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IXYS 10-Q 2010 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2010
or
For the transition period from to
COMMISSION FILE NUMBER 000-26124
IXYS CORPORATION
(Exact name of registrant as specified in its charter)
1590 BUCKEYE DRIVE
MILPITAS, CALIFORNIA 95035-7418 (Address of principal executive offices and Zip Code) (408) 457-9000
(Registrant’s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of October
28, 2010 was 31,048,920.
IXYS CORPORATION
FORM 10-Q
September 30, 2010 2
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Unaudited Condensed Consolidated Financial Statements
The accompanying interim unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America
for complete financial statements. The unaudited condensed consolidated financial statements
include the accounts of IXYS Corporation and its wholly-owned subsidiaries. The preparation of
financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and judgments that affect the amounts reported in the
financial statements and accompanying notes. The accounting estimates that require management’s
most difficult judgments include, but are not limited to, revenue reserves, inventory valuation,
accounting for income taxes, allocation of purchase price in business combinations and
restructuring costs. All significant intercompany transactions have been eliminated in
consolidation. All adjustments of a normal recurring nature that, in the opinion of management, are
necessary for a fair statement of the results for the interim periods have been made. The condensed
balance sheet as of March 31, 2010 has been derived from our audited balance sheet as of that date.
It is recommended that the interim financial statements be read in conjunction with our audited
condensed consolidated financial statements and notes thereto for the fiscal year ended March 31,
2010 contained in our Annual Report on Form 10-K. Interim results are not necessarily indicative of
the operating results expected for later quarters or the full fiscal year.
2. Accounting Changes and Recent Accounting Pronouncements
In July 2010, the Financial Accounting Standards Board, or FASB, issued authoritative guidance
on the disclosures about the credit quality of financing receivables and the allowance for credit
losses. The objective of the guidance is for an entity to provide disclosures that facilitate
financial statement users’ evaluation of the nature of the credit risk, the analysis and assessment
of the risk and the changes and reasons for those changes in the allowance for credit losses. The
guidance is effective for us for the quarter ended December 31, 2010. We are currently evaluating
the impact that the adoption of the guidance will have on our condensed consolidated financial
statements.
In June 2009, FASB issued authoritative guidance on the consolidation of variable interest
entities. The guidance eliminates a mandatory quantitative approach to determine whether a variable
interest gives the entity a controlling financial interest in a variable interest entity in favor
of a qualitatively focused analysis. It also requires an ongoing reassessment of whether an entity
is the primary beneficiary. We adopted the guidance in the quarter ending June 30, 2010. The
adoption of the guidance did not have a significant impact on our condensed consolidated financial
statements.
3. Business Combination
Zilog, Inc.
On February 18, 2010, we completed the acquisition of Zilog, Inc., or Zilog, a supplier of
application specific, embedded microcontroller units that are system-on-chip solutions for
industrial and consumer markets. We acquired all outstanding shares as of the acquisition date for
a cash consideration of $62.5 million and Zilog became our wholly-owned subsidiary. The acquisition
is intended to add digital control to our power management and to create more cost-effective system
integration solutions for our diversified customer base.
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The following table summarizes the consideration paid for Zilog and the preliminary values of
the assets acquired and liabilities assumed at the acquisition date.
Recognized amounts of identifiable assets acquired and liabilities assumed (in
thousands):
The fair value of assets acquired included trade receivables of $3.3 million, of which an
estimated $1.2 million is not expected to be collected, resulting in a fair value of $2.1 million.
Other receivables, included above in other assets, were stated at their fair value and also
approximate the gross contractual value of the receivable.
Identifiable intangible assets consisted of developed intellectual property, customer
relationships, contract backlog, trade name and information technology related assets. The
valuation of the acquired intangibles was classified as a level 3 measurement under the fair value
measurement guidance, because the valuation was based on significant unobservable inputs and
involved management judgment and assumptions about market participants and pricing. In determining
fair value of the acquired intangible assets, we determined the appropriate unit of measure, the
exit market and the highest and best use for the assets. The income approach and royalty savings
approach were used to estimate the fair value. The income approach indicates the fair value of an
asset based on the value of the cash flows that the asset can be expected to generate in the future
through a discounted cash flow method. The income approach was used to determine the fair values of
developed intellectual property, contract backlog and customer relationships. We utilized a
discount rate of 22% to value these intangibles using the income approach. The royalty savings
approach was used to determine the fair value of the trade name and indicates the fair value of an
asset based upon a 22% discount rate and a 1% royalty rate. The purchase price allocation table
presented above reflects our preliminary determination of the fair values of the assets acquired
and liabilities assumed. We are in the process of completing our review of income tax related
effects in order to finalize the purchase price allocation.
The goodwill arising from the acquisition was largely attributable to the synergies expected
to be realized after our acquisition and integration of Zilog. We have one reportable operating
segment, so all of the goodwill was assigned to that segment. The goodwill is not deductible for
tax purposes.
Supplemental Pro Forma Financial Information (unaudited):
The following pro forma summary gives effect to the acquisition of Zilog as if it had occurred
at the beginning of fiscal 2010. The pro forma financial information reflects the business
combination accounting effects resulting from this acquisition including our amortization charges
from acquired intangible assets. The summary is provided for illustrative purposes only and is not
necessarily indicative of the consolidated results of operations for future periods. The unaudited
pro forma financial information includes the historical results of IXYS Corporation for the three
and six months ended September 30, 2009 and Zilog for the three and six months ended September 26,
2009. The unaudited pro forma financial information for the three and six months ended September
30, 2009 was as follows (in thousands, except per share data):
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4. Fair Value
We account for certain assets and liabilities at fair value. In determining fair value, we
consider its principal or most advantageous market and the assumptions that market participants
would use when pricing, such as inherent risk, restrictions on sale and risk of nonperformance. The
fair value hierarchy is based upon the observability of inputs used in valuation techniques.
Observable inputs (highest level) reflect market data obtained from independent sources, while
unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value
measurements are classified under the following hierarchy:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical
or similar instruments in markets that are not active; and model-derived valuations in
which all significant inputs or significant value-drivers are observable in active
markets.
Level 3 — Model-derived valuations in which one or more significant inputs or significant
value-drivers are unobservable.
Assets and liabilities measured at fair value on a recurring basis, excluding accrued interest
components, consisted of the following types of instruments as of September 30, 2010 and March 31,
2010 (in thousands):
We measure our marketable securities and derivative contracts at fair value. Marketable
securities are valued using the quoted market prices and are therefore classified as Level 1
estimates.
We use derivative instruments to manage exposures to changes in interest rates, and the fair
values of these instruments are recorded on the balance sheets. We have elected not to designate
these instruments as accounting hedges. The changes in the fair value of these instruments are
recorded in the current period’s income statement and are included in other income (expense), net.
All of our derivative instruments are traded on over-the-counter markets where quoted market prices
are not readily available. For those
derivatives, we measure fair value using prices obtained from the counterparties with whom we
have traded. The counterparties price the derivatives based on models that use primarily market
observable inputs, such as yield curves and option volatilities. Accordingly, we classify these
derivatives as Level 2. See Note 9, “Borrowing Arrangements” for further information regarding the
terms of the derivative contract. Auction Rate Preferred Securities, or ARPS, are stated at par
value based upon observable inputs including historical redemptions received from the ARPS issuers.
All of our ARPS have AAA credit ratings, are 100% collateralized and continue to pay interest
in accordance with their contractual terms. Additionally, the collateralized asset value ranges
exceed the value of our ARPS by approximately 300 percent. Accordingly, the remaining ARPS balance
of $375,000 is categorized as Level 2 for fair value measurement in accordance with the
authoritative
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guidance provided by FASB and was recorded at full par value on the unaudited
condensed consolidated balance sheets as of September 30, 2010. We currently believe that the ARPS
values are not impaired and as such, no impairment has been recognized against the investment. If
future auctions fail to materialize and the credit rating of the issuers deteriorates, we may be
required to record an impairment charge against the value of our ARPS.
Cash and cash equivalents are recognized and measured at fair value in our consolidated
financial statements. Accounts receivable and prepaid expenses and other current assets are
financial assets with carrying values that approximate fair value. Accounts payable and accrued
expenses and other current liabilities are financial liabilities with carrying values that
approximate fair value.
Long term loans, which primarily consist of loans from banks, approximate fair value as the
interest rates either adjust according to the market rates or the interest rates approximate the
market rates at September 30, 2010. See Note 11, “Pension Plans” for a discussion of pension
liabilities.
5. Other Assets
Other assets consist of the following (in thousands):
6. Inventories
Inventories consist of the following (in thousands):
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
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8. Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair value of the net
assets acquired in connection with two acquisitions completed during fiscal 2010. The acquisition
of businesses from Leadis Technology, Inc., or Leadis, was completed in September 2009 and resulted
in goodwill of $304,000. The acquisition of Zilog was completed in February 2010 and resulted in
preliminary goodwill of $8.9 million.
The following table summarizes the components of the acquired identifiable intangible assets
associated with the Zilog and Leadis acquisitions. The fair value of the amortizable intangible
assets was determined using the income approach, royalty savings approach and cost approach.
Identified intangible assets consisted of the following as of September 30, 2010 (in
thousands):
Identified intangible assets consisted of the following as of March 31, 2010 (in thousands):
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We recorded the amortization of identified intangible assets on our unaudited consolidated
condensed statements of operations as cost of sales and operating expenses. The aggregate
amortization expenses for the three months ended September 30, 2010 and 2009 were $2.0 million and
$38,000, respectively. The aggregate amortization expenses for the six months ended September 30,
2010 and 2009 were $4.0 million and $76,000, respectively.
9. Borrowing Arrangements
Bank of the West
On November 13, 2009, we entered into a credit agreement for a revolving line of credit with
Bank of the West, or BOW, under which we may borrow up to $15.0 million. Borrowings may be repaid
and re-borrowed during the term of the credit agreement. The obligations are guaranteed by two of
our subsidiaries. All amounts owed under the credit agreement are due and payable on October 31,
2011. On November 16, 2009, we borrowed $15.0 million pursuant to the credit agreement.
The credit agreement provides different interest rate alternatives under which we may borrow
funds. We may elect to borrow based on LIBOR plus a margin, an alternative base rate plus a margin
or a floating rate plus a margin. The margin can range from 1.5% to 3.25%, depending on interest
rate alternatives and on our leverage of liabilities to effective tangible net worth. The effective
interest rate as of September 30, 2010 was 3.28%.
The credit agreement is subject to a set of financial covenants, including minimum effective
tangible net worth, the ratio of cash, cash equivalents and accounts receivable to current
liabilities, profitability, a ratio of EBITDA to interest expense and a minimum amount of U.S.
domestic cash on hand. At September 30, 2010, we complied with the financial covenants.
The credit agreement also includes a $3.0 million letter of credit subfacility. See Note 17,
“Commitments and Contingencies” for further information regarding the terms of the subfacility.
IKB Deutsche Industriebank
On June 10, 2005, IXYS Semiconductor GmbH, our German subsidiary, borrowed €10.0 million,
or about $12.2 million at the time, from IKB Deutsche Industriebank for a term of 15 years. The
outstanding balance at September 30, 2010 was €6.5 million, or $8.8 million.
The interest rate on the loan is determined by adding the then effective three 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 our German subsidiary. In June 2010, we
entered into an interest rate swap agreement commencing June 30, 2010. The swap agreement has a
fixed interest rate of 1.99% and expires on June 30, 2015. It is not designated as a hedge in the
financial statements.
See Note 4, “Fair Value” for further information regarding the derivative contract.
During each fiscal quarter, a principal payment of €167,000, or about $227,000, and a
payment of accrued interest are required.
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 September 30, 2010, we complied with the financial covenants. The loan
is partially collateralized by a security interest in the facility owned by our company in
Lampertheim, Germany.
LaSalle Bank National Association
On August 2, 2007, IXYS Buckeye, LLC, a subsidiary of our company, entered into an Assumption
Agreement with LaSalle Bank National Association, trustee for Morgan Stanley Dean Witter Capital I
Inc., for the assumption of a loan of $7.5 million in connection with the purchase of property in
Milpitas, California. The loan carries a fixed annual interest rate of 7.455%. Monthly payments of
principal and interest of $56,000 are due under the loan. In addition, monthly impound payments
aggregating $14,000 are to be made for items such as real property taxes, insurance and capital
expenditures. The loan is due and payable on February 1, 2011. At maturity, the remaining balance
on the loan will be approximately $7.1 million. The loan is secured by a guarantee from our company
and collateralized by a security interest in the property acquired. Aggregate loan costs of $93,000
incurred in connection with the loan are amortized over the loan period and the unamortized balance
is netted against the loan liability.
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Note payable issued on acquisition
On September 10, 2008, we issued a note payable with a face value of $2.0 million in
connection with the purchase of real property and the acquisition of the shares of Reaction
Technology Incorporated, or RTI. The note is repayable in 60 equal monthly installments of $38,666,
which includes interest at an annual rate of 6.0%. The note is collateralized by a security
interest in the property acquired and the current assets of RTI.
10. Restructuring Charges
In the quarter ended September 30, 2009, we initiated plans to restructure our European
manufacturing and assembly operations to align them to current market conditions. The plans
primarily involved the termination of employees and centralization of certain positions. Costs
related to termination of employees represented severance payments and benefits. The restructuring
charges recorded in conjunction with the plans represented severance costs and have been included
under “Restructuring charges” in our unaudited condensed consolidated statements of operations. The
restructuring accrual as of September 30, 2010 was included under “Accrued expenses and other
current liabilities” on our unaudited condensed consolidated balance sheets.
Restructuring activity as of and for the three and six months ended September 30, 2010 was as
follows (in thousands):
We anticipate that the remaining restructuring obligations of $545,000 as of September 30,
2010 will be substantially paid by March 31, 2011.
11. Pension Plans
We maintain three defined benefit pension plans: one for United Kingdom employees, one for
German employees, and one for Philippine employees. These plans cover most of the employees in the
United Kingdom, Germany and the Philippines. 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, banks or trustees and/or
accrue for the unfunded portion of the obligations. The measurement date for the projected benefit
obligations and the plan assets is March 31. The United Kingdom and German plans have been
curtailed. As such, the plans are closed to new entrants and no credit is provided for additional
periods of service. We expect to contribute approximately $752,000 to these two plans in the fiscal
year ending March 31, 2011. This contribution is primarily contractual.
In connection with the Zilog acquisition in February 2010, we assumed the defined benefit plan
for the local employees of Zilog’s Philippine subsidiary. As of September 30, 2010, the pension
plan was overfunded by approximately $274,000. The overfunding was included under “Other assets” on
our unaudited condensed consolidated balance sheet.
The net periodic pension expense includes the following components (in thousands):
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12. Employee Equity Incentive Plans
Stock Purchase and Stock Option Plans
The 2009 Equity Incentive Plan
Stock Options
On September 10, 2009, our stockholders approved the 2009 Equity Incentive Plan, or the 2009
Plan, under which 900,000 shares of our common stock are reserved for the grant of stock options.
Under the 2009 Plan, nonqualified and incentive stock options may be granted to employees,
consultants and non-employee directors. Generally, the per share exercise price shall not be less
than 100% of the fair market value of a share on the grant date. The Board of Directors has the
full power to determine the provisions of each option issued under the 2009 Plan. While we may
grant options that become exercisable at different times or within different periods, we have
granted options that primarily vest over four years. The options, once granted, expire ten years
from the date of grant.
Restricted Stock
Restricted stock awards may be granted to any employee, director or consultant under the 2009
Plan. Pursuant to a restricted stock award, we will issue shares of common stock that will be
released from restriction if certain requirements, including continued performance of services, are
met.
Stock Appreciation Rights
Awards of stock appreciation rights, or SARs, may be granted to employees, consultants and
nonemployee directors pursuant to the 2009 Plan. In any event, the exercise price of a SAR shall be
not less than 100% of the fair market value of a share on the grant date and shall expire no later
than ten years from the grant date. Upon exercise, the holder of SAR shall be entitled to receive
payment either in cash or a number of shares by dividing such cash amount by the fair market value
of a share on the exercise date.
Performance Units
Performance units may be granted to employees, consultants and nonemployee directors under the
2009 Plan. Each performance unit shall have a value equal to the fair market value of one share.
After the applicable performance period has ended, the holder will be entitled to receive a
payment, either in cash or in the form of shares, based on the number of performance units earned
over the performance period, to be determined as a function of the extent to which the
corresponding performance goals or other vesting provisions have been achieved.
Zilog 2004 Omnibus Stock Incentive Plan
The Zilog 2004 Omnibus Stock Incentive Plan, or the Zilog 2004 Plan, was approved by the
stockholders of Zilog in 2004, and was amended and approved by the stockholders of Zilog in 2007.
In connection with the acquisition of Zilog, our Board of Directors approved assumption of the
Zilog 2004 Plan. Employees of Zilog and persons first employed by our company after the closing of
the acquisition of Zilog may receive grants under the Zilog 2004 Plan. Under the 2004 Plan,
incentive stock options, non-statutory stock options, or restricted shares may be granted. At the
time of the assumption of the Zilog 2004 Plan by our company, up to 652,963 shares of our common
stock were available for grant under the plan.
Zilog 2002 Omnibus Stock Incentive Plan
The Zilog 2002 Omnibus Stock Incentive Plan, or the Zilog 2002 Plan, was adopted in 2002. In
connection with the acquisition of Zilog, our Board of Directors approved the assumption of the
Zilog 2002 Plan with respect to the shares available for grant as stock options. Employees of Zilog
and persons first employed by our company after the closing of the acquisition of Zilog may receive
grants under the Zilog 2002 Plan. At the time of the assumption of the Zilog 2002 Plan by our
company, up to 366,589 shares of our common stock were available for grant under the plan.
Employee Stock Purchase Plan
In May 1999, the Board of Directors approved the 1999 Employee Stock Purchase Plan, or the
Purchase Plan, and reserved 500,000 shares of common stock for issuance under the Purchase Plan.
Under the Purchase Plan, all eligible employees may purchase our common stock at a price equal to
85% of the lower of the fair market value at the beginning of the offer period or the semi-annual
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purchase date. Stock purchases are limited to 15% of an employee’s eligible compensation. On July
31, 2007 and July 9, 2010, the Board of Directors amended the Purchase Plan and on each occasion
reserved an additional 350,000 shares of common stock for
issuance under the Purchase Plan. No shares were purchased during the quarter ended September
30, 2010. During the six months ended September 30, 2010, there were 42,967 shares purchased under
the Purchase Plan, leaving approximately 455,000 shares available for purchase under the plan in
the future.
Stock-Based Compensation
The following table summarizes the effects of stock-based compensation charges (in thousands):
During the three and six months ended September 30, 2010, the unaudited condensed consolidated
statements of operations and cash flows do not reflect any tax benefit for the tax deduction from
option exercises and other awards. As of September 30, 2010, approximately $6.4 million in
stock-based compensation is to be recognized for unvested stock options granted under our equity
incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted
average period of 2.5 years.
The Black-Scholes option pricing model is used to estimate the fair value of options granted
under our equity incentive plans and rights to acquire stock granted under our stock purchase plan.
The weighted average estimated fair values of employee stock option grants and rights granted under
the 1999 Employee Stock Purchase Plan, as well as the weighted average assumptions that were used
in calculating such values during the three and six months ended September 30, 2010 and 2009, were
based on estimates at the date of grant as follows:
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Activity with respect to outstanding stock options for the six months ended September 30, 2010
was as follows:
Activity with respect to outstanding restricted stock units for the six months ended September
30, 2010 was as follows:
13. Comprehensive Income
The components of total comprehensive income (loss) and related tax effects were as follows
(in thousands):
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The components of accumulated other comprehensive income, net of tax, at the end of each
period were as follows (in thousands):
14. Computation of Net Income (Loss) per Share
Basic and diluted earnings (loss) per share are calculated as follows (in thousands, except per
share amounts):
Basic net income (loss) available per common share is computed using net income (loss) and the
weighted average number of common shares outstanding during the period. Diluted net income (loss)
per common share is computed using net income (loss) and the weighted average number of common
shares outstanding, assuming dilution, which includes potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares include the assumed exercise of
stock options and assumed vesting of restricted stock units using the treasury stock method. During
the three and six months ended September 30, 2010, there were outstanding weighted average options
to purchase 2,863,335 and 2,696,062 shares that were not included in the computation of diluted net
income per share since the exercise prices of the options exceeded the market price of the common
stock. These options could dilute earnings per share in future periods. Due to our net loss for the
three and six months ended September 30, 2009, all of the outstanding stock options and restricted
stock units to purchase 1.2 million and 1.4 million shares, respectively, of our common stock were
excluded from the diluted net loss per share calculation because their inclusion would have been
anti-dilutive.
15. Segment Information
We have a single operating segment. This operating segment is comprised of semiconductor
products used primarily in power-related applications. While we have separate legal subsidiaries
with discrete financial information, we have one chief operating decision maker with highly
integrated businesses. Our sales by major geographic area (based on destination) were as follows
(in thousands):
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The following table sets forth net revenues for each of our product groups for the three and
six months ended September 30, 2010 and 2009 (in thousands):
For the three months ended September 30, 2010, two distributors accounted for 12.9% and
10.4% of our net revenues, respectively. For the six months ended September 30, 2010, two
distributors accounted for 13.4% and 10.8% of our net revenues, respectively. For the three and six
months ended September 30, 2009, one distributor accounted for 10.6% and 11.9%, respectively, of
our net revenues.
16. Income Taxes
For the three and six months ended September 30, 2010, we recorded income tax provisions of
$3.7 million and $9.7 million, reflecting effective tax rates of 34.8% and 41.9%, respectively. In
contrast, for the three and six months ended September 30, 2009, we recorded income tax benefits of
$899,000 and $1.3 million, reflecting effective tax rates of 42.2% and 20.9%, respectively. For the
three months ended September 30, 2010, the effective tax rate was affected by the change in the
estimates of annual income in foreign jurisdictions and certain discrete items. For the six months
ended September 30, 2010, the effective tax rate was impacted by certain discrete items. For the
three and six months ended September 30, 2009, the effective tax rates were affected by the fact
that our losses in the periods were largely incurred in a jurisdiction with a comparatively lower
tax rate and by the release of valuation allowance. For the six months ended September 30, 2009,
the effective tax rate also included certain discrete items.
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17. Commitments and Contingencies
Legal Proceedings
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.
Bank of the West
On November 13, 2009, we entered into a credit agreement with BOW. The credit agreement
includes a letter of credit subfacility, under which BOW agrees to issue letters of credit of up to
$3.0 million. However, borrowing under this subfacility is limited to the extent of availability
under the $15.0 million revolving line of credit. The credit agreement expires on October 31, 2011.
See Note 9, “Borrowing Arrangements” for further information regarding the terms of the credit
agreement.
Other Commitments and Contingencies
On occasion, we provide limited indemnification to customers against intellectual property
infringement claims related to our products. To date, we have not experienced significant activity
or claims related to such indemnifications. We also provide in the normal course of business
indemnification to our officers, directors and selected parties. We are unable to estimate any
potential future liability, if any. Therefore, no liability for these indemnification agreements
has been recorded as of September 30, 2010 and March 31, 2010.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements, which are subject to certain risks and
uncertainties, including, without limitation, those described elsewhere in this Form 10-Q and, in
particular, in Item 1A of Part II 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.
Overview
We are a multi-market integrated semiconductor company. Our three principal product groups
are: power semiconductors; integrated circuits, or ICs; 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.
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
power semiconductors. Our microcontrollers provide application specific, embedded system-on-chip,
or SoC, solutions for the industrial and consumer markets.
Our systems include laser diode drivers, high voltage pulse generators and modulators, and
high power subsystems, sometimes known as 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.
We have recorded sequential revenue growth over the past five quarters, in part because of
recent acquisitions. During the current fiscal year, the increase in the sale of power
semiconductors and systems was broad-based, whereas the sale of ICs and RF power semiconductors
remained relatively flat. Gross profit margins have increased in each quarter since the quarter
ended June 30, 2009. In recent periods, gross profit margins increased because of acquisitions and
increased production. During the current fiscal year, distribution revenues have remained largely
constant while revenues from original equipment manufacturers increased. Our selling, general and
administrative expenses, or SG&A expenses, and our research, development and engineering expenses,
or R&D expenses, were relatively flat. In future periods, both our SG&A and R&D expenses are
expected to continue at approximately these levels, subject to sales expenses changing in
proportion to revenues.
Critical Accounting Policies and Significant Management Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our unaudited condensed 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 57% of our revenues in the six months ended September 30, 2010 and 48% of our
revenues in the six months ended September 30, 2009 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 a 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
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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 aid in our reserve analysis. Different
judgments or estimates would result in material differences in the amount and timing of our revenue
for any period.
Accounts receivable from distributors are recognized and inventory is relieved when title to
inventories transfer, typically upon shipment from our company, at which point we have a legally
enforceable right to collection under normal payment terms. 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 their end
customers. Deferred amounts are presented net and included under accrued expenses and other
liabilities.
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 agencies 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 six months ended September 30, 2010 and 2009,
approximately $279,000 and $598,000, respectively, of products were returned to us under the
program. We 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 $15.3 million in inventory of our products on hand at September 30,
2010. 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 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 six months ended September 30, 2010
(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 expenses. 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 steps in the production process. 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. The authoritative guidance provided by FASB requires
certain abnormal expenditures to be recognized as expenses in the current period instead of
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.
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. For example, during fiscal 2009, we examined our
inventory and as a consequence of the dramatic retrenchment in some of our markets, certain of our
inventory that normally would not be considered excess was considered as such. Therefore, we booked
additional charges of about $14.9 million to recognize this exposure.
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 when it 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.
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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 10,000 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, inventory is marked down accordingly. At
September 30, 2010, our lower of cost or market reserve was $587,000.
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.
Income tax. 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 unaudited
condensed consolidated balance sheets. 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 likely
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. We recognize liabilities for uncertain tax positions based
on the two-step process as prescribed by the authoritative guidance provided by FASB. 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
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.
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Recent Accounting Pronouncements
For a description of accounting changes and recent accounting pronouncements, including the
expected dates of adoption and estimated effects, if any, on our consolidated condensed financial
statements, see Note 2, “Accounting Changes and Recent Accounting Pronouncements” in the Notes to
Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
Results of Operations — Three and Six Months Ended September 30, 2010 and 2009
The following table sets forth selected consolidated statements of operations data for the
fiscal periods indicated and the percentage change in such data from period to period. These
historical operating results may not be indicative of the results for any future period.
The following table sets forth selected statements of operations data as a percentage of
net revenues for the fiscal periods indicated. These historical operating results may not be
indicative of the results for any future period.
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Net Revenues.
The following tables set forth the revenues for each of our product groups for the fiscal
periods indicated:
The following tables set forth the average selling prices, or ASPs, and units for the
fiscal periods indicated:
The 67.3% increase in net revenues in the three months ended September 30, 2010 as
compared to the three months ended September 30, 2009 reflected an increase of $20.8 million, or
51.5%, in the sale of power semiconductors, an increase of $13.4 million, or 150.3%, in the sale of
ICs and an increase of $2.0 million, or 44.1%, in the sale of systems and RF power semiconductors.
The increase in power semiconductors included a $12.5 million increase in the sale of bipolar
products, primarily to the industrial and commercial market, and a $7.7 million increase in the
sale of MOS products, principally to the consumer products market and the industrial and commercial
market. The increase in revenues from the sale of ICs was primarily driven by $11.2 million in
revenues from the acquisition of the display driver IC product line from Leadis and the acquisition
of Zilog and a $1.7 million increase in the sale of solid state relays, or SSRs, to the telecom
market. The revenues from the sale of systems and RF power semiconductors increased primarily due
to a $1.7 million increase in the sale of subassemblies to the industrial and commercial market.
For the three months ended September 30, 2010 as compared to the three months ended September
30, 2009, IC unit growth was principally due to shipments of display driver ICs to the consumer
products market, shipments of microcontroller products and shipments of SSRs, whereas in power
semiconductors, the unit growth was broad-based. The unit decrease in systems and RF power
semiconductors was principally due to reduced shipments of RF power semiconductors.
The 70.3% increase in net revenues in the six months ended September 30, 2010 as compared to
the six months ended September 30, 2009 reflected an increase of $39.2 million, or 49.5%, in the
sale of power semiconductors, an increase of $29.7 million, or 201.7%, in the sale of ICs and an
increase of $3.2 million, or 37.1%, in the sale of systems and RF power semiconductors. The
increase in power semiconductors included a $24.0 million increase in the sale of bipolar products,
primarily to the industrial and commercial market, and a $13.7 million increase in the sale of MOS
products, principally to the consumer products market and the industrial and commercial market. The
increase in revenues from the sale of ICs was primarily driven by $23.7 million in revenues due to
the acquisition of the display driver IC product line from Leadis and the acquisition of Zilog, and
a $4.4 million increase in the sale of solid state relays, or SSRs, to the telecom market. The
revenues from the sale of systems and RF power semiconductors increased primarily due to a $2.7
million increase in the sale of subassemblies to the industrial and commercial market.
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For the six months ended September 30, 2010 as compared to the six months ended September 30,
2009, IC unit growth was principally due to shipments of display driver ICs to the consumer
products market, shipments of Zilog microcontrollers and shipments of SSRs, whereas in power
semiconductors, the unit growth was broad-based. The unit increase in systems and RF power
semiconductors was principally due to increased shipments of subassemblies.
For the three and six months ended September 30, 2010 as compared to the comparable period of
the previous fiscal year, the changes in the ASPs of power semiconductor and the systems and RF
power semiconductors were due to changes in the mix of products sold. The ASP of power
semiconductors declined with markedly increased sales to all of our major market segments except
for the higher priced medical market. The ASP of systems and RF power semiconductors increased with
the increased sales of subassemblies. The ASP of ICs increased as a result of the addition of
microcontroller product sales by the recently acquired Zilog division.
For the quarter ended September 30, 2010, sales to customers in the United States represented
approximately 29.8% of our net revenues and sales to international customers represented
approximately 70.2% of our net revenues. Of our international sales, approximately 48.7% were
derived from sales in Europe and the Middle East, approximately 46.8% were derived from sales in
the Asia Pacific region and approximately 4.5% were derived from sales in the rest of the world. By
comparison, for the quarter ended September 30, 2009, sales to customers in the United States
represented approximately 32.2% of our net revenues and sales to international customers
represented approximately 67.8% of our net revenues. Of our international sales, approximately
50.4% were derived from sales in Europe and the Middle East, approximately 45.1% were derived from
sales in the Asia Pacific region and approximately 4.5% were derived from sales in the rest of the
world.
For the six months ended September 30, 2010, sales to customers in the United States
represented approximately 29.3% of our net revenues and sales to international customers
represented approximately 70.7% of our net revenues. Of our international sales, approximately
47.0% were derived from sales in Europe and the Middle East, approximately 48.0% were derived from
sales in the Asia Pacific region and approximately 5.0% were derived from sales in the rest of the
world. By comparison, for the six months ended September 30, 2009, sales to customers in the United
States represented approximately 31.6% of our net revenues and sales to international customers
represented approximately 68.4% of our net revenues. Of our international sales, approximately
48.7% were derived from sales in Europe and the Middle East, approximately 44.1% were derived from
sales in the Asia Pacific region and approximately 7.2% were derived from sales in the rest of the
world.
For the three and six months ended September 30, 2010 as compared to the three and six months
ended September 30, 2009, we experienced sales growth in all major geographic areas including the
U.S., Europe and Middle East, and Asia Pacific area. Our sales to the telecom market, the consumer
products market and the industrial and commercial market increased significantly, whereas our sales
to the medical market were largely unchanged.
For the three and six months ended September 30, 2010, one distributor accounted for 12.9% and
13.4% of our net revenues, respectively, and another distributor accounted for 10.4% and 10.8% of
our net revenues, respectively. For the three and six months ended September 30, 2009, one
distributor accounted for 10.6% and 11.9%, respectively, of our net revenues.
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.
Gross Profit.
Gross profit margin increased to 35.4% in the three months ended September 30, 2010 from 23.5%
in the three months ended September 30, 2009. Gross profit margin increased to 35.1% in the six
months ended September 30, 2010 from 22.4% in the six months ended September 30, 2009. The gross
profit margin improved due to better utilization of facilities caused by increased production to
support the growth in revenues and increased utilization or sale of previously written down
inventory. The increased utilization and sale of previously written down inventory resulted in
increased gross profit for the three and six months ended September 30, 2010, respectively. See
“Critical Accounting Policies and Significant Management Estimates — Inventories” elsewhere in this
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Research, Development and Engineering.
R&D expenses typically consist of internal engineering efforts for product design and
development. As a percentage of net revenues, our R&D expenses for the three and six months ended
September 30, 2010 were 7.3% and 7.8%, respectively, as compared to 8.4% and 8.8% for the three and
six months ended September 30, 2009. The reduction in the percentage resulted from increased net
revenues. Expressed in absolute dollars, for the three and six months ended September 30, 2010 as
compared to the same periods of
the prior year, our R&D expenses increased by approximately $2.1 million and $4.6 million, or
46.9% and 50.2%, respectively. The increase in R&D spending was primarily caused by the
acquisitions of Zilog and our display and LED driver businesses in fiscal year 2010, which resulted
in increases in R&D headcount and expenses in the three and six months ended September 30, 2010 as
compared to the same periods in the prior fiscal year.
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Selling, General and Administrative.
As a percentage of net revenues, our SG&A expenses for the three and six months ended
September 30, 2010 were 11.6% and 11.9% as compared to 14.9% and 16.0% for the three and six months
ended September 30, 2009. The reduction in the percentage resulted from increased net revenues.
Expressed in absolute dollars, SG&A expenses increased by $2.4 million and $4.5 million, or 30.4%
and 27.6%, respectively, for the three and six months ended September 30, 2010 as compared to the
same periods in the prior fiscal year, primarily due to the acquisition of Zilog, as well as higher
commission and freight expenses incurred in relation to higher revenues.
Amortization of Acquisition-Related Intangible Assets.
We recorded certain intangible assets during fiscal 2010 in connection with the acquisitions
of Zilog and the display and LED driver businesses from Leadis. These assets are amortized based
upon their estimated useful lives that range from 12 months to 72 months. For the three and six
months ended September 30, 2010, we recorded amortization expenses on acquisition-related
intangible assets of $1.9 million and $3.8 million, respectively. There were no amortization
expenses related to acquisition-related intangible assets in the three and six months ended
September 30, 2009.
Restructuring Charges.
In the quarter ended September 30, 2009, we initiated plans to restructure our European
manufacturing and assembly operations to align them to current market conditions. The plans
primarily involved the termination of employees and centralization of certain positions. Costs
related to termination of employees represented severance payments and benefits. The restructuring
charges recorded in conjunction with the plan represented severance costs and have been included
under “Restructuring charges” in our unaudited condensed consolidated statements of operations. The
restructuring accrual as of September 30, 2010 was included under “Accrued expenses and other
current liabilities” on our unaudited condensed consolidated balance sheets.
We incurred restructuring charges of $4,000 and $51,000 during the three and six months ended
September 30, 2010. During the three and six months ended September 30, 2009, we incurred
restructuring charges of $1.0 million. See Note 10, “Restructuring Charges” in the Notes to
Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.
Other Income (Expense), net.
In the quarter ended September 30, 2010, other expense, net was $2.0 million as compared to
other expense, net of $963,000 in the quarter ended September 30, 2009. The other expense, net in
the three months ended September 30, 2010 principally consisted of $2.0 million of losses
associated with changes in exchange rates for foreign currency transactions. The other expense, net
in the three months ended September 30, 2009 consisted principally of $1.1 million in losses
associated with changes in exchange rates for foreign currency transactions.
Other income, net in the six months ended September 30, 2010 was $818,000, as compared to
other expense, net of $2.4 million in the six months ended September 30, 2009. For the six months
ended September 30, 2010, other income, net consisted principally of $757,000 of gains associated
with changes in exchange rates for foreign currency transactions. For the six months ended
September 30, 2009, other expense, net consisted principally of losses associated with changes in
exchange rates for foreign currency transactions of $2.3 million.
Provision for Income Tax.
For the three and six months ended September 30, 2010, we recorded income tax provisions of
$3.7 million and $9.7 million, reflecting effective tax rates of 34.8% and 41.9%, respectively. In
contrast, for the three and six months ended September 30, 2009, we recorded income tax benefits of
$899,000 and $1.3 million, reflecting effective tax rates of 42.2% and 20.9%, respectively. For the
three months ended September 30, 2010, the effective tax rate was affected by the change in the
estimates of annual income in foreign jurisdictions and certain discrete items. For the six months
ended September 30, 2010, the effective tax rate was impacted by certain discrete items. For the
three and six months ended September 30, 2009, the effective tax rates were affected by the fact
that our losses in the periods were largely incurred in a jurisdiction with a comparatively lower
tax rate and by the release of valuation allowance. For the six months ended September 30, 2009,
the effective tax rate also included certain discrete income items.
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Liquidity and Capital Resources
At September 30, 2010, cash and cash equivalents were $65.4 million as compared to $60.5
million at March 31, 2010.
Our cash provided by operating activities for the six months ended September 30, 2010 was
$13.6 million, a decrease of $3.3 million as compared to the comparable period of the prior year.
The decrease in our operating cash flow was primarily due to a decrease of $19.4 million in net
changes in operating assets and liabilities, offset by an increase of $16.0 million in net income
and total adjustments to reconcile net income.
The increase in net income and total adjustments to reconcile net income was driven by the
increase in net revenues. The changes in operating assets and liabilities for the six months ended
September 30, 2010 compared to the six months ended September 30, 2009 were primarily caused by the
following: Accounts receivables increased due to higher revenues, inventory purchases increased to
meet our production plans and accrued expenses increased primarily due to an increase in income tax
liabilities.
Our net cash used in investing activities for the six months ended September 30, 2010 was $4.2
million, as compared to net cash used in investing activities of $4.1 million during the six months
ended September 30, 2009. During the six months ended September 30, 2010, our uses of cash for
investing activities principally reflected $3.9 million in purchases of property and equipment.
During the six months ended September 30, 2009, our uses of cash for investing activities
principally reflected $2.6 million for a business combination and $1.7 million in purchases of
plant and equipment.
For the six months ended September 30, 2010, net cash used in financing activities was $5.3
million, as compared to net cash used in financing activities of $2.9 million in the six months
ended September 30, 2009. During the six months ended September 30, 2010, we used $3.7 million for
the purchase of treasury stock and $2.2 million for principal repayment on capital lease and loan
obligations, offset by proceeds from employee equity plans of $593,000. During the six months ended
September 30, 2009, net cash used in financing activities primarily reflected $2.8 million in
principal payments on capital lease and loan obligations.
At September 30, 2010, capital lease obligations and loans payable totaled $35.2 million. This
represented 53.8% of our cash and cash equivalents and 17.9% of our stockholders’ equity.
We are obligated on a €6.5 million, or $8.8 million, loan. The loan has a remaining term of
about 10 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 a principal payment of €167,000, or about $227,000, and a payment of accrued interest
are required. 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. At September 30, 2010, we complied with the financial covenants.
The loan may be prepaid in whole or in part at the end of a fiscal quarter without penalty. The
loan is collateralized by a security interest in the facility in Lampertheim, Germany, which is
owned by our U.S. parent.
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 $14,000 are to be made for items such as real property taxes, insurance and capital
expenditures. The balance of the loan liability at September 30, 2010 was, and the remaining
balance on the loan at maturity will be, approximately $7.1 million.
On November 13, 2009, we entered into a credit agreement for a revolving line of credit with
BOW, under which we may borrow up to $15.0 million. Borrowings may be repaid and re-borrowed during
the term of the credit agreement. The obligations are guaranteed by two of our subsidiaries. All
amounts owed under the credit agreement are due and payable on October 31, 2011. On November 16,
2009, we borrowed $15.0 million pursuant to the credit agreement. See Note 9, “Borrowing
Arrangements” in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form
10-Q for further information regarding the credit agreement. The credit agreement also includes a
$3.0 million letter of credit subfacility. See Note 17, “Commitments and Contingencies” in the
Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further
information regarding the terms of the subfacility.
Additionally, we maintain three defined benefit pension plans: one for the United Kingdom
employees, one for German employees and one for Philippine employees. These plans cover most of the
employees in the United Kingdom, Germany and the Philippines. 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, banks,
trustees or accrue for the unfunded portion of the obligations. The United Kingdom and German plans
have been curtailed. As such, the plans are closed to new entrants and no credit is provided for
additional periods of service. The total pension liability accrued for the United Kingdom and
German
plans at September 30, 2010 was $16.2 million. The Philippines plan is overfunded and the
overfunding of $274,000 is included under “Other assets” on our unaudited condensed consolidated
balance sheet.
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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, increases in the cost of
materials or labor, investments in new product development or one or more acquisitions. From time
to time, we use derivative contracts in the normal course of business to manage our foreign
currency exchange and interest rate risks. We did not have any significant open derivative
contracts at September 30, 2010. 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk has not changed materially from the market risk disclosed in Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for
the fiscal year ended March 31, 2010.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation as of September 30, 2010, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to
ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q
was recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and regulations. Furthermore, these controls and procedures were also effective to ensure
that information required to be disclosed by us in this Quarterly Report on Form 10-Q was
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our procedures or our internal controls will prevent or detect all errors and all
fraud. An internal control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of
the inherent limitations in all control systems, no evaluation of our controls can provide absolute
assurance that all control issues, errors and instances of fraud, if any, have been detected.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We currently are involved in a variety of legal matters that arise in the normal course of
business. Based on information currently available, management does not believe that the ultimate
resolution of these matters will have a material adverse effect on our financial condition, results
of operations and cash flows. Were an unfavorable ruling to occur, there exists the possibility of
a material adverse impact on the results of operations of the period in which the ruling occurs.
ITEM 1A. RISK FACTORS
In addition to the other information in this Quarterly Report on Form 10-Q, 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.
Fluctuations in demand for our products may harm our financial results and are difficult to
forecast.
Current uncertainty in global economic conditions poses a risk to the overall economy and to
our business, as our customers may defer purchases in response to tighter credit and negative
financial news, which could negatively affect product demand and other related matters. If demand
for our products fluctuates, as a result of economic conditions or otherwise, our revenue and gross
margin could be harmed. Important factors that could cause demand for our products to fluctuate
include:
If product demand decreases, our manufacturing or assembly and test capacity could be
underutilized, and we may be required to record an impairment on our long-lived assets including
facilities and equipment, as well as intangible assets, which would increase our expenses. In
addition, factory planning decisions may shorten the useful lives of long-lived assets, including
facilities and equipment, and cause us to accelerate depreciation. These changes in demand for our
products and in our customers’ product needs could have a variety of negative effects on our
competitive position and our financial results, and, in certain cases, may reduce our revenue,
increase our costs, lower our gross margin percentage or require us to recognize impairments of our
assets. In addition, if product demand decreases or we fail to forecast demand accurately, we could
be required to write off inventory or record underutilization charges, which would have a negative
impact on our gross margin.
Our operating results fluctuate significantly because of a number of factors, many of which are
beyond our control.
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, from fiscal 2005 to fiscal 2006 and from fiscal
2008 to fiscal 2009, 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:
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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 Quarterly Report on Form 10-Q, we may experience
materially adverse fluctuations in our future operating results on a quarterly or annual basis.
Our backlog may not result in future revenues.
Customer orders typically can be cancelled or rescheduled without penalty to the customer.
Further, in periods of increasing demand, particularly when production is allocated or delivery
delayed, customers of semiconductor companies have on occasion placed orders without expectation of
accepting delivery to increase their share of allocated product or in an effort to improve the
timeliness of delivery. While we are attuned to the potential for such behavior and attempt to
identify such orders, we could accept orders of this nature and subsequently experience order
cancellation unexpectedly. 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.
Our international operations expose us to material risks.
For the fiscal year ended March 31, 2010, our product sales by region were approximately 29.8%
in the United States, approximately 33.3% in Europe and the Middle East, approximately 32.6% in
Asia Pacific and approximately 4.3% in Canada and the rest of the world. We expect revenues from
foreign markets to continue to 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:
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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. Reductions in
the value of the Euro or British pound would reduce our revenues recognized in U.S. dollars, all
other things being equal. Increases in the value of the Euro or the British pound could cause
losses associated with changes in exchange rates for foreign currency transactions. 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.
Our financial performance is dependent on economic stability and credit availability in
international markets. Actions by governments to address deficits or sovereign debt issues could
adversely affect gross domestic product or currency exchange rates in countries where we operate,
which in turn could adversely affect our financial results. If our customers or suppliers are
unable to obtain the credit necessary to fund their operations, we could experience increased bad
debts, reduced product orders and interruptions in supplier deliveries leading to delays or
stoppages in our production.
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.
The semiconductor industry is cyclical, and an industry downturn could adversely affect our
operating results.
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:
These factors could harm our business and cause our operating results to suffer.
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Fluctuations in the mix of products sold may adversely affect our financial results.
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.
Our dependence on subcontractors to assemble and test our products subjects us to a number of
risks, including an inadequate supply of products and higher materials costs.
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.
Assembly subcontractors generally work on narrow margins and have limited capital. We have
experienced assembly subcontractors who have ceased or reduced production because of financial
problems. We engage assembly subcontractors who operate while in insolvency proceedings or whose
financial stability is uncertain. The unexpected cessation of production or reduction in production
by one or more of our assembly subcontractors could adversely affect our production, our customer
relations, our revenues and our financial condition. Our reliance on these subcontractors also
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.
Semiconductors for inclusion in consumer products have short product life cycles.
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.
We may not be successful in our acquisitions.
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.
We may not be able to increase production capacity to meet the present and future demand for our
products.
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 depend on external foundries to manufacture many of our products.
Of our revenues for our fiscal year ended March 31, 2010, 38.8% 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.
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 foundry
capacity as required, our relationships with our customers could be harmed, we could be unable to
fulfill contractual requirements and our revenues could be reduced or growth limited.
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Moreover,
even if we are able to secure 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
to the business relationship. The costs related to maintaining 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.
Our success depends on our ability to manufacture our products efficiently.
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 dies 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, the additional demands placed on existing
equipment and personnel or the addition of new equipment or personnel may lead to 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 debt agreements contain certain restrictions that may limit our ability to operate our
business.
The agreements governing our debt contain, and any other future debt agreement we enter into
may contain, restrictive covenants that limit our ability to operate our business, including, in
each case subject to certain exceptions, restrictions on our ability to:
In addition, our debt agreements contain financial covenants and additional affirmative and
negative covenants. Our ability to comply with these covenants is dependent on our future
performance, which will be subject to many factors, some of which are beyond our control, including
prevailing economic conditions. If we are not able to comply with all of these covenants for any
reason and we have debt outstanding at the time of such failure, some or all of our outstanding
debt could become immediately due and payable and the incurrence of additional debt under the
credit facilities provided by the debt agreements would not be allowed. If our cash is utilized to
repay any outstanding debt, depending on the amount of debt outstanding, we could experience an
immediate and significant reduction in working capital available to operate our business.
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As a result of these covenants, our ability to respond to changes in business and economic
conditions and to obtain additional financing, if needed, may be significantly restricted, and we
may be prevented from engaging in transactions that might otherwise be beneficial to us, such as
strategic acquisitions or joint ventures.
Our gross margin is dependent on a number of factors, including our level of capacity utilization.
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 order materials and commence production in advance of anticipated customer demand. Therefore,
revenue shortfalls may also result in inventory write-downs.
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. For example, additional inventory write downs occurred in the quarter ended
March 31, 2009.
Changes in our decisions about restructuring could affect our results of operations and financial
condition.
Factors that could cause actual results to differ materially from our expectations about
restructuring actions include:
Our royalties are uncertain and unpredictable in amount.
We are unable to discern a pattern in or otherwise predict the amount of any royalty payments
that we may receive. Consequently, we are unable to plan on the receipt of royalties and our
results of operations may be adversely affected by a reduction in the amount of royalties received
in an unanticipated manner.
Increasing raw material prices could impact our profitability.
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.
Our markets are subject to technological change and our success depends on our ability to develop
and introduce new products.
The markets for our products are characterized by:
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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.
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.
Our revenues are dependent upon our products being designed into our customers’ products.
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.
We could be harmed by intellectual property litigation.
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. For example, in June 2000, we were sued
for patent infringement by International Rectifier Corporation. The case was ultimately resolved in
our favor, but not until October 2008. In the interim, the U.S. District Court entered multimillion
dollar judgments against us on two different occasions, each of which was subsequently vacated.
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.
We may not be able to protect our intellectual property rights adequately.
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.
Because our products typically have lengthy sales cycles, we may experience substantial delays
between incurring expenses related to research and development and the generation of revenues.
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 development efforts and our
realization of revenues, if any, from volume purchasing of our products by our customers.
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The markets in which we participate are intensely competitive.
Many 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, Toshiba and Vishay Intertechnology. Our IC
products compete principally with those of Atmel, Cypress Semiconductor, Freescale Semiconductor,
Matsushita, Microchip, NEC, Silicon Labs and Supertex. 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 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.
We rely on our distributors and sales representatives to sell many of our products.
Most 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 former 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 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.
Acquisitions and expansion place a significant strain on our resources, including our information
systems and our employee base.
Presently, because of our 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. 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 possibility of control deficiencies and material weaknesses.
We are also transferring some accounting functions to our recently acquired Philippine
subsidiary from other locations. These transfers involve changing accounting systems and
implementing different software from that previously used.
If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our ability to manage or 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 or consolidating our operational and financial systems, procedures and controls,
we would expect to periodically implement new or different 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 or different system.
In connection with any of the foregoing, we could experience errors, delays and other
inefficiencies, which could adversely affect our business. Any error, delay, disruption, transition
or conversion, including with respect to any new or different 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 or change functionality, 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 or the evolution of our current business.
We depend on a limited number of suppliers for our substrates, most of whom we do not have long
term agreements with.
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 related to product defects and errata may harm our results of operations and business.
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:
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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.
We face the risk of financial exposure to product liability claims alleging that the use of
products that incorporate our semiconductors resulted in adverse effects.
Approximately 12.8% of our net revenues for the fiscal year ended March 31, 2010 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.
If our goodwill or long-lived assets become impaired, we may be required to record a significant
charge to earnings.
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. In fiscal 2009, we recorded an impairment charge for
the entire goodwill balance of $6.4 million, based on our estimates of the future operating results
and discounted cash flows of the reporting units with goodwill.
We estimate tax liabilities, the final determination of which is subject to review by domestic and
international taxation authorities.
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 the authoritative guidance issued by FASB in connection with accounting for income taxes.
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.
Our results of operations could vary as a result of the methods, estimates, and judgments that we
use in applying our accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a
significant impact on our results of operations (see “Critical Accounting Policies and Significant
Management Estimates” in Part I, Item 2 of this Form 10-Q). Such methods, estimates, and judgments
are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may
arise over time that lead us to change our methods, estimates, and judgments. Changes in those
methods, estimates, and judgments could significantly affect our results of operations.
We are exposed to various risks related to the regulatory environment.
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.
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In addition, approximately 12.8% of our net revenues for the fiscal year ended March 31, 2010
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.
We invest in companies for strategic reasons and may not realize a return on our investments.
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 for
operational reasons or 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.
Our ability to access capital markets could be limited.
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.
Geopolitical instability, war, terrorist attacks and terrorist threats, and government responses
thereto, may negatively affect all aspects of our operations, revenues, costs and stock price.
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.
Business interruptions may damage our facilities or those of our suppliers.
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.
We may be affected by environmental laws and regulations.
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.
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Nathan Zommer, Ph.D. owns a significant interest in our common stock.
Nathan Zommer, Ph.D., our Chief Executive Officer, beneficially owned, as of October 28, 2010,
approximately 21.8% 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.
Our stock price is volatile.
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.
The anti-takeover provisions of our certificate of incorporation and of the Delaware General
Corporation Law may delay, defer or prevent a change of control.
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 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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
See the Index to Exhibits, which is incorporated by reference herein.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EXHIBIT INDEX
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