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IXYS 10-K 2008 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission file number
000-26124
1590 Buckeye Drive
Milpitas, California
95035-7418
(Address of principal executive
offices and zip code)
(408) 457-9000
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
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reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Note — Checking the box above will not relieve any
registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. Yes o No þ
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. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant, computed by reference to the
last sale price on the Nasdaq Global Market on
September 28, 2007 was approximately $249,189,586. For
purpose of this calculation, shares held by directors and
executive officers have been excluded because they may be deemed
to be “affiliates.” This determination is used for
convenience and is not conclusive for any purpose. The number of
shares of the registrant’s Common Stock outstanding as of
May 30, 2008 was 31,113,909.
Portions of the registrant’s Proxy Statement relating to
its Annual Meeting of Stockholders to follow its fiscal year
ended March 31, 2008, to be filed subsequently —
Part III.
IXYS
CORPORATION
ANNUAL
REPORT ON
FORM 10-K
FOR THE
FISCAL YEAR ENDED MARCH 31, 2008
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This Annual Report on
Form 10-K
contains forward-looking statements that include, but are not
limited to, statements concerning projected revenues, expenses,
gross profit and income, the need for additional capital and the
outcome of pending litigation. These forward-looking statements
are based on our current expectations, estimates and projections
about our industry, management’s beliefs and certain
assumptions made by us. In some cases, these statements may be
identified by terminology such as “may,”
“will,” “should,” “expects,”
“plans,” “anticipates,”
“believes,” “estimates,”
“predicts,” “potential,” or
“continue” or the negative of such terms and other
comparable expressions. These statements involve known and
unknown risks and uncertainties that may cause our results,
levels of activity, performance or achievements or our industry
to be materially different than those expressed or implied by
the forward-looking statements. Factors that may cause or
contribute to such differences include, but are not limited to,
our ability to compete successfully in our industry, to continue
to develop new products on a timely basis, cancellation of
customer orders, and other factors discussed below and under the
caption “Risk Factors” in Item 1A. We disclaim
any obligation to update any of the forward-looking statements
contained in this report to reflect any future events or
developments, except as may be required by law.
We are a multi-market integrated semiconductor company. We
specialize in the development, manufacture and marketing of high
performance power semiconductors, advanced mixed signal
integrated circuits, or ICs, application specific integrated
circuits, or ASICs, and systems and radio frequency, or RF,
power semiconductors. Our power semiconductors improve system
efficiency and reliability by converting electricity at
relatively high voltage and current levels into the finely
regulated power required by electronic products. We focus on the
market for power semiconductors that are capable of processing
greater than 200 watts of power.
Our power semiconductor products have historically been divided
into two primary categories, power MOS, or metal oxide silicon,
and power bipolar products. Our power semiconductors are sold as
individual units and are also packaged in high power modules
that frequently consist of multiple semiconductor die. In our
fiscal year ended March 31, 2008, or fiscal 2008, power
semiconductors constituted approximately 77.7% of our revenues,
which included 34.0% of revenues from power MOS transistors and
43.7% of revenues from bipolar products. References to revenues
in this Annual Report on
Form 10-K
constitute references to net revenues, except where the context
otherwise requires.
We design and sell ICs that have applications in
telecommunications, display and power management products. In
fiscal 2008, ICs constituted approximately 13.5% of our revenues.
Our systems include laser diode drivers, high voltage pulse
generators and modulators, and high power subsystems, sometimes
known as modules or stacks, that are principally based on our
high power semiconductor devices. We also design and sell RF
power devices that switch electricity at the high rates required
by circuitry that generates radio frequencies.
IXYS’s power semiconductor products are used primarily to
control electricity in:
Our mixed signal ICs are used in telecommunications products,
central office switching equipment, customer premises equipment,
set top boxes, remote meter reading equipment, security systems,
advanced flat displays,
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medical electronics and defense aerospace systems. Our RF power
devices are used in wireless infrastructure, industrial RF
applications, medical systems and defense and space electronics.
We design our products primarily for industrial and business
applications, rather than for use in personal computers or
mobile phones. In fiscal 2008, our products were used by over
2,000 customers worldwide. Our major customers include ABB,
Astec, Boston Scientific, Delta Electronics, Medtronic, Samsung
and Siemens.
We were founded in 1983 and are incorporated in the state of
Delaware.
The worldwide demand for electrical energy is currently
increasing due to:
Not only is demand increasing, but the requirements for
electricity are also changing. Electronic products in all
markets are becoming increasingly sophisticated, offering more
“intelligence” through the use of microprocessors and
additional solid-state components. The increasing complexity of
such products requires more precisely regulated power quality
and greater power reliability. In addition, the increasing costs
of electricity, coupled with governmental regulations and
environmental concerns, have caused an increased demand for
energy efficiency.
Power semiconductors are used to provide the precisely regulated
power required by sophisticated electronic products and
equipment and address the growing demand for energy efficiency.
In most cases, power semiconductors:
The more sophisticated the end product, the greater the need for
specially formatted, finely regulated power, and the greater the
need for a high performance power semiconductor.
Power semiconductors improve system efficiency and reliability
by processing and converting electrical energy into more usable,
higher quality power. Specifically, our power semiconductors are
used primarily in controlling energy in power conversion
systems, including switch-mode power supplies and
uninterruptible power supplies, and in motor drive controls.
Switch-mode power supplies efficiently convert power to meet the
specific voltage requirements of an application, such as
communications equipment. Uninterruptible power supplies provide
a short-term backup of electricity in the event of power
failure. Motor drive controls regulate the voltage, current and
frequency of power to a motor.
With the growth in telecommunications, data communications and
wireless communications, the demand for analog and mixed signal
ICs and RF power semiconductors has grown. Our mixed signal ICs
address the interface between telecommunication and data
communication components, both in the central office and in
gateway
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applications, especially with the increased use of the Internet
protocol, or IP. Our RF power semiconductors are used in
wireless infrastructure and in other microwave communication
applications. Technical advancement in the communication
industries is expected to drive the demand for higher
performance semiconductors.
Our power semiconductor products have historically been divided
into two primary categories, power MOS transistors and bipolar
products. Our power semiconductors are sold separately and are
also packaged in high power modules that frequently consist of
multiple semiconductor dies. In fiscal year 2008, power
semiconductors constituted approximately 77.7% of our revenues,
which included about 34.0% of revenues from power MOS
transistors and about 43.7% of revenues from bipolar products.
In fiscal 2007, power semiconductors constituted approximately
72.6% of our revenues, which included about 32.0% of revenues
from power MOS transistors and about 40.6% of revenues from
bipolar products. In fiscal 2006, power semiconductors
constituted approximately 76.0% of our revenues, which included
about 36.4% of revenues from power MOS transistors and about
39.6% of revenues from bipolar products.
Power MOS transistors operate at much greater switching speeds,
allowing the design of smaller and less costly end products.
Power MOS transistors are activated by voltage rather than
current, so they require less external circuitry to operate,
making them more compatible with IC controls. Power MOS
transistors also offer more reliable long-term performance and
are more rugged than traditional bipolar transistors, permitting
them to better withstand adverse operating conditions. Our power
MOS transistors consist of power MOSFETs and IGBTs.
A power MOSFET, or metal oxide silicon field effect transistor,
is a switch controlled by voltage at the gate. Power MOSFETs are
used in combination with passive components to vary the amperage
and frequency of electricity by switching on and off at high
frequency. Our power MOSFETs are used primarily in power
conversion systems and are focused on higher voltage
applications ranging from 60 to 1,700 volts.
IGBTs, or insulated gate bipolar transistors, also are used as
switches. IGBTs have achieved many of the advantages of power
MOSFETs and of traditional bipolar technology by combining the
voltage-controlled switching features of power MOSFETs with the
superior conductivity and energy efficiency of bipolar
transistors. For a given semiconductor die size, IGBTs can
operate at higher currents and voltages, making them a more
cost-effective device for high energy applications than power
MOSFETs.
Since inception, we have developed IGBTs for high voltage
applications. Our current products are focused on voltage
applications ranging from 300 volts to 2,500 volts. Our IGBTs
are used principally in AC motor drives, power systems and
defibrillators.
Bipolar products are also used to process electricity, but are
activated by current rather than voltage. Bipolar products are
capable of switching electricity at substantially higher power
levels than power MOS transistors. However, switching speeds of
bipolar products are slower than those of power MOS transistors
and, as a result, bipolar products are preferred where very high
power is required. Our bipolar products consist of rectifiers
and thyristors.
Rectifiers convert AC power to DC power and are used primarily
in input and output rectification and inverters. Our rectifiers
are used in DC and AC motor drives, power supplies, lighting and
heating controls and welding equipment.
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A subset of our rectifier product group is a very fast switching
device known as a FRED, or fast recovery epitaxial diode. FREDs
limit spikes in voltage across the power switch to reduce power
dissipation and electromagnetic interference. Our FREDs are used
principally in AC motor drives and power supplies.
Thyristors are switches that can be turned on by a controlled
signal and turned off only when the output current is reduced to
zero, which occurs in the flow of AC power. Thyristors are
preferred over power MOSFETs and IGBTs in high voltage, low
frequency AC applications because their on-state resistance is
lower than the on state resistance of power MOSFETs and IGBTs.
Our thyristors are used in motor drives, defibrillators, power
supplies, lighting and heating controls and welding.
Our integrated circuits address the demand for analog and mixed
signal interface solutions in the communication and other
industries, and include mixed signal application specific ICs
designed for specific customers as well as standard products,
and ICs for power management and control. ICs accounted for
13.5% of our revenues in fiscal 2008, 19.7% of our revenues in
fiscal 2007, and 16.5% of our revenues in fiscal 2006.
We manufacture solid-state relays, or SSRs, that isolate the low
current communication signal from the higher power circuit,
while also switching to control the flow of current. Our SSRs,
which include high voltage analog components, optocouplers and
integrated packages, are utilized principally in
telecommunication and video and data communication applications,
as well as instrumentation, industrial control, and aerospace
and automotive applications.
A line card access switch, or LCAS, is a solid-state solution
for a switching function traditionally performed by
electromagnetic devices. Our LCAS products are used in central
office switching applications to enable data and voice
telephony. Data access arrangements, or DAAs, integrate a number
of discrete components and are principally used in analog data
communications that interface with telephone network
applications. Our
Litelinktm
products are DAAs for applications such as VoIP, wired
communication lines and set top boxes.
We design high voltage, analog and mixed signal ASICs for a
variety of applications. Applying our technological expertise in
ASICs, we also design and sell application specific standard
products. In this regard, we have developed a line of source and
gate drivers.
We also make and sell power management and control ICs, such as
current regulators, motion controllers, digital power modulators
and drivers for power MOSFETs and IGBTs. These ICs typically
manage, control or regulate power semiconductors and the
circuits and subassemblies that incorporate them.
Our RF power devices switch electricity at the high rates
necessary to enable the amplification or reception of radio
frequencies. Our products include field effect transistors, or
FETs, pseudomorphic high electron mobility transistors, or
PHEMTs, and Gunn diodes. These products are principally gallium
arsenide devices, which remain efficient at the high heat and
energy levels inherent in RF applications.
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We manufacture and sell laser diode drivers, high voltage pulse
generators and modulators, and high power subsystems, sometimes
known as modules or stacks, that are principally based on our
high power semiconductor devices. Additionally, we manufacture
our proprietary direct copper bond, or DCB, substrates for use
in our own semiconductor products as well as for sale to a
variety of customers, including those in the power semiconductor
industry. DCB technology cost-effectively provides excellent
thermal transfer while maintaining high electrical isolation.
Our power semiconductors are used primarily to control
electricity in power conversion systems, motor drives, medical
electronics and plasma display panels. Our ICs are used mainly
to interface with telecommunication lines, to control power
semiconductors and to drive medical equipment and displays. Our
RF power semiconductors enable the amplification and reception
of radio frequencies in telecommunication, industrial, defense
and space applications. The following table summarizes the
primary categories of uses for our products, some products used
within the categories and some of the applications served within
the categories.
We also sell our power semiconductor chips and DCB substrates to
other power semiconductor companies for use in their modules.
We sell our products through a worldwide selling organization
that includes direct sales personnel, independent
representatives and distributors. As of March 31, 2008, we
employed 65 people in sales, marketing and customer support
and used 35 sales representative organizations and 11
distributors in North and South America and 100 sales
representative organizations and distributors in the rest of the
world. Sales to distributors accounted for approximately 48% of
net revenues in fiscal 2008, 47% of net revenues in fiscal 2007,
and 44% of net revenues in fiscal 2006.
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In fiscal 2008, United States sales represented approximately
26.3%, and international sales represented approximately 73.7%,
of our net revenues. Of our international sales in fiscal 2008,
approximately 54.5% were derived from sales in Europe and the
Middle East, approximately 37.3% were derived from sales in Asia
and approximately 8.2% were derived from sales in Canada and the
rest of the world. No one customer accounted for more than 10%
of net revenues in fiscal 2008. For financial information about
geographic areas for each of our last three fiscal years, see
Note 13, “Segment and Geographic Information,” of
our Notes to Consolidated Financial Statements, provided in
Item 8 of this Annual Report on
Form 10-K,
which information is incorporated by reference into this
Item 1. For a discussion of the risks attendant to our
foreign operations, see “Risk Factors-Our international
operations expose us to material risks,” provided in
Item 1A of this Annual Report on
Form 10-K,
which information is incorporated by reference into this
Item 1.
We market our products through advertisements, technical
articles and press releases that appear regularly in a variety
of trade publications, as well as through the dissemination of
brochures, data sheets and technical manuals. We also have a
presence on the Internet through a worldwide web page that
enables engineers to access and download technical information
and data sheets.
We believe that we successfully compete in our markets because
of our ability to design, develop and introduce to the market on
a timely basis new products offering technological improvements.
While the time from initiation of design to volume production of
new semiconductors often takes 18 months or longer, our
power semiconductors typically have a product life of several
years. Our research and development expenses were approximately
$21.1 million in fiscal 2008, $20.1 million in fiscal
2007, and $17.5 million in fiscal 2006. As of
March 31, 2008, we employed 101 people in engineering
and research and development activities.
We are engaged in ongoing research and development efforts
focused on enhancements to existing products and the development
of new products. Currently, we are pursuing research and
development projects with respect to:
Research and development activities are conducted in
collaboration with manufacturing activities to help expedite new
products from the development phase to manufacturing and to more
quickly implement new process technologies. From time to time,
our research and development efforts have included participation
in technology collaborations with universities and research
institutions.
As of March 31, 2008, we held 158 issued patents, of which
118 were issued in the U.S. and 40 were issued in
international jurisdictions. We rely on a combination of patent
rights, copyrights and trade secrets to protect the proprietary
elements of our products. Our policy is to file patent
applications to protect technology, inventions and improvements
that are important to our business. We also seek to protect our
trade secrets and proprietary
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technology, in part, through confidentiality agreements with
employees, consultants and other parties. While we believe that
our intellectual property rights are valuable, we also believe
that other factors, such as innovative skills, technical
expertise, the ability to adapt quickly to new technologies and
evolving customer requirements, product support and customer
relations, are of greater competitive significance.
We are currently engaged in patent litigation. See Item 3,
“Legal Proceedings.”
The production of our products is a highly complex and precise
process. We manufacture our products in our own manufacturing
facilities and utilize external wafer foundries and subcontract
assembly facilities. We divide our manufacturing operations into
three key areas: wafer fabrication, assembly and test.
We have four facilities which perform manufacturing. We own an
approximately 170,000 square-foot facility in Lampertheim,
Germany at which we fabricate bipolar products and an
approximately 83,000 square-foot facility in Beverly,
Massachusetts, capable of manufacturing high voltage silicon on
insulator ICs. We also lease an approximately 30,000 square
foot facility in Fremont, California, where we manufacture
gallium arsenide RF power semiconductors, and an
approximately 100,000 square foot facility in Chippenham,
England where we fabricate very high power bipolar devices. We
believe that our internal fabrication capabilities enable us to
bring products to the market more quickly, retain certain
proprietary aspects of our process technology and more quickly
develop new innovations.
In addition to maintaining our own fabrication facilities, we
have established alliances with selected foundries for wafer
fabrication. This approach allows us to reduce substantial
capital spending and manufacturing overhead expenses, obtain
competitive pricing and technologies and expand manufacturing
capacity more rapidly than could be achieved with internal
foundries alone. We retain the flexibility to shift the
production of our products to different or additional foundries
for cost or performance reasons. Our product designs enable the
production of our devices at multiple foundries using
well-established and cost-effective processes.
Measured in dollars, we relied on external foundries for
approximately 37.8% of our wafer fabrication requirements in
fiscal 2008. We have arrangements with a number of external
wafer foundries, three of which provide the wafers for power
semiconductors. Our principal external foundry is Samsung
Electronics’ facility located in Kiheung, South Korea. Our
relationship with Samsung Electronics extends for more than two
decades. We provide our foundries forecasts for wafer
fabrication six months in advance and make firm purchase
commitments one to two months in advance of delivery.
Wafer fabrication of power semiconductors generally employs
process technology and equipment already proven in IC
manufacturing. Power semiconductors are manufactured using
fabrication equipment that is one or more generations behind the
equipment used to fabricate leading edge ICs. Used fabrication
equipment can be obtained at prices substantially less than the
original cost of such equipment or the cost of current equipment
applying the latest technology. Consequently, the fabrication of
power semiconductors is less capital intensive than the
fabrication of leading edge ICs.
For a discussion of risks attendant to our use of external
foundries, see “Risk Factors-We depend on external
foundries to manufacture many of our products,” provided in
Item 1A of this Annual Report on
Form 10-K,
which information is incorporated by reference into this
Item 1. For a discussion of risks attendant to our
acquisition of substrates prior to wafer fabrication, see
“Risk Factors-We depend upon a limited number of suppliers
for our substrates, most of whom we do not have long term
agreements with,” provided in Item 1A of this Annual
Report on
Form 10-K,
which information is incorporated by reference into this
Item 1. For a discussion of environmental risks attendant
to our business, see “Risk Factors-We may be affected by
environmental laws and regulations,” provided in
Item 1A of this Annual Report on
Form 10-K,
which information is incorporated by reference into this
Item 1.
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Packaging or assembly refers to the sequence of production steps
that divide the wafer into individual chips and enclose the
chips in external structures, called packages, which make them
useable in a circuit. Discrete manufacturing involves the
assembly and packaging of single semiconductor, or die, devices.
Module manufacturing involves the assembly of multiple devices
within a single package. SSR products involve multiple chip
assembly on a specialized lead frame. The resulting packages
vary in configuration, but all have leads that are used to mount
the package through holes in the customer’s printed circuit
boards.
Most of our wafers are sent to subcontract assembly facilities.
We use assembly subcontractors located in Asia and Europe in
order to take advantage of low assembly costs. Measured in
dollars, approximately 60.2% of our products were, during fiscal
2008, assembled at external assembly facilities, and the rest
were assembled in our Lampertheim, Chippenham and Fremont
facilities.
Generally, each die on our wafers is electrically tested for
performance after wafer fabrication. Following assembly, our
products undergo testing and final inspection, either internally
or externally, prior to shipment to customers.
The semiconductor industry is intensely competitive and is
characterized by price competition, technological change,
limited fabrication capacity, international competition and
manufacturing yield problems. The competitive factors in the
market for our products include:
Regarding these factors, we view our competitive advantage as an
ability to respond quickly to customer requests for new product
development. On the other hand, we rarely consider our company
to be among the most aggressive in pricing. We believe that we
are one of a limited group of companies focused on the
development and marketing of high power, high performance
semiconductors capable of performing all of the basic functions
of power semiconductor design and manufacture. Our primary power
semiconductor competitors include Fairchild Semiconductor, Fuji,
Hitachi, Infineon, International Rectifier, Microsemi,
Mitsubishi, On Semiconductor, Powerex, Renesas Technology,
Semikron International, STMicroelectronics and Toshiba. Our IC
products compete principally with those of Supertex, NEC,
Silicon Labs and Zarlink Semiconductor. Our RF power
semiconductor competitors include RF Micro Devices.
In the semiconductor industry, backlog quantities and shipment
schedules under outstanding purchase orders are frequently
revised to reflect changes in customer needs. Agreements calling
for the sale of specific quantities are either contractually
subject to quantity revisions or, as a matter of industry
practice, are often not enforced. Therefore, a significant
portion of our order backlog may be cancelable. For these
reasons, the amount of backlog as
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of any particular date may not be an accurate indicator of
future results. At March 31, 2008, our backlog of orders
was approximately $109.1 million, as compared with
$105.2 million at March 31, 2007. Backlog represents
existing orders from customers expected to be shipped within the
12 months following March 31, 2008.
Our trade sales are made primarily pursuant to standard purchase
orders that are booked months in advance of delivery. Generally,
prices and quantities are fixed at the time of booking. Backlog
is influenced by several factors including market demand,
pricing and customer order patterns in reaction to product lead
times.
We sell products to key customers pursuant to contracts that
allow us to schedule production capacity in advance and allow
the customers to manage their inventory levels consistent with
just-in-time
principles while shortening the cycle times required to produce
ordered product. However, these contracts are typically amended
to reflect changes in customer demands and periodic price
renegotiations.
At March 31, 2008, we employed 1,049 employees, of
whom 101 were primarily engaged in engineering and research and
development activities, 65 in marketing, sales and customer
support, 818 in manufacturing and 65 in administration and
finance. Of these employees, 139 hold engineering or science
degrees, including 20 Ph.D.s. Certain employees at our
Lampertheim and Chippenham facilities are subject to collective
bargaining agreements. There have been no work stoppages at any
of our facilities to date. We believe that our employee
relations are good.
Over the years, we have experienced a pattern, although not
consistently, in our September and December quarters of reduced
revenues or reduced growth in revenues from quarter to
sequential quarter because of summer vacation and year-end
holiday schedules in our and our customers’ facilities,
particularly in our European operations.
We currently make available through our website at
http://www.IXYS.com,
free of charge, copies of our Annual Report on
Form 10-K,
our quarterly reports on
Form 10-Q
and our current reports on
Form 8-K,
and amendments to those reports, as soon as reasonably
practicable after submitting the information to the Securities
and Exchange Commission, or SEC. None of the information posted
on our website is incorporated by reference into this Annual
Report on
Form 10-K.
You can also request free copies of such documents by contacting
us at
408-457-9000
or by sending an
e-mail to
investorrelations@IXYS.net.
In addition to the other information in this Annual Report on
Form 10-K,
the following risk factors should be considered carefully in
evaluating our business and us. Additional risks not presently
known to us or that we currently believe are not serious may
also impair our business and its financial condition.
Given the nature of the markets in which we participate, we
cannot reliably predict future revenues and profitability, and
unexpected changes may cause us to adjust our operations. Large
portions of our costs are fixed, due in part to our significant
sales, research and development and manufacturing costs. Thus,
small declines in revenues could seriously negatively affect our
operating results in any given quarter. Our operating results
may fluctuate significantly from quarter to quarter and year to
year. For example, comparing fiscal 2002 to fiscal 2001, net
revenues fell by 25.6% and net income fell by 85.7%. Further,
from fiscal 2002 to fiscal 2003 and from
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fiscal 2005 to fiscal 2006, net income in one year shifted
to net loss in the next year. Some of the factors that may
affect our quarterly and annual results are:
As a result of these factors, many of which are difficult to
control or predict, as well as the other risk factors discussed
in this Annual Report on
Form 10-K,
we may experience materially adverse fluctuations in our future
operating results on a quarterly or annual basis.
Semiconductor manufacturing requires significant capital
investment, leading to high fixed costs, including depreciation
expense. We are limited in our ability to reduce fixed costs
quickly in response to any shortfall in revenues. If we are
unable to utilize our manufacturing, assembly and testing
facilities at a high level, the fixed costs associated with
these facilities will not be fully absorbed, resulting in lower
gross margins. Increased competition and other factors may lead
to price erosion, lower revenues and lower gross margins for us
in the future.
We typically plan our production and inventory levels based on
our own expectations for customer demand. Actual customer
demand, however, can be highly unpredictable and can fluctuate
significantly. In response to anticipated long lead times to
obtain inventory and materials, we order materials and
production in advance of customer demand. This advance ordering
and production may result in excess inventory levels or
unanticipated inventory write-downs if expected orders fail to
materialize. This risk has increased in recent periods. As our
customers have increasingly demanded
“just-in-time”
deliveries that cannot be accommodated in the time required for
a normal production cycle, we have increased our inventory
produced in expectation of future orders.
For the fiscal year ended March 31, 2008, our product sales
by region were approximately 26.3% in the United States,
approximately 40.2% in Europe and the Middle East, approximately
27.5% in Asia Pacific and approximately 6.0% in Canada and the
rest of the world. We expect revenues from foreign markets to
continue to
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represent a significant portion of total revenues. We maintain
significant operations in Germany and the United Kingdom
and contracts with suppliers and manufacturers in South Korea,
Japan and elsewhere in Europe and Asia Pacific. Some of the
risks inherent in doing business internationally are:
Our sales of products manufactured in our Lampertheim, Germany
facility and our costs at that facility are primarily
denominated in Euros, and sales of products manufactured in our
Chippenham, U.K. facility and our costs at that facility are
primarily denominated in British pounds. Fluctuations in the
value of the Euro and the British pound against the
U.S. dollar could have a significant adverse impact on our
balance sheet and results of operations. We generally do not
enter into foreign currency hedging transactions to control or
minimize these risks. Fluctuations in currency exchange rates
could cause our products to become more expensive to customers
in a particular country, leading to a reduction in sales or
profitability in that country. If we expand our international
operations or change our pricing practices to denominate prices
in other foreign currencies, we could be exposed to even greater
risks of currency fluctuations.
In addition, the laws of certain foreign countries may not
protect our products or intellectual property rights to the same
extent as do U.S. laws regarding the manufacture and sale
of our products in the U.S. Therefore, the risk of piracy
of our technology and products may be greater when we
manufacture or sell our products in these foreign countries.
Business conditions in the semiconductor industry may rapidly
change from periods of strong demand and insufficient production
to periods of weakened demand and overcapacity. The industry in
general is characterized by:
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These factors could harm our business and cause our operating
results to suffer.
Changes in the mix and types of products sold may have a
substantial impact on our revenues and gross profit margins. In
addition, more recently introduced products tend to have higher
associated costs because of initial overall development costs
and higher
start-up
costs. Fluctuations in the mix and types of our products may
also affect the extent to which we are able to recover our fixed
costs and investments that are associated with a particular
product, and as a result can negatively impact our financial
results.
The semiconductor industry has been characterized by periodic
limitations on production capacity. Although we may be able to
obtain the capacity necessary to meet present demand, if we are
unable to increase our production capacity to meet possible
future demand, some of our customers may seek other sources of
supply or our future growth may be limited.
We believe that consumer products are subject to shorter product
life cycles, because of technological change, consumer
preferences, trendiness and other factors, than other types of
products sold by our customers. Shorter product life cycles
result in more frequent design competitions for the inclusion of
semiconductors in next generation consumer products, which may
not result in design wins for us.
In particular, in recent years we have sold semiconductors for
inclusion in the plasma display panels of a small number of
manufacturers. Plasma display panels are one of several
technologies used for visual display in television. Should
competition among the various visual display technologies for
television adversely affect the sales of plasma display panels
that incorporate our products, our operating results could be
adversely affected. Moreover, our operating results could be
adversely affected if those plasma display panel manufacturers
that have selected our semiconductors for inclusion in their
products are not successful in their competition against other
manufacturers of plasma display panels. As plasma display panels
cycle into next generation products, we must achieve new design
wins for our semiconductors to be included in the next
generation plasma display panels. New design wins may not occur.
We have in the past made, and may in the future make,
acquisitions of other companies and technologies. These
acquisitions involve numerous risks, including:
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We cannot assure that we will be able to successfully acquire
other businesses or product lines or integrate them into our
operations without substantial expense, delay in implementation
or other operational or financial problems.
As a result of an acquisition, our financial results may differ
from the investment community’s expectations in a given
quarter. Further, if market conditions or other factors lead us
to change our strategic direction, we may not realize the
expected value from such transactions. If we do not realize the
expected benefits or synergies of such transactions, our
consolidated financial position, results of operations, cash
flows, or stock price could be negatively impacted.
Of our revenues for fiscal year ended March 31, 2008, 37.8%
came from wafers manufactured for us by external foundries. Our
dependence on external foundries may grow. We currently have
arrangements with a number of wafer foundries, three of which
produce the wafers for power semiconductors that we purchase
from external foundries. Samsung Electronics’ facility in
Kiheung, South Korea is our principal external foundry. We and
Samsung are in the process of migrating our products fabricated
at Samsung from a 6” to an 8” line. In making the
transition, we will be making new photo masks for our products
and will be experiencing the issues associated with ramping up
production on a new wafer fabrication line. During the ramp up
phase we may encounter problems that may affect our
manufacturing yields and delay our production.
Our relationships with our external foundries do not guarantee
prices, delivery or lead times, or wafer or product quantities
sufficient to satisfy current or expected demand. These
foundries manufacture our products on a purchase order basis. We
provide these foundries with rolling forecasts of our production
requirements; however, the ability of each foundry to provide
wafers to us is limited by the foundry’s available
capacity. At any given time, these foundries could choose to
prioritize capacity for their own use or other customers or
reduce or eliminate deliveries to us on short notice. If growth
in demand for our products occurs, these foundries may be unable
or unwilling to allocate additional capacity to our needs,
thereby limiting our revenue growth. Accordingly, we cannot be
certain that these foundries will allocate sufficient capacity
to satisfy our requirements. In addition, we cannot be certain
that we will continue to do business with these or other
foundries on terms as favorable as our current terms. If we are
not able to obtain additional foundry capacity as required, our
relationships with our customers could be harmed and our
revenues could be reduced or growth limited. Moreover, even if
we are able to secure additional foundry capacity, we may be
required, either contractually or as a practical business
matter, to utilize all of that capacity or incur penalties or an
adverse effect on the business relationship. The costs related
to maintaining
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foundry capacity could be expensive and could harm our operating
results. Other risks associated with our reliance on external
foundries include:
Our requirements typically represent a small portion of the
total production of the external foundries that manufacture our
wafers and products. We cannot be certain these external
foundries will continue to devote resources to the production of
our wafers and products or continue to advance the process
design technologies on which the manufacturing of our products
is based. These circumstances could harm our ability to deliver
our products or increase our costs.
We manufacture our products in facilities that are owned and
operated by us, as well as in external wafer foundries and
subcontract assembly facilities. The fabrication of
semiconductors is a highly complex and precise process, and a
substantial percentage of wafers could be rejected or numerous
die on each wafer could be nonfunctional as a result of, among
other factors:
For these and other reasons, we could experience a decrease in
manufacturing yields. Additionally, if we increase our
manufacturing output, we may also experience a decrease in
manufacturing yields. As a result, we may not be able to
cost-effectively expand our production capacity in a timely
manner.
Our products use large amounts of silicon, metals and other
materials. In recent periods, we have experienced price
increases for many of these items. If we are unable to pass
price increases for raw materials onto our customers, our gross
margins and profitability could be adversely affected.
The markets for our products are characterized by:
To develop new products for our target markets, we must develop,
gain access to and use leading technologies in a cost-effective
and timely manner and continue to expand our technical and
design expertise. Failure to do so could cause us to lose our
competitive position and seriously impact our future revenues.
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Products or technologies developed by others may render our
products or technologies obsolete or noncompetitive. A
fundamental shift in technologies in our product markets would
have a material adverse effect on our competitive position
within the industry.
Many of our products are incorporated into customers’
products or systems at the design stage. The value of any design
win largely depends upon the customer’s decision to
manufacture the designed product in production quantities, the
commercial success of the customer’s product and the extent
to which the design of the customer’s electronic system
also accommodates incorporation of components manufactured by
our competitors. In addition, our customers could subsequently
redesign their products or systems so that they no longer
require our products. The development of the next generation of
products by our customers generally results in new design
competitions for semiconductors, which may not result in design
wins for us, potentially leading to reduced revenues and
profitability. We may not achieve design wins or our design wins
may not result in future revenues.
As a general matter, the semiconductor industry is characterized
by substantial litigation regarding patent and other
intellectual property rights. We have been sued on occasion for
purported patent infringement. In the future, we could be
accused of infringing the intellectual property rights of third
parties. We also have certain indemnification obligations to
customers and suppliers with respect to the infringement of
third party intellectual property rights by our products. We
could incur substantial costs defending ourselves and our
customers and suppliers from any such claim. Infringement claims
or claims for indemnification, whether or not proven to be true,
may divert the efforts and attention of our management and
technical personnel from our core business operations and could
otherwise harm our business.
In the event of an adverse outcome in any intellectual property
litigation, we could be required to pay substantial damages,
cease the development, manufacturing, use and sale of infringing
products, discontinue the use of certain processes or obtain a
license from the third party claiming infringement with royalty
payment obligations upon us. An adverse outcome in an
infringement action could materially and adversely affect our
financial condition, results of operations and cash flows.
Our ability to compete is affected by our ability to protect our
intellectual property rights. We rely on a combination of
patents, trademarks, copyrights, trade secrets, confidentiality
procedures and non-disclosure and licensing arrangements to
protect our intellectual property rights. Despite these efforts,
we cannot be certain that the steps we take to protect our
proprietary information will be adequate to prevent
misappropriation of our technology, or that our competitors will
not independently develop technology that is substantially
similar or superior to our technology. More specifically, we
cannot assure that our pending patent applications or any future
applications will be approved, or that any issued patents will
provide us with competitive advantages or will not be challenged
by third parties. Nor can we assure that, if challenged, our
patents will be found to be valid or enforceable, or that the
patents of others will not have an adverse effect on our ability
to do business. We may also become subject to or initiate
interference proceedings in the U.S. Patent and Trademark
Office, which can demand significant financial and management
resources and could harm our financial results. Also, others may
independently develop similar products or processes, duplicate
our products or processes or design their products around any
patents that may be issued to us.
The time from initiation of design to volume production of new
semiconductors often takes 18 months or longer. We first
work with customers to achieve a design win, which may take nine
months or longer. Our customers then complete the design,
testing and evaluation process and begin to ramp up production,
a period that may last an additional nine months or longer. As a
result, a significant period of time may elapse between our
research and
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development efforts and our realization of revenues, if any,
from volume purchasing of our products by our customers.
Customer orders typically can be cancelled or rescheduled
without penalty to the customer. As a result, our backlog at any
particular date is not necessarily indicative of actual revenues
for any succeeding period. A reduction of backlog during any
particular period, or the failure of our backlog to result in
future revenues, could harm our results of operations.
Certain of our target markets are intensely competitive. Our
ability to compete successfully in our target markets depends on
the following factors:
In addition, our competitors or customers may offer new products
based on new technologies, industry standards or end-user or
customer requirements, including products that have the
potential to replace our products or provide lower cost or
higher performance alternatives to our products. The
introduction of new products by our competitors or customers
could render our existing and future products obsolete or
unmarketable.
Our primary power semiconductor competitors include Fairchild
Semiconductor, Fuji, Hitachi, Infineon, International Rectifier,
Microsemi, Mitsubishi, On Semiconductor, Powerex, Renesas
Technology, Semikron International, STMicroelectronics and
Toshiba. Our IC products compete principally with those of
Supertex, Zarlink Semiconductor, NEC and Silicon Labs. Our RF
power semiconductor competitors include RF Micro Devices. Many
of our competitors have greater financial, technical, marketing
and management resources than we have. Some of these competitors
may be able to sell their products at prices below which it
would be profitable for us to sell our products or benefit from
established customer relationships that provide them with a
competitive advantage. We cannot assure you that we will be able
to compete successfully in the future against existing or new
competitors or that our operating results will not be adversely
affected by increased price competition.
Many of our products are sold to distributors or through sales
representatives. Our distributors and sales representatives
could reduce or discontinue sales of our products. They may not
devote the resources necessary to sell our products in the
volumes and within the time frames that we expect. In addition,
we depend upon the continued viability and financial resources
of these distributors and sales representatives, some of which
are small organizations with limited working capital. These
distributors and sales representatives, in turn, depend
substantially on general economic conditions and conditions
within the semiconductor industry. We believe that our success
will continue to depend upon these distributors and sales
representatives. If any significant distributor or sales
representative experiences financial difficulties, or otherwise
becomes unable or unwilling to promote and sell our products,
our business could be harmed. For example, All American
Semiconductor, Inc., one of our distributors, filed for
bankruptcy in April 2007.
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Our
future success depends on the continued service of management
and key engineering personnel and our ability to identify, hire
and retain additional personnel.
Our success depends upon our ability to attract and retain
highly skilled technical, managerial, marketing and finance
personnel, and, to a significant extent, upon the efforts and
abilities of Nathan Zommer, Ph.D., our President and Chief
Executive Officer, and other members of senior management. The
loss of the services of one or more of our senior management or
other key employees could adversely affect our business. We do
not maintain key person life insurance on any of our officers,
employees or consultants. There is intense competition for
qualified employees in the semiconductor industry, particularly
for highly skilled design, applications and test engineers. We
may not be able to continue to attract and retain engineers or
other qualified personnel necessary for the development of our
business or to replace engineers or other qualified individuals
who could leave us at any time in the future. If we grow, we
expect increased demands on our resources, and growth would
likely require the addition of new management and engineering
staff as well as the development of additional expertise by
existing management employees. If we lose the services of or
fail to recruit key engineers or other technical and management
personnel, our business could be harmed.
Presently, because of past acquisitions, we are operating a
number of different information systems that are not integrated.
In part because of this, we use spreadsheets, which are prepared
by individuals rather than automated systems, in our accounting.
Consequently, in our accounting, we perform many manual
reconciliations and other manual steps, which result in a high
risk of errors. Manual steps also increase the probability of
control deficiencies and material weaknesses.
If we do not adequately manage and evolve our financial
reporting and managerial systems and processes, our ability to
manage and grow our business may be harmed. Our ability to
successfully implement our goals and comply with regulations,
including those adopted under the Sarbanes-Oxley Act of 2002,
requires an effective planning and management system and
process. We will need to continue to improve existing, and
implement new, operational and financial systems, procedures and
controls to manage our business effectively in the future.
In improving our operational and financial systems, procedures
and controls, we would expect to periodically implement new
software and other systems that will affect our internal
operations regionally or globally. The conversion process from
one system to another is complex and could require, among other
things, that data from the existing system be made compatible
with the upgraded system. During any transition, we could
experience errors, delays and other inefficiencies, which could
adversely affect our business. Any delay in the implementation
of, or disruption in the transition to, any new or enhanced
systems, procedures or controls, could harm our ability to
forecast sales demand, manage our supply chain, achieve accuracy
in the conversion of electronic data and record and report
financial and management information on a timely and accurate
basis. In addition, as we add additional functionality, new
problems could arise that we have not foreseen. Such problems
could adversely impact our ability to do the following in a
timely manner: provide quotes; take customer orders; ship
products; provide services and support to our customers; bill
and track our customers; fulfill contractual obligations; and
otherwise run our business. Failure to properly or adequately
address these issues could result in the diversion of
management’s attention and resources, impact our ability to
manage our business and our results of operations, cash flows,
and stock price could be negatively impacted.
Any future growth would also require us to successfully hire,
train, motivate and manage new employees. In addition, continued
growth and the evolution of our business plan may require
significant additional management, technical and administrative
resources. We may not be able to effectively manage the growth
and evolution of our current business.
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We depend on subcontractors for the assembly and testing of our
products. The substantial majority of our products are assembled
by subcontractors located outside of the United States. Our
reliance on these subcontractors involves the following
significant risks:
These risks may lead to delayed product delivery or increased
costs, which would harm our profitability and customer
relationships.
In addition, we use a limited number of subcontractors to
assemble a significant portion of our products. If one or more
of these subcontractors experience financial, operational,
production or quality assurance difficulties, we could
experience a reduction or interruption in supply. Although we
believe alternative subcontractors are available, our operating
results could temporarily suffer until we engage one or more of
those alternative subcontractors. Moreover, in engaging
alternative subcontractors in exigent circumstances, our
production costs could increase markedly.
We purchase the bulk of our silicon substrates from a limited
number of vendors, most of whom we do not have long-term supply
agreements with. Any of these suppliers could reduce or
terminate our supply of silicon substrates at any time. Our
reliance on a limited number of suppliers involves several
risks, including potential inability to obtain an adequate
supply of silicon substrates and reduced control over the price,
timely delivery, reliability and quality of the silicon
substrates. We cannot assure that problems will not occur in the
future with suppliers.
Costs associated with unexpected product defects and errata
(deviations from published specifications) due to, for example,
unanticipated problems in our manufacturing processes include,
the costs of:
These costs could be substantial and may therefore increase our
expenses and lower our gross margin. In addition, our reputation
with our customers or users of our products could be damaged as
a result of such product defects and errata, and the demand for
our products could be reduced. These factors could harm our
financial results and the prospects for our business.
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Approximately 12% of our net revenues for the fiscal year ended
March 31, 2008 were derived from sales of products used in
medical devices such as defibrillators. Product liability risks
may exist even for those medical devices that have received
regulatory approval for commercial sale. We cannot be sure that
the insurance that we maintain against product liability will be
adequate to cover our losses. Any defects in our semiconductors
used in these devices, or in any other product, could result in
significant product liability costs to us.
Under generally accepted accounting principles, we review our
long-lived assets for impairment when events or changes in
circumstances indicate the carrying value may not be
recoverable. Goodwill is required to be tested for impairment at
least annually. Factors that may be considered a change in
circumstances indicating that the carrying value of our goodwill
or long-lived assets may not be recoverable include a decline in
stock price and market capitalization, future cash flows, and
slower growth rates in our industry. We may be required to
record a significant charge to earnings in our financial
statements during the period in which any impairment of our
goodwill or long-lived assets is determined resulting in an
impact on our results of operations.
We are subject to income taxes and other taxes in both the
United States and the foreign jurisdictions in which we
currently operate or have historically operated. We are also
subject to review and audit by both domestic and foreign
taxation authorities. The determination of our worldwide
provision for income taxes and current and deferred tax assets
and liabilities requires significant judgment and estimation.
The provision for income taxes can be adversely affected by a
variety of factors, including but not limited to changes in tax
laws, regulations and accounting principles, including
accounting for uncertain tax positions, or interpretation of
those changes. Significant judgment is required to determine the
recognition and measurement attributes prescribed in
FIN 48. Although we believe our tax estimates are
reasonable, the ultimate tax outcome may materially differ from
the tax amounts recorded in our consolidated financial
statements and may materially affect our income tax provision,
net income, goodwill or cash flows in the period or periods for
which such determination is made.
We are subject to various risks related to: (1) new,
different, inconsistent or even conflicting laws, rules and
regulations that may be enacted by legislative bodies
and/or
regulatory agencies in the countries in which we operate;
(2) disagreements or disputes between national or regional
regulatory agencies; and (3) the interpretation and
application of laws, rules and regulations. If we are found by a
court or regulatory agency not to be in compliance with
applicable laws, rules or regulations, our business, financial
condition and results of operations could be materially and
adversely affected.
In addition, approximately 12% of our net revenues for the
fiscal year ended March 31, 2008 were derived from the sale
of products included in medical devices that are subject to
extensive regulation by numerous governmental authorities in the
United States and internationally, including the U.S. Food
and Drug Administration, or FDA. The FDA and certain foreign
regulatory authorities impose numerous requirements for medical
device manufacturers to meet, including adherence to Good
Manufacturing Practices, or GMP, regulations and similar
regulations in other countries, which include testing, control
and documentation requirements. Ongoing compliance with GMP and
other applicable regulatory requirements is monitored through
periodic inspections by federal and state agencies, including
the FDA, and by comparable agencies in other countries. Our
failure to comply with applicable regulatory requirements could
prevent our products from being included in approved medical
devices.
Our business could also be harmed by delays in receiving or the
failure to receive required approvals or clearances, the loss of
previously obtained approvals or clearances or the failure to
comply with existing or future regulatory requirements.
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Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we must include in our Annual Report on
Form 10-K
a report of management on the effectiveness of our internal
controls over financial reporting and an attestation by our
independent registered public accounting firm to the adequacy of
management’s assessment of our internal control. Ongoing
compliance with these requirements is complex, costly and
time-consuming. If (1) we fail to maintain effective
internal control over financial reporting; (2) our
management does not timely assess the adequacy of such internal
control; or (3) our independent registered public
accounting firm does not timely attest to the evaluation, we
could be subject to regulatory sanctions and the public’s
perception of our company may decline.
We make investments in companies to further our strategic
objectives and support our key business initiatives. Such
investments include investments in equity securities of public
companies and investments in non-marketable equity securities of
private companies, which range from early-stage companies that
are often still defining their strategic direction to more
mature companies whose products or technologies may directly
support a product or initiative. The success of these companies
is dependent on product development, market acceptance,
operational efficiency, and other key business success factors.
The private companies in which we invest may fail because they
may not be able to secure additional funding, obtain favorable
investment terms for future financings, or take advantage of
liquidity events such as initial public offerings, mergers, and
private sales. If any of these private companies fail, we could
lose all or part of our investment in that company. If we
determine that an other-than-temporary decline in the fair value
exists for the equity securities of the public and private
companies in which we invest, we write down the investment to
its fair value and recognize the related write-down as an
investment loss. Furthermore, when the strategic objectives of
an investment have been achieved, or if the investment or
business diverges from our strategic objectives, we may decide
to dispose of the investment even at a loss. Our investments in
non-marketable equity securities of private companies are not
liquid, and we may not be able to dispose of these investments
on favorable terms or at all. The occurrence of any of these
events could negatively affect our results of operations.
From time to time, we may need to access the capital markets to
obtain long-term financing. Although we believe that we can
continue to access the capital markets on acceptable terms and
conditions, our flexibility with regard to long-term financing
activity could be limited by our existing capital structure, our
credit ratings, and the health of the semiconductor industry. In
addition, many of the factors that affect our ability to access
the capital markets, such as the liquidity of the overall
capital markets and the current state of the economy, are
outside of our control. There can be no assurance that we will
continue to have access to the capital markets on favorable
terms.
Any such event may disrupt our operations or those of our
customers or suppliers. Our markets currently include South
Korea, Taiwan and Israel, which are currently experiencing
political instability. Additionally, our principal external
foundry is located in South Korea.
Our operations and those of our suppliers are vulnerable to
interruption by fire, earthquake and other natural disasters, as
well as power loss, telecommunications failure and other events
beyond our control. We do not have a detailed disaster recovery
plan and do not have backup generators. Our facilities in
California are located near major earthquake faults and have
experienced earthquakes in the past. If any of these events
occur, our ability to conduct our operations could be seriously
impaired, which could harm our business, financial condition and
results of operations and cash flows. We cannot be sure that the
insurance we maintain against general business interruptions
will be adequate to cover all our losses.
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We are subject to a variety of laws, rules and regulations in
the United States, England and Germany related to the use,
storage, handling, discharge and disposal of certain chemicals
and gases used in our manufacturing process. Any of those
regulations could require us to acquire expensive equipment or
to incur substantial other expenses to comply with them. If we
incur substantial additional expenses, product costs could
significantly increase. Failure to comply with present or future
environmental laws, rules and regulations could result in fines,
suspension of production or cessation of operations.
Nathan Zommer, Ph.D., our President and Chief Executive
Officer, beneficially owned, as of May 30, 2008,
approximately 22% of the outstanding shares of our common stock.
As a result, Dr. Zommer can exercise significant control
over all matters requiring stockholder approval, including the
election of the board of directors. His holdings could result in
a delay of, or serve as a deterrent to, any change in control of
IXYS, which may reduce the market price of our common stock.
The market price of our common stock has fluctuated
significantly to date. The future market price of our common
stock may also fluctuate significantly in the event of:
In addition, the stock market in recent years has experienced
extreme price and volume fluctuations that have affected the
market prices of many high technology companies, including
semiconductor companies. These fluctuations have often been
unrelated or disproportionate to the operating performance of
companies in our industry, and could harm the market price of
our common stock.
Our board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further
vote or action by 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 because the terms of
any issued preferred stock could potentially prohibit our
consummation of any merger, reorganization, sale of
substantially all of our assets, liquidation or other
extraordinary corporate transaction, without the approval of the
holders of the outstanding
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shares of preferred stock. In addition, the issuance of
preferred stock could have a dilutive effect on our stockholders.
Our stockholders must give substantial advance notice prior to
the relevant meeting to nominate a candidate for director or
present a proposal to our stockholders at a meeting. These
notice requirements could inhibit a takeover by delaying
stockholder action. The Delaware anti-takeover law restricts
business combinations with some stockholders once the
stockholder acquires 15% or more of our common stock. The
Delaware statute makes it more difficult for us to be acquired
without the consent of our board of directors and management.
Not Applicable.
Our principal facilities are described below:
We believe that our current facilities are suitable to our needs
and will be adequate through at least fiscal year 2009 and that
suitable additional or replacement space will be available in
the future as needed on commercially reasonably terms. The
Lampertheim and Milpitas properties serve as collateral for
loans, and are subject to security interests.
We are currently involved in a variety of legal matters that
arise in the normal course of business. Were an unfavorable
ruling to occur, there could be a material adverse impact on our
financial condition, results of operations or cash flows.
In June 2000, International Rectifier Corporation filed an
action for patent infringement against IXYS in the United States
District Court for the Central District of California, alleging
that certain of IXYS’s products sold in the United States
infringed U.S. patents owned by International Rectifier.
International Rectifier’s complaint against IXYS contended
that IXYS’s alleged infringement of International
Rectifier’s patents had been and
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continued to be willful and deliberate. Subsequently, the
U.S. District Court decided that certain of IXYS’s
power MOSFETs and IGBTs infringed patents of International
Rectifier.
In September 2006, the U.S. District Court entered a
judgment for $6.2 million in damages and issued a permanent
injunction barring IXYS from selling or distributing the
infringing products. Counsel to IXYS inadvertently did not file
the requisite notice of appeal following the entry of judgment
within the required time period. However, IXYS believes that its
counsel took timely corrective measures and that it is unlikely
that IXYS’s appeal will ultimately be ruled to be late. In
January 2008, the appeal was argued before the United States
Court of Appeals for the Federal Circuit. In February 2008, the
Federal Circuit Court reversed the U.S. District Court,
vacated the damages award and the permanent injunction and ruled
that there shall be no further proceedings in the case regarding
any question of infringement. In March 2008, the Federal Circuit
Court also refused to rehear the case. International Rectifier
could petition the U.S. Supreme Court to consider the
Federal Circuit’s ruling.
There can be no assurance of a favorable final outcome in the
International Rectifier suit. In the event of an adverse
outcome, damages awarded by the U.S. District Court would
be materially adverse to IXYS’s financial condition,
results of operations and cash flows.
Not Applicable.
The executive officers, their ages and positions at IXYS, as
well as certain biographical information of these individuals,
are set forth below. The ages of the individuals are provided as
of March 31, 2008.
There are no family relationships among our directors and
executive officers.
Nathan Zommer. Dr. Zommer, our founder,
has served as a Director since our inception in 1983, and has
served as Chairman of the Board, President and Chief Executive
Officer since 1993. From 1984 to 1993, Dr. Zommer served as
our Executive Vice President. Prior to founding IXYS,
Dr. Zommer served in a variety of positions with Intersil,
Hewlett-Packard and General Electric, including as a scientist
in the Hewlett-Packard Laboratories and Director of the Power
MOS Division for Intersil/General Electric. Dr. Zommer
received his B.S. and M.S. degrees in Physical Chemistry from
Tel Aviv University and a Ph.D. in Electrical Engineering from
Carnegie Mellon University.
Uzi Sasson. Mr. Sasson has served as our
Chief Operating Officer since June 2007 and our Chief Financial
Officer, Vice President and Secretary since November 2004. From
February to November 2004, Mr. Sasson was the Chief
Executive Officer of Sagent Management, a tax and accounting
consulting firm. Mr. Sasson also served as the interim
Chief Financial Officer for Digital Power Corp., a manufacturer
of switching power supplies, from June 2004 to November 2004.
Mr. Sasson served as Vice President of Tax for Mercury
Interactive Corporation, a provider of software and services for
the business technology optimization marketplace, from 2001 to
January 2004. Prior to that, Mr. Sasson was a Senior
Manager at PricewaterhouseCoopers LLP, an accounting firm, from
1992 to 2001. From August to November 2004, Mr. Sasson
served as a director of IXYS. Mr. Sasson has a Masters of
Science in Taxation and Bachelor of Science in Accounting from
Golden Gate University and is a Certified Public Accountant in
California.
Peter H. Ingram. Mr. Ingram has served as
our President of European Operations since 2000. From 1994 to
2000, he served as our Vice President of European Operations.
From 1989 to 1994, he served as our Director of Wafer Fab
Operations. Mr. Ingram worked with the semiconductor
operations of ABB, Ltd. from 1982 until we acquired those
operations in 1989. Mr. Ingram received an Honors degree in
Chemistry from the University of Nottingham.
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Our common stock is traded on the Nasdaq Global Market under the
symbol “IXYS.” The following table presents, for the
periods indicated, the intraday high and low sale prices per
share of our common stock as reported by the Nasdaq Global
Market:
The number of record holders of our common stock as of
May 30, 2008 was 419. To date, we have not declared or paid
cash dividends. We have no plans to do so.
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The line graph below shows the total stockholder return of an
investment of $100 in cash for the period from March 31,
2003 through March 31, 2008 for (i) the Company’s
Common Stock, (ii) the NASDAQ Composite Index and
(iii) the Standard & Poor’s Semiconductor
Index. All values assume reinvestment of the full amount of all
dividends and are calculated as of March 31 of each year.
Historical stock price performance should not be relied upon as
indicative of future stock price performance.
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The following selected consolidated financial information should
be read in conjunction with our consolidated financial
statements and related notes and Management’s Discussion
and Analysis of Financial Condition and Results of Operations
included elsewhere in this Annual Report on
Form 10-K.
The consolidated statements of operations data for the years
ended March 31, 2008, 2007 and 2006, and the balance sheet
data as of March 31, 2008 and 2007 are derived from our
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
The statements of operations data for the years ended
March 31, 2005 and 2004 and the balance sheet data as of
March 31, 2006, 2005 and 2004 are derived from our
consolidated financial statements that are not included in this
Annual Report on
Form 10-K.
Historical results are not necessarily indicative of results to
be expected in any future period.
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This discussion contains forward-looking statements, which
are subject to certain risks and uncertainties, including,
without limitation, those described elsewhere in this
Form 10-K
and, in particular, in Item 1A hereof. Actual results may
differ materially from the results discussed in the
forward-looking statements. For a discussion of risks that could
affect future results, see “Item 1A. Risk
Factors.” All forward-looking statements included in this
document are made as of the date hereof, based on the
information available to us as of the date hereof, and we assume
no obligation to update any forward-looking statement, except as
may be required by law.
We are a multi-market integrated semiconductor company. Our
three principal product groups are: power semiconductors;
integrated circuits; and systems and RF power semiconductors.
Our power semiconductors improve system efficiency and
reliability by converting electricity at relatively high voltage
and current levels into the finely regulated power required by
electronic products. We focus on the market for power
semiconductors that are capable of processing greater than 200
watts of power.
We also design, manufacture and sell integrated circuits for a
variety of applications. Our analog and mixed signal ICs are
principally used in telecommunications applications. Our mixed
signal application specific ICs, or ASICs, address the
requirements of the medical imaging equipment and display
markets. Our power management and control ICs are used in
conjunction with our power semiconductors.
Our systems include laser diode drivers, high voltage pulse
generators and modulators, and high power subsystems, sometimes
known as modules or stacks, that are principally based on our
high power semiconductor devices. Our RF power semiconductors
enable circuitry that amplifies or receives radio frequencies in
wireless and other microwave communication applications, medical
imaging applications and defense and space applications.
Over the past fiscal year, our revenues from the sales of
semiconductors for the consumer products market have declined
while our revenues from the sale of semiconductors for the
industrial and commercial market have increased. Geographically,
over the same period, our revenues in Europe and the Middle East
increased substantially, in large part because of the
strengthening European economy, growth in the industrial and
commercial market
29
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and the depreciation of the U.S. dollar against and the
Euro; our revenues in Asia decreased as a result of a decrease
in revenues from consumer products markets; and our revenues in
the United States increased slightly. Gross profit margins
decreased during the fiscal year due to the decline in revenues
from higher margin ICs. Selling, general and administrative
expenses decreased in the fiscal year, in large part due to
decreased professional and consulting expenses and lower bad
debt expenses. Distribution revenues increased during the fiscal
year, as revenues shifted to applications that are traditionally
bought through distributors, such as industrial and commercial
applications, while our revenues from semiconductors for the
consumer products market, which are typically purchased directly
from us, declined. To service increasing demand for bipolar
products, we shifted some production processes to improve
efficiency and to obtain additional capacity. In doing so we
encountered production
ramp-up
challenges that we expect to be resolved over time.
The discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosures of contingent assets and liabilities. On
an ongoing basis, management evaluates the reasonableness of its
estimates. Management bases its estimates on historical
experience and on various assumptions that are believed 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 available from other
sources. Actual results may differ materially from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies require
that we make significant judgments and estimates in preparing
our consolidated financial statements.
Revenue recognition. We sell to distributors
and original equipment manufacturers. Approximately 48% of our
revenues in fiscal 2008, 47% of our revenues in fiscal 2007 and
44% of our revenues in fiscal 2006 were from distributors. We
provide some of our distributors with the following programs:
stock rotation and ship and debit. Ship and debit is a sales
incentive program for products previously shipped to
distributors. We recognize revenue from product sales upon
shipment provided that we have received an executed purchase
order, the price is fixed and determinable, the risk of loss has
transferred, collection of resulting receivables is reasonably
assured, there are no customer acceptance requirements, and
there are no remaining significant obligations. Our shipping
terms are generally FOB shipping point. Reserves for allowances
are also recorded at the time of shipment. Our management must
make estimates of potential future product returns and so called
“ship and debit” transactions related to current
period product revenue. Our management analyzes historical
returns and ship and debit transactions, current economic trends
and changes in customer demand and acceptance of our products
when evaluating the adequacy of the sales returns and
allowances. Significant management judgments and estimates must
be made and used in connection with establishing the allowances
in any accounting period. We have visibility into inventory held
by our distributors to air in our reserve analysis. Different
judgments or estimates would result in material differences in
the amount and timing of our revenue for any period.
Under certain circumstances where our management is not able to
reasonably and reliably estimate the actual returns, revenues
and costs relating to distributor sales are deferred until
products are sold by the distributors to the distributor’s
end customers. Deferred amounts are presented net and included
under “Accrued expenses and other liabilities.”
Accounts receivable from distributors are recognized and
inventory is relieved when title to inventories transfer,
typically upon shipment from IXYS at which point we have a
legally enforceable right to collection under normal payment
terms.
For our nonrecurring engineering, or NRE, related to engineering
work performed by our Clare Micronix division to design chip
prototypes that will later be used to produce required units,
customers enter into arrangements with Clare Micronix to perform
engineering work for a fixed fee. Clare Micronix records
fixed-fee payments during the development phase from customers
in accordance with Statement of Financial Accounting Standards,
or SFAS, No. 68, “Research and Development
Arrangements.” Amounts offset against research and
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development costs totaled approximately $352,000 in fiscal 2008,
$355,000 in fiscal 2007 and $363,000 in fiscal 2006.
We state our revenues, net of any taxes collected from customers
that are required to be remitted to the various government
agencies. The amount of taxes collected from customers and
payable to government is included under accrued expenses and
other liabilities. Shipping and handling costs are included in
cost of sales.
Allowance for sales returns. We maintain an
allowance for sales returns for estimated product returns by our
customers. We estimate our allowance for sales returns based on
our historical return experience, current economic trends,
changes in customer demand, known returns we have not received
and other assumptions. If we were to make different judgments or
utilize different estimates, the amount and timing of our
revenue could be materially different. Given that our revenues
consist of a high volume of relatively similar products, to date
our actual returns and allowances have not fluctuated
significantly from period to period, and our returns provisions
have historically been reasonably accurate. This allowance is
included as part of the accounts receivable allowance on the
balance sheet and as a reduction of revenues in the statement of
operations.
Allowance for stock rotation. We also provide
“stock rotation” to select distributors. The rotation
allows distributors to return a percentage of the previous six
months’ sales in exchange for orders of an equal or greater
amount. In the fiscal years ended March 31, 2008, 2007 and
2006, approximately $1.0 million, $1.8 million and
$962,000, respectively, of products were returned to us under
the program. We generally establish the allowance for all sales
to distributors except in cases where the revenue recognition is
deferred and recognized upon sale by the distributor of products
to the end-customer. The allowance, which is management’s
best estimate of future returns, is based upon the historical
experience of returns and inventory levels at the distributors.
This allowance is included as part of the accounts receivable
allowance on the balance sheet and as a reduction of revenues in
the statement of operations. Should distributors increase stock
rotations beyond our estimates, our statements would be
adversely affected.
Allowance for ship and debit. Ship and debit
is a program designed to assist distributors in meeting
competitive prices in the marketplace on sales to their end
customers. Ship and debit requires a request from the
distributor for a pricing adjustment for a specific part for a
customer sale to be shipped from the distributor’s stock.
We have no obligation to accept this request. However, it is our
historical practice to allow some companies to obtain pricing
adjustments for inventory held. We receive periodic statements
regarding our products held by our distributors. Our
distributors had approximately $5.2 million in inventory of
our products on hand at March 31, 2008. Ship and debit
authorizations may cover current and future distributor activity
for a specific part for sale to the distributor’s customer.
In accordance with Staff Accounting Bulletin No. 104,
Topic 13, “Revenue Recognition,” at the time we record
sales to the distributors, we provide an allowance for the
estimated future distributor activity related to such sales
since it is probable that such sales to distributors will result
in ship and debit activity. The sales allowance requirement is
based on sales during the period, credits issued to
distributors, distributor inventory levels, historical trends,
market conditions, pricing trends we see in our direct sales
activity with original equipment manufacturers and other
customers, and input from sales, marketing and other key
management. We believe that the analysis of these inputs enable
us to make reliable estimates of future credits under the ship
and debit program. This analysis requires the exercise of
significant judgments. Our actual results to date have
approximated our estimates. At the time the distributor ships
the part from stock, the distributor debits us for the
authorized pricing adjustment. This allowance is included as
part of the accounts receivable allowance on the balance sheet
and as a reduction of revenues in the statement of operations.
If competitive pricing were to decrease sharply and
unexpectedly, our estimates might be insufficient, which could
significantly adversely affect our operating results.
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Additions to the ship and debit allowance are estimates of the
amount of expected future ship and debit activity related to
sales during the period and reduce revenues and gross profit in
the period. The following table sets forth the beginning and
ending balances of, additions to and deductions from our
allowance for ship and debit during the three years ended
March 31, 2008 (in thousands):
Allowance for doubtful accounts. We maintain
an allowance for doubtful accounts for estimated losses from the
inability of our customers to make required payments. We
evaluate our allowance for doubtful accounts based on the aging
of our accounts receivable, the financial condition of our
customers and their payment history, our historical write-off
experience and other assumptions. If we were to make different
judgments of the financial condition of our customers or the
financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required. This allowance is
reported on the balance sheet as part of the accounts receivable
allowance and is included on the statement of operations as part
of selling, general and administrative expense. This allowance
is based on historical losses and management’s estimates of
future losses.
Inventories. Inventories are recorded at the
lower of standard cost, which approximates actual cost on a
first-in-first-out
basis, or market value. Our accounting for inventory costing is
based on the applicable expenditure incurred, directly or
indirectly, in bringing the inventory to its existing condition.
Such expenditures include acquisition costs, production costs
and other costs incurred to bring the inventory to its use. As
it is impractical to track inventory from the time of purchase
to the time of sale for the purpose of specifically identifying
inventory cost, our inventory is therefore valued based on a
standard cost, given that the materials purchased are identical
and interchangeable at various production processes. Effective
April 1, 2006, we adopted SFAS No. 151,
“Inventory Costs — an amendment of ARB
No. 43, Chapter 4.” SFAS No. 151
requires certain abnormal expenditures to be recognized as
expenses in the current period versus being capitalized in
inventory. It also requires that the amount of fixed production
overhead allocated to inventory be based on the normal capacity
of the production facilities. The application of
SFAS No. 151 did not have a material impact on our
consolidated financial statements. We review our standard costs
on an as-needed basis but in any event at least once a year, and
update them as appropriate to approximate actual costs.
We typically plan our production and inventory levels based on
internal forecasts of customer demand, which are highly
unpredictable and can fluctuate substantially. The value of our
inventories is dependent on our estimate of future demand as it
relates to historical sales. If our projected demand is
overestimated, we may be required to reduce the valuation of our
inventories below cost. We regularly review inventory quantities
on hand and record an estimated provision for excess inventory
based primarily on our historical sales and expectations for
future use. We also recognize a reserve based on known
technological obsolescence, when appropriate. However, for new
products, we do not consider whether there is excess inventory
until we develop sufficient sales history or experience a
significant change in expected product demand based on backlog.
Actual demand and market conditions may be different from those
projected by our management. This could have a material effect
on our operating results and financial position. If we were to
make different judgments or utilize different estimates, the
amount and timing of our write-down of inventories could be
materially different.
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Excess inventory frequently remains saleable. When excess
inventory is sold, it yields a gross profit margin of up to
100%. Sales of excess inventory have the effect of increasing
the gross profit margin beyond that which would otherwise occur,
because of previous write-downs. Once we have written down
inventory below cost, we do not subsequently write it up until
inventory is subsequently sold or scrapped. We do not physically
segregate excess inventory nor do we assign unique tracking
numbers to it in our accounting systems. Consequently, we cannot
isolate the sales prices of excess inventory from the sales
prices of non-excess inventory. Therefore, we are unable to
report the amount of gross profit resulting from the sale of
excess inventory or quantify the favorable impact of such gross
profit on our gross profit margin.
The following table provides information on our excess and
obsolete inventory reserve charged against inventory at cost (in
thousands):
The practical efficiencies of wafer fabrication require the
manufacture of semiconductor wafers in minimum lot sizes. Often,
when manufactured, we do not know whether or when all the
semiconductors resulting from a lot of wafers will sell. With
more than 9,000 different part numbers for semiconductors,
excess inventory resulting from the manufacture of some of those
semiconductors will be continual and ordinary. Because the cost
of storage is minimal when compared to potential value and
because our products do not quickly become obsolete, we expect
to hold excess inventory for potential future sale for years.
Consequently, we have no set time line for the sale or scrapping
of excess inventory.
In addition, our inventory is also being written down to the
lower of cost or market or net realizable value. We review our
inventory listing on a quarterly basis for an indication of
losses being sustained for costs that exceed selling prices less
direct costs to sell. When it is evident that our selling price
is lower than current cost, the inventory is marked down
accordingly. At March 31, 2008 and 2007, our lower of cost
or market reserve was $1.0 million and $615,000,
respectively.
Furthermore, we perform an annual inventory count and periodic
cycle counts for specific parts that have a high turnover. We
also periodically identify any inventory that is no longer
usable and write it off.
We entered into purchase agreements for purchase of fabricated
wafers and substrates over one to five years. Under these
agreements, the supplier agrees to supply and we are obliged to
purchase products corresponding to an agreed yearly purchase
amount. We have recognized the liability for all products
delivered as at March 31, 2008. The total amounts committed
under the agreement have been disclosed in “Disclosures
about Contractual Obligations and Commercial Commitments”
elsewhere in Item 7, “Management’s Discussion and
Analysis of
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Financial Condition and Results of Operations” and in
Note 6, “Commitments and Contingencies” of Notes
to Consolidated Financial Statements in Item 8 of this
Annual Report on
Form 10-K.
Income tax: On April 1, 2007, we adopted
Financial Accounting Standards Board, or FASB, Interpretation
No. 48, “Accounting for Uncertainty in Income
Taxes — an interpretation of
SFAS No. 109” (“FIN 48”), and
related guidance (See Note 11 of Notes to Consolidated
Financial Statements for further discussion).
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure together with
assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent we
believe that recovery is not likely, we establish a valuation
allowance. A valuation allowance reduces our deferred tax assets
to the amount that is more likely than not to be realized. In
determining the amount of the valuation allowance, we consider
estimated future taxable income as well as feasible tax planning
strategies in each taxing jurisdiction in which we operate. If
we determine that it is more probable than not that we will not
realize all or a portion of our remaining deferred tax assets,
then we will increase our valuation allowance with a charge to
income tax expense. Conversely, if we determine that it is
likely that we will ultimately be able to utilize all or a
portion of the deferred tax assets for which a valuation
allowance has been provided, then the related portion of the
valuation allowance will reduce goodwill, intangible assets or
income tax expense. Significant management judgment is required
in determining our provision for income taxes and potential tax
exposures, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax
assets. In the event that actual results differ from these
estimates or we adjust these estimates in future periods, we may
need to establish a valuation allowance, which could materially
impact our financial position and results of operations. Our
ability to utilize our deferred tax assets and the need for a
related valuation allowance are monitored on an ongoing basis.
Furthermore, computation of our tax liabilities involves
examining uncertainties in the application of complex tax
regulations. As a result of the implementation of FIN 48,
we recognize liabilities for uncertain tax positions based on
the two-step process as prescribed within the interpretation.
The first step is to evaluate the tax position for recognition
by determining if there is sufficient available evidence to
indicate if it is more likely than not that the position will be
sustained on an audit, including resolution of any related
appeals or litigation processes. The second step requires us to
measure and determine the approximate amount of the tax benefit
at the largest amount that is more than 50% likely of being
realized upon ultimate settlement with the tax authorities. It
is inherently difficult and requires significant judgment to
estimate such amounts, as this requires us to determine the
probability of various possible outcomes. We reexamine these
uncertain tax positions on a quarterly basis. This reassessment
is based on various factors during the period including, but not
limited to, changes in worldwide tax laws and treaties, changes
in facts or circumstances, effectively settled issues under
audit and any new audit activity. A change in recognition or
measurement would result in the recognition of a tax benefit or
an additional charge to the tax provision in the period.
Defined benefit plans. We maintain pension
plans covering certain of our employees in foreign locations.
Effective at the end of fiscal 2007, we adopted
SFAS No. 158 for financial reporting purposes.
SFAS No. 158 requires that we recognize the funded
status of our defined benefit pension and post-retirement
benefit plans with a corresponding adjustment to accumulated
other comprehensive income, net of tax. Funded status is
measured as the difference between the fair value of plan assets
and the projected benefit obligation for pension plans. These
amounts are adjusted to recognize the amortized gain or losses
as a part of net periodic pension cost. Net periodic pension
costs are calculated based upon a number of actuarial
assumptions, including a discount rate for plan obligations,
assumed rate of return on pension plan assets and assumed rate
of compensation increase for plan employees. Our assumptions are
derived from actuarial projections and actual market data. These
assumptions are based upon management’s judgment,
considering known trends and uncertainties. Actual results that
differ from these assumptions would impact the future expense
recognition and cash funding requirements of our pension plans.
The adoption of SFAS No. 158 did not have any impact
on the consolidated financial statements.
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We adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109” (“FIN 48”), and
related guidance as of April 1, 2007. See Note 11 of
Notes to Consolidated Financial Statements for further
discussion.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, or GAAP, and
expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that
require or permit fair value measurements. Accordingly, this
Statement does not require any new fair value measurements.
SFAS No. 157 is effective for our company beginning
April 1, 2008. We are currently evaluating the impact of
SFAS No. 157 to our financial position and results of
operations.
In February 2008, the FASB issued FASB Staff Position
(“FSP”)
157-1,
“Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13”
(“FSP 157-1”)
and
FSP 157-2,
“Effective Date of FASB Statement No. 157”
(“FSP 157-2”).
FSP 157-1
amends SFAS No. 157 to remove certain leasing
transactions from its scope.
FSP 157-2
delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
to fiscal years beginning after November 15, 2008. We are
currently evaluating the impact that
SFAS No. 157-1
and
No. 157-2
will have on our consolidated financial statements and results
of operations.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”).
SFAS No. 159 permits companies to choose to measure
certain financial instruments and certain other items at fair
value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be
reported in earnings. SFAS No. 159 is effective for
our company beginning April 1, 2008. We are currently
evaluating the impact of SFAS No. 159 on our financial
position and results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS No. 141(R)”) and
SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”
(“SFAS No. 160”). These standards aim to
improve, simplify and converge internationally the accounting
for business combinations and the reporting of our
noncontrolling interests in consolidated financial statements.
The provisions of SFAS No. 141(R) and
SFAS No. 160 are effective for our fiscal year
beginning April 1, 2009. We are currently evaluating the
provisions of SFAS No. 141(R) and
SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement
No. 133” (“SFAS No. 161”). The
standard requires additional quantitative disclosures (provided
in tabular form) and qualitative disclosures for derivative
instruments. The required disclosures include how derivative
instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows;
relative volume of derivative activity; the objectives and
strategies for using derivative instruments; the accounting
treatment for those derivative instruments formally designated
as the hedging instrument in a hedge relationship; and the
existence and nature of credit-related contingent features for
derivatives. SFAS No. 161 does not change the
accounting treatment for derivative instruments.
SFAS No. 161 is effective for our company for the
fiscal quarter beginning January 1, 2009. We are currently
evaluating the impact of SFAS No. 161.
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Results
of Operations
The following table sets forth selected consolidated statement
of operations data for the fiscal years indicated and the
percentage change in such data from year to year:
The following table sets forth selected statement of operations
data as a percentage of net revenues for the fiscal years
indicated. These historical operating results may not be
indicative of the results for any future period.
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The following table sets forth the revenues for each of our
product groups for fiscal 2008, 2007 and 2006:
The following tables set forth the average selling prices, or
ASPs, and units for fiscal 2008, 2007 and 2006:
The 6.5% increase in net revenues from fiscal 2007 to fiscal
2008 resulted from an increase in net revenues from power
semiconductors and systems and RF power semiconductors, offset
by a decrease in net revenues from ICs. The increase in net
revenues from power semiconductors was primarily due to an
increase in unit sales and reflected increased revenue from the
sale of MOS products of $15.2 million and increased revenue
from the sale of bipolar products of $13.9 million,
primarily to the industrial and commercial market. The increase
in net revenues from systems and RF power semiconductors was
primarily due to a $4.6 million increase in net revenues
from the sale of subassemblies to the industrial and commercial
market. The increase in net revenues from power semiconductors
and systems and RF power semiconductors was primarily due to the
strengthening European economy and growth in the industrial and
commercial markets. Net revenues from the sale of ICs in fiscal
2008 as compared to fiscal 2007 declined due to a sharp decrease
in unit sales, partially offset by an increase in ASP. There was
an $8.5 million decrease in net revenues from the sale of
ASICs, primarily to the consumer products market, and a
$6.5 million decrease in the sale of other ICs, principally
to the telecommunications market.
The increase in the ASPs of our ICs in fiscal 2008 as compared
to fiscal 2007 was primarily due to the reduction in the unit
sales of low cost ASICs to the consumer products market and ICs
to the telecommunications market. The increase in ASPs of
systems and RF power semiconductors was due to an increase in
the sale of higher priced subassemblies. The overall decrease in
the number of units sold was principally due to a decrease in
the shipments of ASICs to the consumer products market,
partially offset by an increase in unit shipments of power
semiconductors.
The 13.7% increase in net revenues from fiscal 2006 to fiscal
2007 resulted primarily from an increase in net revenues from
the sale of power semiconductors and ICs, notwithstanding a
decline in ASPs for both types of
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products. The increase in net revenues from the sale of power
semiconductors was primarily due to an increase in net revenues
from the sale of bipolar products of $16.4 million,
principally to the industrial and commercial market. The
increase in net revenues from IC sales was primarily due to an
increase of approximately $7.1 million in net revenues from
the sale of ASICs to the consumer products market and an
increase of $5.8 million in net revenues from the sale of
ICs to the telecom market. Revenues from the sale of systems and
RF power semiconductors in fiscal 2007 as compared to fiscal
2006 grew due to an increase of $5.3 million in net
revenues from the sale of subassemblies, partially offset by a
$2.0 million decrease in net revenues from the sale of our
RF devices.
The decrease in the ASPs of our power semiconductors and ICs in
fiscal 2007 as compared to fiscal 2006 was primarily due to a
shift in product mix and a substantial increase in the sale of
low-price units of ASIC devices. The increase in the number of
units sold was principally due to an increase in shipments of
ASICs for the consumer products market and power semiconductors
for the industrial and commercial markets. The increase in ASPs
and units for systems and RF semiconductors resulted from a
shift towards the sale of subassemblies.
For fiscal 2008, sales to customers in the United States
represented approximately 26.3%, and sales to international
customers represented approximately 73.7%, of our net revenues.
Of our international sales in fiscal 2008, approximately 54.5%
were derived from sales in Europe and the Middle East,
approximately 37.3% were derived from sales in Asia and
approximately 8.2% were derived from sales in Canada and the
rest of the world.
By comparison, for fiscal 2007, sales to customers in the United
States represented approximately 27.5% and sales to
international customers represented approximately 72.5%, of our
net revenues. Of our international sales in fiscal 2007,
approximately 52.1% were derived from sales in Europe and the
Middle East, approximately 41.4% were derived from sales in Asia
and approximately 6.5% were derived from sales in Canada and the
rest of the world. For fiscal 2006, sales to customers in the
United States represented approximately 31.5%, and sales to
international customers represented approximately 68.5%, of our
net revenues. Of our international sales in fiscal 2006,
approximately 48.5% were derived from sales in Europe and the
Middle East, approximately 44.2% were derived from sales in Asia
and approximately 7.3% were derived from sales in Canada and the
rest of the world.
From fiscal 2007 to fiscal 2008, our revenues in the United
States increased slightly, while our revenues in Europe and
Middle East increased substantially, in large part because of
the strengthening European economy, growth in the industrial and
commercial market and the depreciation of the dollar against the
Euro. From fiscal 2007 to fiscal 2008, our revenues to Asia
decreased due to decreased revenues from the consumer products
market.
From fiscal 2006 to fiscal 2007, our revenues in the United
States decreased because of a decrease in sales to the medical
market and a shift by our U.S. based customers to
manufacturing overseas. The revenues in Europe and the Middle
East increased in fiscal 2007 as compared to fiscal 2006 because
of increased demand in the industrial and commercial market, the
strengthening of the European economy and the depreciation of
the U.S. dollar against the British pound and the Euro. Our
revenues in Asia increased due to a shift in product mix and a
movement to overseas production by U.S. based companies.
None of our customers accounted for more than 10% of our net
revenues in fiscal 2008, 2007 or 2006.
In each of the last three fiscal years, our revenues were
reduced by allowances for sales returns, stock rotations and
ship and debit. See “Critical Accounting Policies and
Significant Management Estimates” elsewhere in this
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
From fiscal 2007 to fiscal 2008, gross profit increased by
$2.8 million while the gross profit margin decreased from
29.5% to 28.6%. The gross profit margin declined due to the
decline in revenues from higher margin ICs and higher unabsorbed
overhead relating to ICs of $5.3 million.
From fiscal 2006 to fiscal 2007, gross profit increased by
$2.6 million, but the gross profit margin decreased from
32.5% to 29.5%, primarily due to write-offs of excess inventory,
production inefficiencies during the fiscal year and the decline
in revenues from power semiconductors as a percentage of total
revenues, including from the higher margin medical market. The
additional accrual of excess inventories in fiscal 2007 was
$7.0 million, as compared to $4.0 million in fiscal
2006. Medical market revenues as percentage of total net
revenues declined to
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12.3% in fiscal 2007 from 14.5% in fiscal 2006. The reduction in
gross margin was partially offset by the sale of fully reserved
inventory.
In each of the last three years, our gross profit and gross
profit margin were positively affected by the sale of excess
inventory, which had previously been written down. See
“Critical Accounting Policies and Significant Management
Estimates — Inventories” elsewhere in the
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
Research, development and engineering, or R&D, expenses
typically consist of internal engineering efforts for product
design and development. From fiscal 2007 to fiscal 2008,
R&D expenses increased by $1.0 million. From fiscal
2006 to fiscal 2007, R&D expenses increased by
$2.6 million. Expressed as a percentage of revenues, our
R&D expenses remained largely unchanged over the past three
fiscal years, changing from 7.0% in fiscal 2006 and 2007 to 6.9%
in fiscal 2008. The year to year increases in R&D expenses
were principally due to general increases in spending for the
design, layout and testing of integrated circuits and power
semiconductors, consistent with the growth in revenues. Although
R&D expenses may increase as we fund more development
projects, we do not expect a material increase in such expenses
when expressed as a percentage of revenues.
In fiscal 2008 as compared to fiscal 2007, selling, general and
administrative expenses decreased by $2.0 million and from
15.4% to 13.8% as a percentage of net revenues. The decrease was
principally due to a decline in professional and consulting
expenses of $2.9 million and a reduction in bad debt
expense of $616,000, offset by an increase in sales and
marketing expenses of $1.7 million. Sales and marketing
expenses increased primarily due to higher commission and
freight expenses in the European locations. In fiscal 2007 as
compared to fiscal 2006, selling, general and administrative
expenses increased by $5.8 million and from 15.3% to 15.4%
as a percentage of net revenues. The increase was principally
the result of an increase in professional and consulting
expenses of $2.3 million, recognition of stock compensation
expenses of $2.0 million upon adoption of
SFAS No. 123(R), an increase of bad debt expenses of
$1.3 million from the write-off of the receivables from All
American Semiconductor, Inc., a distributor that went bankrupt,
and an increase in personnel costs due to an increase in
headcount. While selling, general and administrative expenses
may increase in future periods, we do not expect a material
increase in such expenses when expressed as a percentage of
revenues.
For the year ended March 31, 2008, we recorded a reversal
of litigation provision of $13.0 million, upon the
favorable decisions of the appellate courts in the matters
involving International Rectifier Corporation and LoJack
Corporation. While the LoJack Corporation matter has concluded,
see Item 3 for a description of the current status of the
International Rectifier Corporation matter. For the year ended
March 31, 2007, we accrued $6.8 million related to our
litigation against International Rectifier Corporation and
released a net amount of $36.2 million from the litigation
reserve that we established for the LoJack Corporation lawsuit,
as the court reduced the amount of damages from
$36.7 million to $4.0 million.
In fiscal 2008, other expense, net, including interest income,
net, and changes in foreign currency transactions, was
$2.9 million, as compared to other expense, net of
$1.3 million in fiscal 2007 and other income, net of
$4.0 million in fiscal 2006. The increase in other expense,
net, in fiscal 2008 is primarily due to foreign exchange losses
from the deterioration of the U.S. dollar against the Euro,
partially offset by the recognition of $1.1 million
received on an insurance claim. The shift to other expense, net,
from fiscal 2006 to fiscal 2007 occurred principally due to the
decline of the dollar as compared to the Euro, partially offset
by proceeds from an insurance claim.
Interest income, net, was $277,000 in fiscal 2008 as compared to
$1.8 million in fiscal 2007 and $2.2 million in fiscal
2006. Interest income, net, declined principally because of an
increase in interest expense on capital leases, as we acquired
capital equipment in Europe.
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In fiscal 2008, the provision for income taxes reflected an
effective tax rate of 31% as compared to 37% in fiscal 2007 and
(53%) in fiscal 2006. The fiscal 2008 tax rate was reduced from
the statutory tax provision rate of 37% primarily due to
adjustments recorded to our deferred tax assets and liabilities
for a benefit of 6%. The fiscal 2007 tax rate was reduced from
the statutory tax provision rate of 38% primarily due to
adjustments recorded to our deferred tax assets and liabilities
for a benefit of 1%. The fiscal 2006 tax benefit rate was
increased from the statutory tax rate of 44% due to the release
of valuation allowance booked against deferred tax assets for a
benefit of 175%, the write-off of non-utilizable net operating
losses for a provision of 175%, and other tax benefits of 9%.
As of March 31, 2008, cash and cash equivalents were
$56.6 million as compared to $54.0 million at
March 31, 2007 and $78.2 million at March 31,
2006. The increase in cash and cash equivalents during fiscal
2008 as compared to fiscal 2007 was primarily from cash
generated by operations. The decrease in cash and cash
equivalents in fiscal 2007 as compared to fiscal 2006 was
primarily due to an inventory buildup of $23.8 million and
stock repurchases of $18.4 million. Over the past three
fiscal years, the cash generated by our operations has provided
sufficient liquidity for our needs.
Our cash provided by operating activities in fiscal 2008 was
$28.0 million as compared to $1.9 million in fiscal
2007 and $31.1 million in fiscal 2006. During fiscal 2008,
net accounts receivable increased by $7.8 million, or
18.2%, primarily due to the timing of revenues. At
March 31, 2008, one customer accounted for 11.8% of our net
receivables. Our net inventory increased slightly by $551,000,
or 0.6%, primarily to meet the expected higher demand. Our
accounts payable increased by $1.6 million, or 7.8%,
principally because of the timing of purchases of inventories.
In fiscal 2007, working capital was principally used to fund the
purchase of inventories. In fiscal 2006, working capital
increased principally due to build up of inventory and increase
in accounts receivable.
We used $10.7 million in net cash for investing activities
during fiscal 2008, as compared to $8.9 million in fiscal
2007 and $20.8 million in fiscal 2006. In all three fiscal
years, our uses of cash for investing activities reflected
principally the purchase of plant and equipment. During fiscal
2008, we spent $7.2 million on capital expenditures, as
compared to $9.5 million in fiscal 2007 and
$18.6 million in fiscal 2006. In fiscal 2008 and 2007, the
capital expenditures were principally for equipment required to
increase our production capacity. In fiscal 2006, the capital
expenditure was primarily for the purchase of two buildings.
For fiscal 2008, net cash used in financing activities was
$18.6 million, as compared to net cash used in financing
activities of $20.1 million in fiscal 2007 and net cash
provided by financing activities of $11.2 million in fiscal
2006. In fiscal 2008 and 2007, we spent $15.1 million and
$18.4 million, respectively, to purchase our stock for
treasury. During fiscal 2006, we received $17.9 million,
primarily from a loan of €10 million, or
$12.2 million at the time and $5.3 million from the
exercise of options.
Another potential source of liquidity is available borrowings
under existing lines of credit. At March 31, 2008, we had
available credit aggregating $3.6 million.
At March 31, 2008, our debt, consisting of capital lease
obligations and loans payable, was $32.4 million,
representing 57.2% of our cash and cash equivalents and 16.2% of
our stockholders’ equity. Over the past three fiscal years,
satisfying our payment obligations for debt has not materially
affected our ability to fund our operating needs.
We are obligated on a €8.2 million, or
$12.9 million, loan. The loan has a remaining term of
12 years, ending in June 2020, and bears a variable
interest rate, dependent upon the current Euribor rate and the
ratio of indebtedness to cash flow for the German subsidiary.
Each fiscal quarter during the first five years of the loan
through 2010, a principal payment of €167,000, or about
$264,000, and a payment of accrued interest will be required.
Thereafter, the amount of the payment will be recomputed.
Financial covenants for a ratio of indebtedness to cash flow, a
ratio of equity to total assets and a minimum stockholders’
equity for the German subsidiary must be satisfied for the loan
to remain in good standing. The loan may be prepaid in whole or
in part at the end of a fiscal quarter without penalty. At
March 31, 2008, the Company had complied with the financial
covenants. The loan is partially collateralized by a security
interest in the facility owned by IXYS in Lampertheim, Germany.
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On August 2, 2007, we completed the purchase of a building
in Milpitas, California. We moved our corporate office and a
facility for operations to this location in January 2008. In
connection with the purchase, we assumed a loan, secured by the
building, of $7.5 million. The loan bears interest at the
rate of 7.455% per annum and is due and payable in February
2011. Monthly payments of principal and interest of $56,000 are
due under the loan. In addition, monthly impound payments
aggregating $13,000 are to be made for items such as real
property taxes, insurance and capital expenditures. The balance
of the loan liability at March 31, 2008 was
$7.3 million. At maturity, the remaining balance on the
loan will be approximately $7.1 million.
At March 31, 2008, we maintain two defined benefit pension
plans: one for the United Kingdom employees and one for German
employees. These plans cover most of the employees in the United
Kingdom and Germany. Benefits are based on years of service and
the employees’ compensation. We deposit funds for these
plans, consistent with the requirements of local law, with
investment management companies, insurance companies, trustees,
and/or
accrue for the unfunded portion of the obligations. Both plans
have been curtailed. As such, the plans are closed to new
entrants and no credit is provided for additional periods of
service. See Note 10, “Pension Plans” of Notes to
Consolidated Financial Statements for a discussion of the
investment return assumptions, the underlying estimates and the
expected future cash flows associated with the pension plans.
As of March 31, 2008, we had $56.6 million in cash and
cash equivalents. We believe that our cash and cash equivalents,
together with cash generated from operations, will be sufficient
to meet our anticipated cash requirements for the next
12 months. Our liquidity could be negatively affected by a
decline in demand for our products, investments in new product
development or one or more acquisitions. We use forward and
option contracts in the normal course of business to manage our
foreign currency exchange risks. We did not have any significant
open foreign exchange forward and option contracts at
March 31, 2008. There can be no assurance that additional
debt or equity financing will be available when required or, if
available, can be secured on terms satisfactory to us.
Details of our contractual obligations and commitments as of
March 31, 2008 to make future payments under contracts are
set forth below (in thousands):
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We are exposed to various risks, including fluctuations in
interest and foreign currency rates. In the normal course of
business, we also face risks that are either non-financial or
non-quantifiable. Such risks principally include country risks,
credit risks and legal risks that are not discussed or
quantified in the following analyses.
We currently keep our funds in accounts and instruments that,
for accounting purposes, are cash and cash equivalents and do
not carry interest rate risk to the fair market value of
principal. We may, in the future, choose to place our funds in
investments in high quality debt securities, potentially
consisting of debt instruments of the United States or state or
local governments or investment grade corporate issuers.
Investments in both fixed and floating rate securities have some
degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted by increases in
interest rates. Floating rate securities may produce less income
than anticipated if interest rates fall. As a result, changes in
interest rates could cause us to incur losses in principal if we
are forced to sell securities that have declined in market value
or may result in lower than anticipated investment income.
We intend to manage our exposure to interest rate, market and
credit risk in any investment portfolio with investment policies
and procedures that limit such things as term, credit rating and
the amount of credit exposure to any one issue, issuer and type
of instrument. We have not used derivative financial instruments
in any investment portfolio.
The impact on the fair market value of our cash equivalents and
our earnings from a hypothetical 100 basis point adverse
change in interest rates as of the end of fiscal 2008 would have
had the effect of decreasing our net income by an amount less
than $1.0 million. As our cash and cash equivalents have
historically been held in accounts and instruments where the
principal is not subject to interest rate risk and our cash and
cash equivalents greatly exceed our variable rate borrowings,
this sensitivity analysis was accomplished by offsetting our
variable rate borrowings against our cash and cash equivalents
and then estimating the impact of a 100 basis point
reduction in interest rates on such adjusted cash balances.
Revenues from our foreign subsidiaries were approximately 48.9%
of total revenues in fiscal 2008. These revenues come from our
German and UK subsidiaries and are primarily denominated in
Euros and British pounds, respectively. Our risk to European
currencies is partially offset by the natural hedge of
manufacturing and selling goods in local currency. Our foreign
subsidiaries also incur most of their expenses in the local
currency. Our principal foreign subsidiaries use their
respective local currencies as their functional currency.
Although from time to time we enter into a limited number of
foreign exchange forward or option contracts or to help manage
foreign currency exchange risk associated with certain of our
operations, we do not generally hedge foreign currency exchange
rates. The foreign exchange forward or option contracts we have
entered into generally have original maturities ranging from one
to six months. We do not enter into these contracts for trading
purposes and do not expect gains or losses on these contracts to
have a material impact on our financial results.
We have foreign currency exchange rate risk and interest rate
risk from a €8.2 million, or approximately
$12.9 million, loan taken by IXYS Semiconductor GmbH, a
German subsidiary of IXYS, from IKB Deutsche Industriebank for a
term of about 12 years.
The interest rate on the loan is determined by adding the then
effective
3-month
Euribor rate and a margin. The margin can range from
70 basis points to 125 basis points, depending on the
calculation of a ratio of indebtedness to cash flow for the
German subsidiary. During the first five years of the loan, if
the Euribor rate exceeds 3.75%, then the Euribor rate for the
purposes of the loan shall be 4.1%, and, if the Euribor rate
falls below 2%, the Euribor rate for the purposes of the loan
shall be 3%. Thereafter, the interest rate is recomputed
annually. The interest rate at March 31, 2008 was 4.8%. See
Note 2, “Summary of Significant Accounting
Policies” to the Condensed Consolidated Financial
Statements for further information regarding fair value.
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A hypothetical 10% adverse fluctuation in exchange rate between
the Euro and the U.S. dollar and the exchange rate between
the British pound and the U.S. dollar would have had the
effect of decreasing our net income as of the end of fiscal 2008
by an amount less than $3.0 million. Because of the
operation of our principal foreign units in their own functional
currencies, this sensitivity analysis was undertaken by
examining the net income or loss of the foreign units
incorporated into our statement of operations and testing the
impact of the hypothetical change in exchange rates on such
income or loss. The hypothetically derived net income or loss of
the foreign units was then calculated with our statement of
operations data to derive the hypothetical impact on our net
income. Additionally, the impact of the hypothetical change in
exchange rates on the balance sheets of our principal foreign
units was examined and the hypothetical transaction effects,
using normal accounting practices, was incorporated in the
analysis.
This model represents a change from last year’s
model. Last year we did not include the impact of foreign
exchange changes on the balance sheets of our principal foreign
units. We changed the model because we concluded that the
foreign exchange effects on the balance sheets of our principal
foreign units were having a significant impact on our financial
statements. In fiscal 2007, we concluded that a 10% adverse
change in foreign exchange rates would have had an effect of
decreasing our net income as of the end of fiscal 2007 by less
than $1.0 million. Applying last year’s model to the
fiscal 2008 data results in a conclusion that a 10% adverse
change in foreign exchange rates would have had an effect of
decreasing our net income as of the end of fiscal 2008 by an
amount less than $1.0 million.
It is likely that our future financial results could be directly
affected by changes in foreign currency exchange rates. We will
continue to face foreign currency exchange risks in the future.
Therefore, our financial results could be directly affected by
weak economic conditions in foreign markets. In addition, a
strengthening of the U.S. dollar, the Euro or the British
pound could make our products less competitive in foreign
markets.
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To the Board of Directors and Stockholders
IXYS Corporation
Milpitas, California
We have audited the accompanying consolidated balance sheets of
IXYS Corporation as of March 31, 2008 and 2007 and the
related consolidated statements of operations,
stockholders’ equity, comprehensive income (loss), and cash
flows for each of the three years in the period ended
March 31, 2008. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of IXYS Corporation as of March 31, 2008 and
2007, and the results of its operations and its cash flows for
each of the three years in the period ended March 31, 2008,
in conformity with accounting principles generally accepted in
the United States of America.
As more fully described in Note 11 to the Consolidated
Financial Statements, effective April 1, 2007, the Company
changed its method of accounting for uncertain tax positions to
conform to FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes.”
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
IXYS Corporation’s internal control over financial
reporting as of March 31, 2008, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated June 12,
2008 expressed an unqualified opinion thereon.
BDO Seidman, LLP
San Francisco, California
June 12, 2008
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IXYS
CORPORATION
CONSOLIDATED
BALANCE SHEETS
The accompanying notes are an integral part of these
consolidated financial statements.
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IXYS
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these
consolidated financial statements.
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IXYS
CORPORATION
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IXYS
CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these
consolidated financial statements.
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IXYS
CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these
consolidated financial statements.
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IXYS
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these
consolidated financial statements.
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IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
IXYS Corporation (“IXYS” or the
“Company”) designs, develops, manufactures and markets
power semiconductors and digital and analog integrated circuits
(“ICs”). Power semiconductors are used primarily in
controlling energy in motor drives, power conversion including
uninterruptible power supplies (“UPS”) and switch mode
power supplies (“SMPS”), and medical electronics.
IXYS’s power semiconductors convert electricity at
relatively high voltage and current levels to create efficient
power as required by a specific application. IXYS’s target
market includes segments of the power semiconductor market that
require medium to high power semiconductors, with a particular
emphasis on high power semiconductors. IXYS’s power
semiconductors include power metal oxide silicon field effect
transistors (“Power MOSFETs”), insulated gate bipolar
transistors (“IGBTs”), thyristors and rectifiers,
including fast recovery epitaxial diodes (“FREDs”).
IXYS’s ICs include solid-state relays (“SSRs”)
for telecommunications applications and power management and
control ICs, such as current regulators, motion controllers,
digital power modulators and drivers.
IXYS sells products in North America, Europe and Asia through an
organization that includes direct sales personnel, independent
representatives and distributors. The Company is headquartered
in Northern California with principal operations in California,
Massachusetts, Germany and the United Kingdom. Each site has
manufacturing, research and development and sales and
distribution activities. The Company also makes use of
subcontract manufacturers for fabrication of wafers and for
assembly and test operations.
The consolidated financial statements include the accounts of
IXYS and its wholly owned subsidiaries after elimination of all
intercompany balances and transactions.
The local currency is considered to be the functional currency
of IXYS’s wholly owned international subsidiaries: the euro
for IXYS Semiconductor GmbH (“IXYS GmbH”); and the
pound sterling for Westcode Semiconductors Limited
(“Westcode”). Accordingly, assets and liabilities are
translated at the exchange rate in effect at year-end and
revenues and expenses are translated at average rates during the
year. Adjustments resulting from the translation of the accounts
of IXYS GmbH and Westcode into U.S. dollars are included in
accumulated other comprehensive income, a separate component of
stockholders’ equity. The Company’s Swiss subsidiary
utilizes the US dollar as its functional currency. Foreign
currency transaction gains and losses are included as a
component of other income or expense.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could materially differ from IXYS’s
estimates.
IXYS complies with the guidance summarized in Staff Accounting
Bulletin (“SAB”) No. 104, “Revenue
Recognition.”
Revenues are recognized upon shipment, provided that a signed
purchase order has been received, the price is fixed, title has
transferred, collection of resulting receivables is reasonably
assured, and there are no remaining significant obligations.
Reserves for sales returns and allowances, including allowances
for so called “ship and
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IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
debit” transactions, are recorded at the time of shipment,
based on historical levels of returns and discounts, current
economic trends and changes in customer demand. Transactions
with sale terms of FOB shipping point are recognized when the
products are shipped and transactions with sale terms of FOB
destination are recognized upon arrival.
IXYS sells to distributors and original equipment manufacturers.
Approximately 48.3% of the Company’s revenues in fiscal
2008 were from distributors. IXYS provides its distributors with
the following programs: stock rotation and ship and debit. Ship
and debit is a form of price protection. IXYS recognizes revenue
from product sales upon shipment provided that it has received
an executed purchase order, the price is fixed and determinable,
the risk of loss has transferred, collection of resulting
receivables is reasonably assured, there are no customer
acceptance requirements, and there are no remaining significant
obligations. Reserves for allowances are also recorded at the
time of shipment. The management of IXYS must make estimates of
potential future product returns and so called “ship and
debit” transactions related to current period product
revenue. Management analyzes historical returns and ship and
debit transactions, current economic trends and changes in
customer demand and acceptance of the Company’s products
when evaluating the adequacy of the sales returns and
allowances. We have visibility into inventory held by our
distributors to aid in our reserve analysis. Significant
management judgments and estimates must be made and used in
connection with establishing the allowances in any accounting
period. Material differences may result in the amount and timing
of the Company’s revenue for any period if management made
different judgments or utilized different estimates.
Accounts receivable from distributors are recognized and
inventory is relieved when title to inventories transfer,
typically upon shipment from IXYS, at which point we have a
legally enforceable right to collection under normal payment
terms. Under certain circumstances where the Company is not able
to reasonably and reliably estimate the actual returns, revenues
and costs relating to distributor sales are deferred until
products are sold by the distributors to the distributor’s
end customers. Deferred amounts are presented net and included
under “Accrued expenses and other liabilities.”
Allowance for sales returns. IXYS maintains an
allowance for sales returns for estimated product returns by its
customers. The Company estimates its allowance for sales returns
based on its historical return experience, current economic
trends, changes in customer demand, known returns it has not
received and other assumptions. If IXYS were to make different
judgments or utilize different estimates, the amount and timing
of its revenue could be materially different. Given that the
Company’s revenues consist of a high volume of relatively
similar products, to date its actual returns and allowances have
not fluctuated significantly from period to period, and its
returns provisions have historically been reasonably accurate.
This allowance is included as part of the accounts receivable
allowance on the balance sheet and as a reduction of revenues in
the statement of operations.
Allowance for stock rotation. The Company also
provides “stock rotation” to select distributors. The
rotation allows distributors to return a percentage of the
previous six months’ sales. In the fiscal years ended
March 31, 2008, 2007 and 2006, approximately
$1.0 million, $1.8 million and $962,000, respectively,
of products were returned to IXYS under the program. IXYS
generally establishes the stock rotation on all sales to
distributors except where the revenue recognition is deferred
and recognized on the sale by the distributor of products to the
end-customers. The allowance, which is management’s best
estimate of future returns, is based upon the historical
experience of returns and inventory levels at the distributors.
This allowance is included as part of the accounts receivable
allowance on the balance sheet and as a reduction of revenues in
the statement of operations.
Allowance for ship and debit. Ship and debit
is a program designed to assist distributors in meeting
competitive prices in the marketplace on sales to their end
customers. Ship and debit requires a request from the
distributor for a pricing adjustment for a specific part for a
customer sale to be shipped from the distributor’s stock.
The Company has no obligation to accept this request. However,
it is the Company’s historical practice to allow some
companies to obtain pricing adjustments for inventory held.
IXYS’s distributors had approximately $5.2 million in
inventory of the Company’s products on hand at
March 31, 2008. Ship and debit authorizations may cover
current and future distributor activity for a specific part for
sale to the distributor’s customer. At the time
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IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the Company records sales to the distributors, it provides an
allowance for the estimated future distributor activity related
to such sales since it is probable that such sales to
distributors will result in ship and debit activity. The sales
allowance requirement is based on sales during the period,
credits issued to distributors, distributor inventory levels,
historical trends, market conditions, pricing trends IXYS sees
in its direct sales activity with original equipment
manufacturers and other customers, and input from sales,
marketing and other key management. The Company receives
periodic statements regarding its products held by distributors.
These procedures require the exercise of significant judgments.
IXYS believes that they enable the Company to make reliable
estimates of future credits under the ship and debit program.
Actual results to date have approximated the estimates. At the
time the distributor ships the part from stock, the distributor
debits IXYS for the authorized pricing adjustment. This
allowance is included as part of the accounts receivable
allowance on the balance sheet and as a reduction of revenues in
the statement of operations. If competitive pricing were to
decrease sharply and unexpectedly, estimates would be
insufficient, which could significantly adversely affect results.
Additions to the ship and debit allowance are estimates of the
amount of expected future ship and debit activity related to
sales during the period and reduce revenues and gross profit in
the period. The following table sets forth the beginning and
ending balances of, additions to, and deductions from, the
allowance for ship and debit during the three years ended
March 31, 2008 (in thousands):
Nonrecurring engineering
(“NRE”): For NRE, related to
engineering work performed by the Clare Micronix division to
design chip prototypes that will later be used to produce
required units, customers enter into arrangements with Clare
Micronix to perform engineering work for a fixed fee. Clare
Micronix records fixed-fee payments during the development phase
from customers in accordance with Statement of Financial
Accounting Standards, or SFAS, No. 68, “Research and
Development Arrangements.” Amounts offset against research
and development costs totaled approximately $352,000 in the
fiscal year ended March 31, 2008 (“fiscal 2008”),
$355,000 in fiscal 2007 and $363,000 in fiscal 2006.
IXYS states its revenues net of any taxes collected from
customers that are required to be remitted to the various
government agencies. The amount of taxes collected from
customers and payable to government is included under accrued
expenses and other liabilities. Shipping and handling costs are
included in cost of sales.
Trade accounts receivable and allowance for doubtful
accounts. Trade accounts receivable are recorded
at the invoiced amount and do not bear interest. The allowance
for doubtful accounts is IXYS’s best estimate of the amount
of probable credit losses in the existing accounts receivable.
IXYS determines the allowance based on the aging of its accounts
receivable, the financial condition of its customers and their
payment history, its historical write-off experience and other
assumptions. The allowance for doubtful accounts is reviewed
quarterly. Past due balances and other specified accounts as
necessary are reviewed individually. Account balances are
charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
remote. This allowance is included as part of the accounts
receivable allowance on the balance sheet and as a selling,
general and administrative expense in the statement of
operations.
IXYS considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be
cash equivalents. Cash equivalents include investments in
commercial paper and money market accounts at banks.
Cash and cash equivalents at March 31, 2008 and
March 31, 2007 include restricted cash balances of $620,000
and $169,000, respectively. The restricted cash balances include
amounts pledged as collateral on outstanding letters of credit
and funds held in escrow.
Inventories, consisting primarily of wafers, bipolar devices,
transistors, diodes and integrated circuits, are recorded at the
lower of a currently adjusted standard cost, which approximates
actual cost on a
first-in-first-out
basis, or market value. The Company’s accounting for
inventory costing is based on the applicable expenditure
incurred, directly or indirectly, in bringing the inventory to
its existing condition. Such expenditures include acquisition
costs, production costs and other costs incurred to bring the
inventory to its use. As it is impractical to track inventory
from the time of purchase to the time of sale for the purpose of
specifically identifying inventory cost, inventory is therefore
valued based on a standard cost, given that the materials
purchased are identical and interchangeable at various
production processes. The Company follows
SFAS No. 151, “Inventory Costs — an
amendment of ARB No. 43, Chapter 4.”
SFAS No. 151 requires certain abnormal expenditures to
be recognized as expenses in the current period versus being
capitalized in inventory. It also requires that the amount of
fixed production overhead allocated to inventory be based on the
normal capacity of the production facilities. The application of
SFAS No. 151 did not have a material impact on the
Company’s consolidated financial statements. IXYS reviews
its standard costs on an as-needed basis but in any event at
least once a year, and updates them as appropriate to
approximate actual costs.
The Company typically plans its production and inventory levels
based on internal forecasts of customer demand, which are highly
unpredictable and can fluctuate substantially. The value of its
inventories is dependent on its estimate of future demand as it
relates to historical sales. If the Company’s projected
demand is over-estimated, IXYS may be required to reduce the
valuation of its inventories below cost. IXYS regularly reviews
inventory quantities on hand and records an estimated provision
for excess inventory based primarily on its historical sales and
expectations for future use. However, for new products, the
Company does not consider whether there is excess inventory
until it develops sufficient sales history or experiences a
significant change in expected product demand, based on backlog.
Actual demand and market conditions may be different from those
projected by IXYS’s management. This could have a material
effect on the Company’s operating results and financial
position. If IXYS were to make different judgments or utilize
different estimates, the amount and timing of the write-down of
inventories could be materially different.
Excess inventory frequently remains saleable. When excess
inventory is sold, it yields a gross profit margin of up to
100%. Sales of excess inventory have the effect of increasing
the gross profit margin beyond that which would otherwise occur,
because of previous write-downs. Once inventory is written down
below cost, it is not written back up until inventory is
subsequently sold or scrapped. IXYS does not physically
segregate excess inventory and assign unique tracking numbers to
it in the Company’s accounting systems. Consequently, IXYS
cannot isolate the sales prices of excess inventory from the
sales prices of non-excess inventory. Therefore, IXYS is unable
to report the amount of gross profit resulting from the sale of
excess inventory or quantify the favorable impact of such gross
profit on its gross profit margin.
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table provides information on the Company’s
excess and obsolete inventory reserve charged against inventory
at cost (in thousands):
The practical efficiencies of wafer fabrication require the
manufacture of semiconductor wafers in minimum lot sizes. Often,
when manufactured, the Company does not know whether or when all
the semiconductors resulting from a lot of wafers will sell.
With more than 9,000 different part numbers for semiconductors,
excess inventory resulting from the manufacture of some of those
semiconductors will be continual and ordinary. Because the cost
of storage is minimal when compared to potential value and
because the products of the Company do not quickly become
obsolete, IXYS expects to hold excess inventory for potential
future sale for years. Consequently, IXYS has no set time line
for the sale or scrapping of excess inventory.
In addition, the inventory of the Company is also being written
down to lower of cost or market or net realizable value. IXYS
reviews its inventory listing on a quarterly basis for an
indication of losses being sustained for costs that exceed
selling prices less direct costs to sell. When it is evident
that the selling price is lower than current cost, the inventory
is marked down accordingly. At March 31, 2008 and 2007, the
Company’s lower of cost or market reserve was
$1.0 million and $615,000, respectively.
The Company periodically identifies any inventory that is no
longer usable and writes it off against recorded reserves.
The Company has entered into purchase agreements for purchase of
wafers and substrates over one to five years. Under these
agreements, the supplier agrees to supply and the Company is
obliged to purchase products corresponding to an agreed yearly
purchase amount. The Company has recognized the liability for
all products delivered as at March 31, 2008. The total
amount committed under the agreements has been disclosed in
Note 6, “Commitments and Contingencies.”
Property, plant and equipment, including equipment under capital
leases, are stated at cost less accumulated depreciation.
Equipment under capital lease is stated at the lower of the
present value of the minimum lease payments at the beginning of
the lease term or the fair value of the leased assets at the
inception of the lease.
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Depreciation is computed using the straight-line method over
estimated useful lives of 2 to 14 years for equipment and
24 years to 50 years for property and plant. Upon
disposal, the assets and related accumulated depreciation are
removed from IXYS’s accounts and the resulting gains or
losses are reflected in the statements of operations. Repairs
and maintenance costs are charged to expense. Depreciation of
leasehold improvements is provided on the straight-line method
over the shorter of the estimated useful life or the term of the
lease.
As required by SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” IXYS
evaluates the recoverability of the carrying amount of its
property, plant and equipment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be fully recoverable. Impairment is assessed when the
forecasted undiscounted cash flows derived for the operation to
which the assets relate are less than the carrying amount
including associated intangible assets of the operation. If the
operation is determined to be unable to recover the carrying
amount of its assets, then intangible assets are written down
first, followed by the other long-lived assets of the operation,
to fair value. Fair value is determined based on discounted cash
flows or appraised values, depending on the nature of the
assets. Judgment is used when applying these impairment rules to
determine the timing of the impairment test, the undiscounted
expected cash flows used to assess impairments and the fair
value of an impaired asset. The dynamic economic environment in
which IXYS operates and the resulting assumptions used to
estimate future cash flows impact the outcome of these
impairment tests.
On June 10, 2005, IXYS Semiconductor GmbH, a German
subsidiary of IXYS, borrowed €10.0 million, or about
$12.2 million at the time, from IKB Deutsche Industriebank
for a term of 15 years. This loan is partially
collateralized by a security interest in the facility owned by
IXYS in Lampertheim, Germany. See Note 5, “Borrowing
Arrangements” for more details.
On August 2, 2007, IXYS Buckeye, LLC, a subsidiary of IXYS,
acquired real property in Milpitas, California for
$7.5 million. The Company moved its corporate office and a
facility for operations to this location in January 2008.
Additional costs of $101,000 incurred in connection with
preparing the building for occupancy were capitalized. The
building is being depreciated over its estimated useful life of
40 years. The property was acquired by assumption of a loan
in the principal amount of $7.5 million. For further
details regarding the loan, see Note 5.
Treasury
Stock:
The Company accounts for treasury stock using the cost method.
Other assets include marketable equity securities classified as
available-for-sale and long term equity investment accounted
under the equity method. In accordance with
SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities,” unrealized gains and losses
on these investments are included as a separate component of
stockholders’ equity. Realized gains (calculated as
proceeds less specifically identified costs) and losses and
declines in value of these investments judged by management to
be other than temporary, if any, are included in interest income
and expense. The Company has a 45% equity interest in Powersem
GmbH (“Powersem”), a semiconductor manufacturer based
in Germany, and 20% equity interest in EB Tech Ltd
(“EB Tech”), a radiation services provider based
in South Korea. These investments are accounted for using the
equity method. The Company recognized income of $507,000 and
loss of $176,000 during fiscal 2008 on each of these
investments, respectively. In fiscal 2007 and fiscal 2006, the
Company recognized income of $433,000 and $510,000,
respectively. See Note 4, “Balance Sheet Details”
for further information.
An impairment loss is recorded when there has been a loss in
value of the investment that is other than temporary.
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Goodwill represents the excess of the purchase price over the
estimated fair value of the net assets acquired. IXYS values
goodwill and intangible assets in accordance with
SFAS No. 142, “Goodwill and Other Intangible
Assets.” The costs of acquired intangible assets are
recorded at fair value at acquisition. Intangible assets with
finite lives are amortized using the straight-line method over
their estimated useful lives, normally three to six years, and
evaluated for impairment in accordance with
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”
Goodwill and intangible assets with indefinite lives are carried
at fair value and reviewed at least annually for impairment
during the quarter ending March 31, as of December 31,
or more frequently if events and circumstances indicate that the
asset might be impaired, in accordance with
SFAS No. 142. An impairment loss would be recognized
to the extent that the carrying amount exceeds the fair value of
the reporting unit. There are two steps in the determination.
The first step compares the carrying amount of the net assets to
the fair value of the reporting unit. The second step, if
necessary, recognizes an impairment loss to the extent the
carrying amount of the reporting unit’s net assets exceed
the fair value of the reporting unit. The implied fair value of
goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141,
“Business Combinations.” The residual fair value after
this allocation is the implied fair value of the reporting
unit’s goodwill. IXYS has not recorded an impairment of
goodwill or intangible assets.
In fiscal 2008, the Company reduced goodwill by $816,000. In
fiscal 2007, the Company reduced goodwill by $1.0 million.
In fiscal 2006, the Company reduced goodwill and intangible
assets by $14 million and $1.3 million, respectively.
The reductions in goodwill resulted from valuation allowance
releases on deferred tax assets, accounted for in accordance
with SFAS No. 109, “Accounting for Income
Taxes.” This is discussed in Note 11, “Income
Taxes” below. These deferred tax assets were from loss
carryforwards of acquired entities. At March 31, 2008, the
Company had goodwill of $5.6 million and intangible assets
of $466,000 included in other assets.
Although the majority of IXYS’s transactions are in
U.S. dollars, IXYS enters into foreign exchange forward and
option contracts to manage foreign currency exchange risk
associated with its operations. From time to time, IXYS
purchases short-term, foreign exchange forward and option
contracts to hedge the impact of foreign currency fluctuations
on certain underlying assets, liabilities and commitments for
operating expenses denominated in foreign currencies. The
purpose of entering into these hedge transactions is to minimize
the impact of foreign currency fluctuations on the results of
operations. The contracts generally have maturity dates that do
not exceed six months. IXYS does not purchase these contracts
for trading purposes. The Company elected not to designate these
contracts as accounting hedges and any changes in fair value are
marked to market and recorded in the results of operations in
other income. IXYS did not have any significant open foreign
exchange forward and option contracts during the year ended
March 31, 2008.
IXYS maintains pension plans covering certain of its employees.
For financial reporting purposes, net periodic pension costs are
calculated based upon a number of actuarial assumptions,
including a discount rate for plan obligations, assumed rate of
return on pension plan assets and assumed rate of compensation
increases for plan employees. All of these assumptions are based
upon management’s judgment, considering all known trends
and uncertainties. Actual results that differ from these
assumptions would impact the future expense recognition and cash
funding requirements of the Company’s pension plans.
Effective at the end of fiscal 2007, IXYS adopted the provisions
of SFAS No. 158, “Employer’s Accounting for
Defined Benefit Pension and Other Retirement Plans.”
SFAS No. 158 required IXYS to recognize the funded
status of its defined benefit pension and post-retirement
benefit plans in its Consolidated Balance Sheets, with a
corresponding adjustment to accumulated other
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
comprehensive income, net of tax. The adoption of
SFAS No. 158 did not have any impact on the
consolidated financial statements. See Note 10,
“Pension Plans” for the effects of the adoption of
SFAS No. 158.
Carrying amounts of certain of IXYS’s financial instruments
including cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to their short
maturities. Based on borrowing rates currently available to IXYS
for loans with similar terms, the carrying value of notes
payable to banks, loans payable and notes receivable from
stockholders approximate fair value.
IXYS expenses advertising as the costs are incurred. Advertising
expense for the years ended March 31, 2008, 2007 and 2006
was $518,000, $628,000 and $603,000, respectively. Advertising
expense is included in selling, general and administrative
expense.
Research
and Development:
Research and development costs are charged to operations as
incurred.
IXYS’s provision for income taxes is comprised of its
current tax liability and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. A valuation allowance is required to reduce
the deferred tax assets to the amount that is more likely than
not to be realized. In determining the amount of the valuation
allowance, IXYS considers estimated future taxable income as
well as feasible tax planning strategies in each taxing
jurisdiction in which it operates. If IXYS determines that it is
more probable that it will not realize all or a portion of its
remaining deferred tax assets, it will increase its valuation
allowance with a charge to income tax expense. Conversely, if
IXYS determines that it is likely that it will ultimately be
able to utilize all or a portion of the deferred tax assets for
which a valuation allowance has been provided, the related
portion of the valuation allowance will be released as either a
credit to goodwill, non-current intangible assets, or income tax
expense. Significant management judgment is required in
determining the provision for income taxes, the deferred tax
assets and liabilities, and any valuation allowance recorded
against net deferred tax assets. In the event that actual
results differ from these estimates or IXYS adjusts these
estimates in future periods, IXYS may need to establish or
increase an additional valuation allowance that could materially
impact its financial position and results of operations.
IXYS’s ability to utilize its deferred tax assets and the
continuing need for a related valuation allowance are monitored
on an ongoing basis.
IXYS adopted FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109” (“FIN 48”), and
related guidance as of April 1, 2007. See Note 11 of
Notes to Consolidated Financial Statements for further
discussion.
Other income and expense primarily consists of gains and losses
on foreign currency transactions and interest income and
expense, together with the Company’s share of income from
investments accounted for on the equity method.
The Company does not provide product guarantees or warranties.
On occasion, the Company provides limited indemnification to
customers against intellectual property infringement claims
related to the Company’s products.
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
To date, the Company has not experienced significant activity or
claims related to such indemnifications. The Company also
provides in the normal course of business indemnification to its
officers, directors and selected parties. The Company is unable
to estimate any potential future liability, if any; therefore,
no liability for these indemnification agreements has been
recorded as of March 31, 2008 and 2007.
IXYS is subject to various legal proceedings and claims, the
outcomes of which are subject to significant uncertainty.
SFAS No. 5, “Accounting for Contingencies,”
requires that an estimated loss from a loss contingency should
be accrued by a charge to income if it is probable that an asset
has been impaired or a liability has been incurred and the
amount of the loss can be reasonably estimated. Disclosure of a
contingency is required if there is at least a reasonable
possibility that a loss has been incurred. IXYS evaluates, among
other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the
amount of loss. Changes in these factors could materially impact
the Company’s financial position, results of operations or
cash flows. At March 31, 2008, IXYS did not have any
reserves for litigation upon the favorable fiscal 2008 decisions
of the appellate courts in the matters involving International
Rectifier Corporation and LoJack Corporation. At March 31,
2007, IXYS had reserves of approximately $14.2 million for
litigation, comprised of reserves for the litigation against
International Rectifier Corporation of $6.8 million and
against LoJack Corporation of $7.4 million. The Company
expenses legal costs related to loss contingencies as incurred.
Basic earnings per share is computed by dividing net income
(loss) by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects
the potential dilution from the exercise of options into common
stock. The calculation of dilutive net income (loss) per share
excludes potential shares if their effect is anti-dilutive; that
is, when the exercise price of the option exceeds the market
price. Potential shares consist of incremental common shares
issuable upon the exercise of stock options.
Accumulated other comprehensive income or loss represents
foreign currency translation adjustments, unrealized gain or
loss on equity investments classified as “available for
sale” and minimum pension liability, net of tax. See
Note 7, “Accumulated Other Comprehensive Income.”
Concentration
and Business Risks:
Measured in dollars, IXYS manufactures approximately 62% of its
wafers, an integral component of its products, in its facilities
in Germany, the UK, Massachusetts and California. IXYS relies on
third party suppliers to provide the remaining 38%. The
principal external foundry is Samsung Electronics’ facility
in Kiheung, South Korea. There can be no assurance that
material disruptions in supply will not occur in the future. In
such event, IXYS may have to identify and secure additional
foundry capacity and may be unable to identify or secure
sufficient foundry capacity to meet demand. Even if such
capacity is available from another manufacturer, the
qualification process could take six months or longer. If IXYS
were unable to qualify alternative manufacturing sources for
existing or new products in a timely manner or if such sources
were unable to produce semiconductor devices with acceptable
manufacturing yields and at acceptable prices, IXYS’s
business, financial condition and results of operations would be
materially and adversely affected.
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
IXYS purchases silicon substrates from a limited number of
vendors, most of whom IXYS does not have long-term supply
agreements with. Any of these suppliers could terminate their
relationship with IXYS at any time. IXYS’s reliance on a
limited number of suppliers involves several risks, including
potential inability to obtain an adequate supply of silicon
substrates and reduced control over the price, timely delivery,
reliability and quality of the silicon substrates. There can be
no assurance that problems will not occur in the future with
suppliers.
Approximately 150 IXYS employees in the United Kingdom and 278
in Germany have their annual pay increases negotiated by a labor
union.
Financial instruments that potentially subject IXYS to credit
risk comprise principally cash and cash equivalents and trade
accounts receivable. IXYS invests its excess cash in accordance
with its investment policy that has been approved by the Board
of Directors and is reviewed periodically by management to
minimize credit risk. The policy authorizes the investment of
excess cash in government securities, tax exempt municipal
securities, Eurodollar notes and bonds, time deposits,
certificates of deposit, commercial paper rated AA or better and
other specific money market accounts and corporate instruments
of similar liquidity and credit quality.
IXYS invests its excess cash primarily in foreign and domestic
banks in short-term time deposit and money market accounts.
Maturities are generally three months or less. Additionally,
IXYS invests in commercial paper with financial institutions
that management believes to be creditworthy. These securities
mature within ninety days or less and bear minimal credit risk.
IXYS has not experienced any losses on such investments.
IXYS sells its products primarily to distributors and original
equipment manufacturers. IXYS performs ongoing credit
evaluations of its customers and generally does not require
collateral. An allowance for potential credit losses is
maintained by IXYS. See Note 13, “Segment and
Geographic Information” for a discussion of revenues by
geography.
In the years ended March 31, 2008, 2007 and 2006, no single
end-user customer accounted for more than 10% of net revenues.
At March 31, 2008 and 2007, one customer accounted for
11.8% and 10.6% of accounts receivable, respectively.
The Company has employee equity incentive plans, which are
described more fully in Note 3, “Employee Equity
Incentive Plans.” Effective April 1, 2006, the Company
adopted the provisions of SFAS No. 123(R), “Share
based payment.” SFAS No. 123(R) requires employee
stock options and rights to purchase shares under stock
participation plans to be accounted for under the fair value
method and requires the use of an option pricing model for
estimating fair value. Accordingly, share-based compensation is
measured at grant date, based on the fair value of the award and
shares expected to vest.
Under the modified prospective method of adoption for
SFAS No. 123(R), the compensation cost recognized by
the Company beginning in fiscal 2007 includes compensation cost
for all equity incentive awards granted prior to, but not yet
vested as of April 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
SFAS No. 123, and compensation cost for all equity
incentive awards granted subsequent to April 1, 2006 based
on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The Company uses the
straight-line attribution method to recognize share-based
compensation costs over the service period of the award.
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair value of issuances under the Company’s Employee
Stock Purchase Plan is estimated on the issuance date by
applying the principles of Financial Accounting Standards Board,
or FASB, Technical
Bulletin 97-1
(“FTB 97-1”),
“Accounting under Statement 123 for Certain Employee Stock
Purchase Plan with a Look Back Option,” and using the
Black-Scholes options pricing model.
In September 2006, the FASB, issued SFAS No. 157,
“Fair Value Measurements,”
(“SFAS No. 157”). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, or GAAP, and
expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that
require or permit fair value measurements. Accordingly, this
Statement does not require any new fair value measurements.
SFAS No. 157 is effective for the Company beginning
April 1, 2008. The Company is currently evaluating the
impact of SFAS No. 157 to the financial position and
results of operations.
In February 2008, the FASB issued FASB Staff Position
(“FSP”)
157-1,
“Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13”
(“FSP 157-1”)
and
FSP 157-2,
“Effective Date of FASB Statement No. 157”
(“FSP 157-2”).
FSP 157-1
amends SFAS No. 157 to remove certain leasing
transactions from its scope.
FSP 157-2
delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
to fiscal years beginning after November 15, 2008. The
Company is currently evaluating the impact that
SFAS No. 157-1
and
No. 157-2
will have on the consolidated financial statements and results
of operations.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”).
SFAS No. 159 permits companies to choose to measure
certain financial instruments and certain other items at fair
value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be
reported in earnings. SFAS No. 159 is effective for
our company beginning April 1, 2008, although earlier
adoption is permitted. The Company is currently evaluating the
impact of SFAS No. 159 to the financial position and
results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS No. 141(R)”) and
SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”
(“SFAS No. 160”). These standards aim to
improve, simplify, and converge internationally the accounting
for business combinations and the reporting of noncontrolling
interests in consolidated financial statements. The provisions
of SFAS No. 141(R) and SFAS No. 160 are
effective for the fiscal year beginning April 1, 2009. The
Company is currently evaluating the provisions of
SFAS No. 141(R) and SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement
No. 133” (“SFAS No. 161”). The
standard requires additional quantitative disclosures (provided
in tabular form) and qualitative disclosures for derivative
instruments. The required disclosures include how derivative
instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows;
relative volume of derivative activity; the objectives and
strategies for using derivative instruments; the accounting
treatment for those derivative instruments formally designated
as the hedging instrument in a hedge relationship; and the
existence and nature of credit-related contingent features for
derivatives. SFAS No. 161 does not change the
accounting treatment for derivative instruments.
SFAS No. 161 is effective for the Company for fiscal
quarter beginning after January 1, 2009. The Company is
currently evaluating the impact of SFAS No. 161.
The Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,”
(“FIN 48”) as of April 1, 2007 as required.
See Note 11 for further discussion.
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock
Purchase and Stock Option Plans:
Stock options may be granted under the 1999 Equity Incentive
Plan and the 1999 Non-Employee Directors’ Equity Incentive
Plan (the “Plans”) for not less than 85% of fair
market value at the time of grant. The options, once granted,
expire ten years from the date of grant. Options granted to
employees under the 1999 Equity Incentive Plan typically vest
over four years. The initial option grants under the 1999
Non-Employee Directors’ Equity Incentive Plan typically
vest over four years and subsequent annual grants vest over one
year. The Board of Directors has the full power to determine the
provisions of each option issued under the Plans. No options
have been granted below fair market value. During fiscal 2007,
the Company also began to grant options that contain net
exercise provisions. These options generally vest over a period
of four years. In a net exercise option, the number of shares
obtained by exercising the stock option is net of the number of
shares subject to the option that the Company cancels to cover
the aggregate exercise price.
Since inception, the cumulative amount authorized for the 1999
Equity Incentive Plan was approximately 11.6 million
shares. The 1999 Equity Incentive Plan has an evergreen feature
that adds up to 1,000,000 shares to the total shares
authorized each year at the discretion of the board. The 1999
Non-Employee Directors’ Equity Incentive Plan had a total
of 500,000 shares authorized at its inception date. On
May 20, 2008, the Board of Directors (the
“Board”) of IXYS approved the adoption of the 2008
Equity Incentive Plan (the “2008 Plan”), under which
3,500,000 shares of the common stock of IXYS will be
reserved for the grant of stock options. The Board adopted a
resolution that no more than 200,000 additional shares will be
granted under the 1999 Equity Incentive Plan between
May 21, 2008 and the plan’s expiration in May 2009 if
the 2008 Plan is approved by the stockholders.
In May 1999, IXYS approved the 1999 Employee Stock Purchase Plan
(“Purchase Plan”) and reserved 500,000 shares of
common stock for issuance under the Purchase Plan. Under the
Purchase Plan, substantially all employees may purchase the
Company’s common stock at a price equal to 85% of the lower
of the fair market value at the beginning or the end of each
specified six-month offering period. Stock purchases are limited
to 15% of an employee’s eligible compensation. On
July 31, 2007, the Board of Directors of the Company
amended the Purchase Plan and reserved an additional
350,000 shares of common stock for issuance under the
Purchase Plan. During the year ended March 31, 2008, there
were 92,736 shares purchased under the Purchase Plan,
leaving 328,977 shares available for purchase under the
plan in the future.
On May 12, 2006, the Board of Directors of the Company
amended the Company’s 1999 Equity Incentive Plan to provide
for the grant of Restricted Stock Unit Awards
(“RSUs”). Pursuant to a RSU award, the Company will,
in the future, deliver shares of the Company’s common stock
if certain requirements, including continued performance of
services, are met. RSUs granted to employees typically vest over
four years. When vested, each RSU will entitle the holder of the
RSU award to one share of the Company’s common stock.
Stock
Bonuses
Under the Plans, IXYS may also award shares of common stock as
stock bonuses.
Effective April 1, 2006, the Company adopted the provisions
of SFAS No. 123(R). SFAS No. 123(R) requires
employee stock options and rights to purchase shares under stock
participation plans to be accounted for under the
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
fair value method and requires the use of an option pricing
model for estimating fair value. Accordingly, share-based
compensation is measured at grant date, based on the fair value
of the award.
Under the modified prospective method of adoption for
SFAS No. 123(R), the compensation cost recognized by
the Company beginning in fiscal 2007 includes compensation cost
for all equity incentive awards granted prior to, but not yet
vested as of, April 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
SFAS No. 123, and compensation cost for all equity
incentive awards granted on or after April 1, 2006, based
on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The Company uses the
straight-line attribution method to recognize share-based
compensation costs over the service period of the award. During
fiscal 2006, IXYS accelerated the vesting of the right to
purchase 920,250 shares of its common stock pursuant to
previously granted stock options. The accelerated options had a
weighted average exercise price of $12.99 per share and the
exercise prices were excess of the closing price on the date of
the acceleration. The vesting was accelerated to avoid future
accounting charges under SFAS No. 123(R).
The fair value of issuances under the Company’s Employee
Stock Purchase Plan is estimated on the issuance date by
applying the principles of FASB Technical
Bulletin 97-1
(“FTB
97-1”),
“Accounting under Statement 123 for Certain Employee Stock
Purchase Plan with a Look Back Option,” and using the
Black-Scholes options pricing model, consistent with the
requirements of SFAS No. 123(R).
Share-based compensation recognized in the fiscal years ended
March 31, 2008 and 2007 as a result of the adoption of
SFAS No. 123(R) as well as pro forma disclosures
according to the original provisions of SFAS No. 123
for periods prior to the adoption of SFAS No. 123(R)
use the Black-Scholes option pricing model for estimating fair
value of options granted under the Plans and rights to acquire
stock under the Employee Stock Purchase Plan.
The following table summarizes the effects of share-based
compensation recognized on the Company’s consolidated
statement of income resulting from the application of
SFAS No. 123(R) to options granted under the
Company’s equity incentive plans and rights to acquire
stock granted under the Company’s Employee Stock Purchase
Plan (in thousands except per share amounts):
Income
Statement Classifications
As of March 31, 2008, there were $3.6 million of total
unrecognized compensation costs related to stock options granted
under the Plans. The unrecognized compensation cost is expected
to be recognized over a weighted average period of
2.6 years. Total tax benefit realized during the year ended
March 31, 2008 on stock options was $241,000.
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pro forma information required under SFAS No. 123 for
periods prior to fiscal 2007, as if the Company had applied the
fair value recognition provisions of SFAS No. 123 to
options granted under the Plans and rights to acquire stock
granted under the Purchase Plan, was as follows (in thousands
except per share amounts):
The weighted average estimated values of employee stock option
grants and rights granted under the Employee Stock Purchase
Plan, as well as the weighted average assumptions that were used
in calculating such values during fiscal 2008, 2007 and 2006,
were based on estimates at the date of grant as follows:
The Company estimates the expected term of options granted based
on the historical average period over which the options are
exercised by employees. The Company estimates the volatility of
its common stock on historical volatility measures. The Company
bases the risk-free interest rate that it uses in the option
valuation model on U.S. Treasury zero-coupon issues with
remaining terms similar to the expected term on the options. The
Company does not anticipate paying any cash dividends in the
foreseeable future and therefore use an expected dividend yield
of zero in the option valuation model. The Company is required
to estimate forfeitures at the time of grants and revise those
estimates in subsequent periods if actual forfeitures differ
from those estimates. The Company uses historical data to
estimate pre-vesting option forfeitures and record stock-based
compensation expense only for those awards that are expected to
vest. All stock-based payment awards are amortized on a
straight-line basis over the requisite service periods of the
awards, which are generally the vesting periods.
The Company recognizes the estimated compensation cost of
restricted stock over the vesting term. The estimated
compensation cost is based on the fair value of IXYS’s
common stock on the date of grant.
The Company recognizes the compensation cost relating to stock
bonuses on the date of grant based on the fair value of
IXYS’s common stock on the date of grant, as such stock
bonuses are vested immediately. The Company did not grant any
bonus shares during fiscal 2008.
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock compensation activity under the Company’s equity
incentive plans for fiscal 2008, 2007 and 2006 is summarized
below:
Table of Contents
IXYS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In November 1995, IXYS sold 6,750,395 shares of common
stock to certain members of IXYS’s management. The shares
were purchased through recourse promissory notes at a purchase
price of $0.11 per share. Interest was due on the notes at a
rate of 5.79% per annum through September 15, 2000 and
6.25% per annum after that date, with the balance outstanding
due in full September 2005. In September 2005, these notes were
paid in full.
The recourse promissory note issued in 2001 by a director in
connection with his purchase of 8,250 shares of common
stock was paid in full during fiscal 2007.
The following table summarizes information about stock options
outstanding at March 31, 2008:
Of the 4,828,817 options outstanding, 3,968,967 were exercisable
on March 31, 2008 at a weighted average exercise price of
$8.28 per share, with an intrinsic value of $4.8 million.
The weighted average remaining contractual life of options
outstanding and options exercisable at March 31, 2008 is
5.1 years and 4.2 years, respectively. Fair value of
options that vested during the year ended March 31, 2008
was $1.2 million.
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