impairment at that time. However, if we continue to see deterioration in the global economy and the current market conditions in the semiconductor industry worsen, the carrying amount of our goodwill may no longer be recoverable, and we may be required to record a material impairment charge, which would have a negative impact on our results of operations.
DISRUPTIONS TO THE AVAILABILITY OF RAW MATERIALS CAN AFFECT OUR ABILITY TO SUPPLY PRODUCTS TO OUR CUSTOMERS, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
44
The manufacture of semiconductor devices requires specialized raw materials, primarily certain types of silicon wafers. We generally utilize more than one source to acquire these wafers, but there are only a limited number of qualified suppliers capable of producing these wafers in the market. In addition, the raw materials, which include specialized chemicals and gases, and the equipment necessary for our business, could become more difficult to obtain as worldwide use of semiconductors in product applications increases. We have experienced supply shortages and price increases from time to time in the past, and on occasion our suppliers have told us they need more time than expected to fill our orders. Any significant interruption of the supply of raw materials or increase in cost of raw materials could harm our business.
WE COULD FACE PRODUCT LIABILITY CLAIMS THAT RESULT IN SIGNIFICANT COSTS AND DAMAGE TO OUR REPUTATION WITH CUSTOMERS, WHICH WOULD NEGATIVELY AFFECT OUR OPERATING RESULTS.
All of our products are sold with a limited warranty. However, we could incur costs not covered by our warranties, including additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting their defective products, costs for product recalls or other damages. These costs could be disproportionately higher than the revenue and profits we receive from the sales of our products.
Our products have previously experienced, and may in the future experience, manufacturing defects, software or firmware bugs, or other similar quality problems. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers. In addition, any defects, bugs or other quality problems could interrupt or delay sales or shipment of our products to our customers.
We have implemented significant quality control measures to mitigate these risks; however, it is possible that products shipped to our customers will contain defects, bugs or other quality problems. Such problems may divert our technical and other resources from other development efforts. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur significant additional costs or delay shipments, which would negatively affect our business, financial condition and results of operations.
CHANGES IN OUR INCOME TAX POSITIONS OR ADVERSE OUTCOMES RESULTING FROM ONGOING OR FUTURE TAX AUDITS, IN THE U.S. OR FOREIGN JURISDICTIONS, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Income tax provisions are subject to significant judgment and estimates and may require material modification as new information is obtained regarding our tax positions, as our business performance changes, or as tax laws, regulations, treaties and interpretations in the U.S. or other jurisdictions change. Our provision for income taxes is subject to volatility and could be adversely affected by many factors including: earnings being lower than anticipated in countries where we operate that have lower tax rates and higher than anticipated in countries that have higher tax rates; changes in the valuation of our deferred tax assets and liabilities; expiration of or lapses in R&D tax credits or similar laws; expiration of or lapses in tax incentives; transfer pricing adjustments, including the effect of intercompany acquisitions under cost sharing arrangements; the legal structure of our foreign subsidiaries and changes to that structure; tax effects of nondeductible compensation; tax costs related to intercompany realignments; changes in accounting principles; or changes in tax laws and regulations, treaties, or interpretations, including possible changes to the taxation of earnings, or the deductibility of expenses (including expenses attributable to foreign income), of our foreign subsidiaries or foreign tax credit rules. If any of these circumstances were to arise, the initial judgments or estimates we use to prepare our financial statements may require adjustment, which could, if material, negatively affect our results of operations and financial condition. For example, the Organization for Economic Co-operation and Development, an international association of 34 countries including the United States, is contemplating changes to numerous long-standing tax principles. These contemplated changes, if finalized and adopted by countries in which we operate, will increase tax uncertainty and may adversely affect our provision for income taxes.
We are also subject to continued examination of our income tax returns by the Internal Revenue Service and other foreign and domestic tax authorities and typically have a number of open audits under way at any time. See Note 9 of Notes to Condensed Consolidated Financial Statements. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. While we believe that the resolution of these audits will not have a material adverse effect on our results of operations, the outcome is subject to significant uncertainties. If we are unable to obtain agreements with the tax authority on the various proposed adjustments, there could be a material adverse effect on our results of operations, cash flows and financial position.
OUR LEGAL ENTITY ORGANIZATIONAL STRUCTURE IS COMPLEX, WHICH COULD RESULT IN UNFAVORABLE TAX OR OTHER CONSEQUENCES, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR NET INCOME AND FINANCIAL CONDITION.
We currently operate legal entities in countries where we conduct manufacturing, design, and sales operations around the world. In some countries, we maintain multiple entities for tax or other purposes. Changes in tax laws, regulations, and related interpretations in the countries in which we operate may adversely affect our results of operations.
45
We have many entities globally and unsettled intercompany balances between some of these entities that could result, if changes in law, regulations or related interpretations occur, in adverse tax or other consequences affecting our capital structure, intercompany interest rates and legal structure.
FROM TIME TO TIME WE RECEIVE GRANTS FROM GOVERNMENTS, AGENCIES AND RESEARCH ORGANIZATIONS. IF WE ARE UNABLE TO COMPLY WITH THE TERMS OF THOSE GRANTS, WE MAY NOT BE ABLE TO RECEIVE OR RECOGNIZE GRANT BENEFITS OR WE MAY BE REQUIRED TO REPAY GRANT BENEFITS PREVIOUSLY PAID TO US AND RECOGNIZE RELATED CHARGES, WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL POSITION.
From time to time, we receive economic incentive grants and allowances from European governments, agencies and research organizations targeted at increasing employment at specific locations. The subsidy grant agreements typically contain economic incentive, headcount, capital and research and development expenditure and other covenants that must be met to receive and retain grant benefits and these programs can be subjected to periodic review by the relevant governments. Noncompliance with the conditions of the grants could result in the forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts received to date.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about the repurchase of our common stock during the three months ended March 31, 2015, pursuant to our Stock Repurchase Program.
Period | Total Number of Shares Purchased | Average Price Paid per Share ($) (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (3) | ||||
January 1 - January 31 | — | — | — | $209,087,083 | ||||
February 1 - February 28 | 904,390 | $8.20 | 904,390 | $201,670,254 | ||||
March 1 - March 31 | 199,300 | $8.42 | 199,300 | $199,992,575 | ||||
_________________________________________
(1)Represents the average price paid per share ($) exclusive of commissions.
(2)Represents shares purchased in open-market transactions under the stock repurchase plan approved by the Board of Directors.
(3)These amounts correspond to a plan announced in August 2010 whereby the Board of Directors authorized the repurchase of up to $200.0 million of our common stock. In May 2011, Atmel’s Board of Directors authorized an additional $300.0 million to our existing repurchase program. In April 2012, Atmel’s Board of Directors authorized an additional $200.0 million to our existing repurchase program. In October 2013, Atmel’s Board of Directors authorized an additional $300.0 million to our existing repurchase program. The repurchase program does not have an expiration date. Shares repurchased under the program may be retired or retained as treasury shares. Amounts remaining to be purchased are exclusive of commissions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
46
ITEM 6. EXHIBITS
The following Exhibits have been filed with, or incorporated by reference into, this Report:
31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | XBRL Taxonomy Definition Linkbase |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
ATMEL CORPORATION (Registrant) | |
May 7, 2015 | /s/ STEVEN LAUB |
Steven Laub | |
President & Chief Executive Officer | |
(Principal Executive Officer) | |
May 7, 2015 | /s/ STEVE SKAGGS |
Steve Skaggs | |
Senior Vice President & Chief Financial Officer | |
(Principal Financial Officer) | |
May 7, 2015 | /s/ HUGO DE LA TORRE |
Hugo De La Torre | |
Vice President & Chief Accounting Officer | |
(Principal Accounting Officer) | |
48
EXHIBIT INDEX
The following Exhibits have been filed with, or incorporated by reference into, this Report:
31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | XBRL Taxonomy Definition Linkbase |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
_________________________________________
49