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SEMTECH CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Item 6 "Selected Consolidated
Financial Data" and our audited consolidated financial statements and related
notes included elsewhere in this Form 10-K.
As discussed in "Special Note Regarding Forward-Looking and Cautionary
Statements" earlier in this report, this Form 10-K contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward looking statements, including
as a result of the risks described in the cautionary statements in Item 1A "Risk
Factors" and elsewhere in this Form 10-K, in our other filings with the SEC, and
in material incorporated herein and therein by reference. We undertake no duty
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Overview
We are a leading supplier of analog and mixed-signal semiconductor products and
were incorporated in Delaware in 1960. We design, produce and market a broad
range of products that are sold principally into applications within the
high-end consumer, industrial, computing and communications end-markets. The
high-end consumer market includes handheld products, tablet computers, set-top
boxes, digital televisions, digital video recorders and other consumer
equipment. Applications for the industrial market include automated meter
reading, military and aerospace, medical, security systems, automotive,
industrial and home automation, and other industrial equipment. Computing
product markets include desktops, notebooks, servers, graphic boards, monitors,
printers, and other computer peripherals. Communications market applications
include base stations, optical networks, switches and routers, wireless LAN, and
other communication infrastructure equipment. Our end-customers are primarily
original equipment manufacturers and their suppliers, including Alcatel-Lucent,
Apple, Inc., Cisco Systems, Inc., Ericsson, Finisar Corporation, Fujitsu,
Hamilton Sundstrand, Huawei Technologies Co., Ltd., JDS Uniphase, LG
Electronics, Motorola, Nokia Siemens Networks, Oclaro, Opnext, Inc., Phonak
International, Research In Motion Limited, Samsung Electronics Co., Ltd., and
ZTE Corporation.
We operate our business in one enterprise-wide reportable segment. Most of our
sales to customers are made on the basis of individual customer purchase orders.
Many customers include liberal cancellation provisions in their purchase orders.
Trends within the industry toward shorter lead-times and "just-in-time"
deliveries have resulted in our reduced ability to predict future shipments. As
a result, we rely on orders received and shipped within the same quarter for a
significant portion of our sales. Sales made directly to customers during fiscal
year 2012 were 56% of net sales. The remaining 44% of net sales were made
through independent distributors.
Our business relies on foreign-based entities. Most of our outside
subcontractors and suppliers, including third-party foundries that supply
silicon wafers, are located in foreign countries, including China, Taiwan, the
United States, Israel, Europe, and Canada. For the fiscal year ended January 29,
2012, approximately 59% of our silicon, in terms of cost of wafers purchased,
was manufactured in China. Foreign sales for fiscal year 2012 constituted
approximately 80% of our net sales. Approximately 75% of foreign sales in fiscal
year 2012 were to customers located in the Asia-Pacific region. The remaining
foreign sales were primarily to customers in Europe, Canada, and Mexico.
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Recent Developments
On March 20, 2012, we announced that we have successfully completed the
acquisition of Gennum, a leading supplier of high speed analog and mixed-signal
semiconductors for the optical communications and video broadcast markets. In
accordance with the terms of the acquisition agreement, the Company acquired all
outstanding common shares of Gennum for approximately $510 million. The
transaction was financed through cash on hand and $350 million of five-year
secured term loans.
On March 20, 2012, we entered into a Credit Agreement with the lenders referred
to therein (the "Lenders") and Jefferies Finance LLC, as administrative agent
(the "Credit Agreement"). Pursuant to the Credit Agreement, the Lenders provided
us with senior secured first lien credit facilities in an aggregate principal
amount of $350 million (the "Facilities"), consisting of Term A loans in an
aggregate principal amount of $100 million (the "Term A Loans") and Term B loans
in an aggregate principal amount of $250 million (the "Term B Loans").
Gennum's data communications and video platforms broaden our existing portfolio
of high-speed communications platforms. Combining Gennum's 1Gbps to 25 Gbps
signal integrity solutions with our 40 Gbps to 100 Gbps SerDes solutions creates
one of the industry's most complete and robust analog and mixed signal
portfolios targeted at the communications and enterprise computing segments.
This will enable us to help customers reduce bottlenecks in the access, metro
and core networks, as demand for bandwidth continues to escalate. Moreover,
Gennum's strong position in video broadcast and the emerging HD video
surveillance market further diversifies our portfolio of high-performance analog
semiconductors.
Results of Operations
Fiscal Year 2012 Compared With Fiscal Year 2011
Presented below is our estimate of net sales by end-market.
(fiscal years, in thousands) January 29, 2012 January 30, 2011
Net Sales % total Net Sales % total Change
Computing $ 41,716 9 % $ 42,728 9 % -2 %
Communications 186,479 39 % 166,419 37 % 12 %
High-End Consumer 168,520 35 % 151,945 33 % 11 %
Industrial/Other 83,886 17 % 93,410 21 % -10 %
Net sales $ 480,601 100 % $ 454,502 100 % 6 %
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Net Sales. Net sales for fiscal year 2012 were $480.6 million, an increase of 6%
from $454.5 million for fiscal year 2011. Fiscal year 2012 revenues increased
driven by strengthening demand in the communications and consumer end markets.
Fiscal year 2012 was also impacted by softening global economic conditions that
resulted in a reduction in orders of our component products during the fiscal
year.
Higher revenue in the communications end market was attributed to the impact of
strengthening demand for our 40G and 100G communications infrastructure products
in our Advanced Communications product line. Higher revenues in the high-end
consumer end market were driven by strengthening demand for Protection products
in consumer applications including LCD TVs, smartphones and tablet computers.
Computing revenues were roughly flat. Within the industrial category, lower
revenue was attributed to softer demand from the military segment in our Power
Management and High-Reliability and Advanced Communications product lines.
Gross Profit. Gross profit was $285.6 million and $268.3 million for fiscal
years 2012 and 2011, respectively. Our gross margin was 59.4% for fiscal year
2012, up from 59.0% in fiscal year 2011. Gross profit margins for fiscal year
2012 were positively impacted by higher revenues, increased manufacturing
volumes and the impact of reduced equity compensation expenses attributed to
staffing reductions associated with a reduction in workforce. These factors
offset the impact of a higher mix of consumer and computing revenues relative to
communications and industrial revenues.
Operating Costs and Expenses.
(fiscal years, in thousands) January 29, 2012 January 30, 2011
Costs/Exp. % sales Costs/Exp. % sales Change
Selling, general and administrative $ 100,629 21 % $ 110,404 25 % (9 )%
Product development and engineering 80,577 17 % 69,624 15 % 16 %
Intangible amortization and impairments 10,853 2 % 9,520 2 % 14 %
Total operating costs and expenses $ 192,059 40 % $ 189,548 42 % 1 %
Selling, General & Administrative Expenses
Selling, general and administrative expenses for fiscal year 2012 decreased by
$9.8 million or 9% driven by the reduction in class action lawsuit expenses as
the Company settled the litigation in August 2011, and lower equity compensation
expenses partially offset by the impact of transaction expenses, reorganization
charges and the impact of higher staffing and information technology
infrastructure upgrade spending. Approximately $2.9 million of transaction
expenses attributed to the acquisition of Gennum and the evaluation of other
acquisition candidates were recorded in fiscal year 2012.
Selling, general and administrative expenses for fiscal years 2012 and 2011
include approximately $0.2 million and $13.6 million (net of insurance
recoveries of $10 million), respectively, for legal and other professional
services incurred in connection with matters related to our historical stock
option practices, including the government inquiries, the related litigation,
and other associated matters. Fiscal year 2012 includes $2.0 million for
expenses attributed to a reorganization plan initiated during the third quarter
of fiscal year 2012 which resulted in consolidation of research and development
activities and reduction in workforce.
Stock-based compensation expense was $15.8 million and $19.3 million in fiscal
years 2012 and 2011, respectively. The year over year decrease in equity
compensation was principally driven by staffing reductions associated with our
reorganization actions.
Product Development and Engineering Expenses
Product development and engineering expenses for fiscal years 2012 and 2011 were
$80.6 million and $69.6 million, respectively or an increase of 16%. The
increase in fiscal year 2012 is principally driven by the impact of increased
new product and process development expenditures primarily in the Advanced
Communications and Protection product lines. In addition, fiscal year 2012
includes a $0.9 million expense associated with the impairment of a new process
development initiative.
Intangible Amortization and Impairments
Intangible Amortization, which reflects amortization costs associated with
acquired intangibles, increased by $1.3 million in fiscal year 2012 compared to
fiscal year 2011, as a result of the impact of impairment charges attributed to
assets acquired from Leadis Technology Inc. During the third quarter of fiscal
year 2012, we abandoned certain development efforts related to acquired
intangible assets and recorded an impairment charge of $2.5 million.
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Interest and Other Income, Net. Interest and other income, net was $593,000 for
fiscal year 2012, up from $574,000 in fiscal year 2011. For fiscal years 2012
and 2011, the primary source of income was interest from investments offset by
loss from foreign currency transactions.
Provision for Taxes. The provision for income taxes was $5.1 million for fiscal
year 2012 compared to $6.8 million for fiscal year 2011. The effective tax rates
for fiscal year 2012 and fiscal year 2011 were 5.4% and 8.5%, respectively. The
rate for fiscal year 2012 reflects the impact of favorable trends in our
regional mix of income. We expect our regional income trends to remain
favorable. However, certain items which occurred in fiscal year 2012 are not
expected to recur in fiscal year 2013. One such item includes a one-time benefit
of $3.9 million related to a release of previously recorded reserves for
uncertain tax positions, as a result of statutes of limitations for the taxing
authority to challenge the positions expiring.
In fiscal year 2012, our tax provision was adversely effected by a net increase
to our valuation allowance of $2.1 million. This net increase was primarily the
result of utilization concerns related to our California net operating losses
due to a projected lower California apportionment in future years.
In fiscal year 2010, we concluded that $120 million of foreign subsidiary
earnings were no longer considered to be permanently reinvested offshore. In
connection with the acquisition of Gennum in March 2012, we reviewed this prior
assertion and concluded that only $50 million of foreign subsidiary earnings
were no longer permanently reinvested offshore resulting in $70 million of
foreign subsidiary earnings deemed to be permanently reinvested. This change in
assertion will result in recording a discrete adjustment to its tax provision in
the first quarter of fiscal year 2013. The impact of this change in assertion is
expected to result in the recognition of a $23 million tax benefit in the first
quarter of fiscal year 2013.
Fiscal Year 2011 Compared With Fiscal Year 2010
Presented below is our estimate of sales by end-market.
(fiscal years, in thousands) January 30, 2011 January 31, 2010
Net Sales % total Net Sales % total Change
Computing $ 42,728 9 % $ 40,875 14 % 5 %
Communications 166,419 37 % 66,038 23 % 152 %
High-End Consumer 151,945 33 % 113,240 40 % 34 %
Industrial/Other 93,410 21 % 66,407 23 % 41 %
Net sales $ 454,502 100 % $ 286,560 100 % 59 %
Net Sales. Net sales for fiscal year 2011 were $454.5 million, an increase of
59% from $286.6 million for fiscal year 2010. While fiscal year 2011 revenue
increased significantly on strengthening demand across the majority of our
product lines, revenues also benefited from the impact of the addition of the
full-year of SMI acquisition related revenues; whereas fiscal year 2010 only
reflected SMI acquisition related revenues for the period of December 10, 2009
through January 31, 2010. The acquisition of SMI provided us with products that
shared similar business processes, markets and intellectual property.
Post-acquisition, we quickly took actions to fully integrate SMI into our
operations. Fiscal year 2010 was also impacted by deteriorating global economic
conditions that resulted in a significant reduction in orders of our component
products during the first half of the fiscal year. Demand and orders increased
during the second half of fiscal year 2010 as business conditions began to
improve. Revenues in the fourth quarter of fiscal year 2010 also benefited from
an extra week in the fiscal quarter.
Higher revenue in the communications end market was driven by higher unit
volumes of Advanced Communications products, including the benefits from the
unit volumes attributable to the acquired SMI business, and Power Management
products. Higher revenues in the high-end consumer end market were driven by
strengthening demand for Protection products. The reduction in computing
revenues was attributed to the overall softness in the macro-economy and the
strategy to exit lower margin areas of the computing end market. Within the
industrial category, lower revenue was attributed to the overall softness in the
macro-economy and the impact of a slowdown in military funding which impacted
the Power Management and High-Reliability product group.
Gross Profit. Gross profit was $268.3 million and $156 million for fiscal years
2011 and 2010, respectively. Our gross margin was 59.0% for fiscal year 2011, up
from 54.5% in fiscal year 2010. Gross profit margins for fiscal year 2011 were
positively impacted by product revenue mix attributed to the higher mix of
communications and industrial revenues and a lower mix of high-end consumer and
computing revenues relative to fiscal year 2010. The contribution of new Power
Management product revenue from our Power Management and High-Reliability
product line also helped fiscal year 2011 gross margins.
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Operating Costs and Expenses.
Operating Costs & Expenses
(fiscal years, in thousands) January 30, 2011 January 31, 2010
Costs/Exp. % sales Costs/Exp. % sales Change
Selling, general and administrative $ 110,404 25 % $ 77,934 27 % 42 %
Product development and engineering 69,624 15 % 44,847 16 % 55 %
Intangible Amortization 9,520 2 % 2,348 1 % 305 %
Total operating costs and expenses $ 189,548 42 % $ 125,129 44 % 51 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal year 2011 increased by
$32.5 million or 42%. Stock-based compensation expense was $19.3 million and
$13.6 million in fiscal years 2011 and 2010, respectively. The year over year
increase in equity compensation was principally driven by the impact of
inducement and replacement awards issued to employees that joined the Company as
a result of the SMI acquisition. This was partially offset by a reduction in
stock-based compensation in fiscal year 2009 which benefited from the reversal
of $1.7 million of expense attributable to performance grants that are not
expected to vest. Selling, general and administrative expenses for fiscal year
2011 includes approximately $4 million of transaction and integration expenses
attributed to the acquisition of SMI. Selling, general administrative expenses
were partially offset by an insurance recovery in the amount of approximately
$1.4 million related to the fire at our Reynosa, Mexico manufacturing facility
in fiscal year 2009. These expenses were partially offset by reduced selling and
marketing expenses.
Selling, general and administrative expenses for fiscal years 2011 and 2010
include approximately $13.6 million (net of insurance recoveries of $10 million)
and $3.3 million, respectively, for legal, accounting, tax and other
professional services in connection with matters related to our historical stock
option practices, including the government inquiries, the related litigation,
and other associated matters. Included in the fiscal year 2010 expense is a $10
million charge related to a settlement offer that was extended to the plaintiffs
in the class action lawsuit. These expenses also include claims for advancement
of legal expenses to current and former directors, officers and employees.
Product Development and Engineering Expenses
Product development and engineering expenses for fiscal years 2011 and 2010 were
$69.6 million and $44.8 million, respectively or an increase of 55%. The
increase in fiscal year 2011 is principally driven by the impact of the
additional product development and engineering expenses resulting from the
acquisition of SMI and a $2.7 million increase in stock-based compensation
expense (which includes the impact of inducement and replacement awards issued
to employees that joined the company as a result of the SMI acquisition).
Intangible Amortization
Intangible Amortization, which reflects amortization costs associated with
acquired intangibles, increased by $7.2 million in fiscal year 2011 compared to
fiscal year 2010 as a result of the amortization of intangibles associated with
our acquisition of SMI in the fourth quarter of fiscal year 2010.
Interest and Other Income, Net. Interest and other income, net was $0.6 million
for fiscal year 2011, down from $3.1 million in fiscal year 2010. For fiscal
years 2011 and 2010, the primary source of income was interest from investments
and secondarily, gain (loss) from foreign currency transactions, gain/ (loss) on
sale of assets, and insurance proceeds recorded as other income.
Interest income decreased in fiscal year 2011 as a result of the continued
environment of low interest rates and the focus on protecting principal by
limiting the investment of new and maturing funds to the higher quality yet
lower yielding investments.
The year over year decrease in interest income was partially mitigated by net
gains related to foreign currency transactions and sale of assets and the
receipt of insurance property claims recorded as other income.
Provision for Taxes. The provision for income taxes was $6.8 million for fiscal
year 2011 compared to $33 million for fiscal year 2010. The effective tax rates
for fiscal year 2011 and fiscal year 2010 were 8.5% and 97.2%, respectively. The
rate for fiscal year 2011 reflects the impact of favorable trends in our
regional mix of income. In addition to favorable trends in regional revenue
distribution, other key drivers in fiscal year 2011 were high levels of expense
related to the class action lawsuit, including the additional $10.0 million of
expense that was recorded in the fourth quarter of fiscal year 2011 (to reflect
the agreement in principle to settle the class action lawsuit).
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Liquidity and Capital Resources
Our capital requirements depend on a variety of factors, including but not
limited to, the rate of increase or decrease in our existing business base; the
success, timing and amount of investment required to bring new products to
market; revenue growth or decline; and potential acquisitions. We believe that
we have the financial resources necessary to meet business requirements for the
next 12 months, including funds needed for working capital requirements.
As of January 29, 2012, our total shareholders' equity was $630.2 million. At
that date we also had approximately $310.1 million in cash and short-term
investments, as well as $17.5 million in long-term investments. We have no
outstanding debt as of January 29, 2012.
On March 20, 2012, we entered into a Credit Agreement with the Lenders and
Jefferies Finance LLC, as administrative agent. Pursuant to the Credit
Agreement, the Lenders provided us with senior secured first lien credit
facilities in an aggregate principal amount of $350 million, consisting of Term
A loans in an aggregate principal amount of $100 million and Term B loans in an
aggregate principal amount of $250 million. The Facilities mature on March 20,
2017. A portion of the proceeds of the Facilities were used to finance the
acquisition of Gennum.
Interest on the Term A Loan accrues, at our option, at a rate per annum equal to
the Base Rate (as defined below) plus a margin ranging from 1.50% to 1.75%
depending upon our consolidated leverage ratio or LIBOR for an interest period
to be selected by us plus a margin ranging from 2.50% to 2.75% depending upon
our consolidated leverage ratio. Interest on the Term B Loan accrues, at our
option, at a rate per annum equal to the Base Rate (subject to a floor of 2.00%)
plus a margin of 2.25% or LIBOR for an interest period to be selected by us
(subject to a floor of 1.00%) plus a margin of 3.25%. The "Base Rate" is equal
to a fluctuating rate equal to the highest of (a) the prime rate, (b) 1/2 of 1%
above the federal funds effective rate and (c) one-month LIBOR plus 1%.
Subject to certain customary exceptions, all obligations under the Facilities
are unconditionally guaranteed by each of our existing and subsequently acquired
or organized direct and indirect domestic subsidiaries (the "Guarantors"). The
obligations and the Guarantors in respect of the Facilities are secured by a
first priority security interest in substantially all of the assets of Semtech
and the Guarantors, subject to certain customary exceptions.
Our primary sources and uses of cash during the comparative fiscal years are
presented below:
Fiscal Years Ended
January 29, January 30, January 31,
(in millions) 2012 2011 2010
Sources of Cash
Operating activities, including working
capital changes $ 99.8 $ 93.8 $ 83.3
Proceeds from exercise of compensatory
stock plans, including tax benefits 45.0 30.7 11.7
Proceeds (purchases) from sale of
investments, net 38.4 (57.8 ) 29.9
Total sources of cash $ 183.2 $ 66.7 $ 124.9
Uses of Cash
Capital expenditures, net of sale
proceeds (excluding land sale) $ (21.5 ) $ (25.5 ) $ (8.6 )
Repurchase of common stock (50.7 ) (2.8 ) (2.9 )
Purchase of software licenses (3.0 ) - -
Acquisition, net of cash acquired - - (178.1 )
Repayment of long-term debt - - (2.4 )
Total uses of cash $ (75.2 ) $ (28.3 ) $ (192.0 )
Net increase (decrease) in cash and cash
equivalents $ 108.0 $ 38.4 $ (67.1 )
We incur significant expenditures in order to fund the development, design, and
manufacture of new products. We intend to continue to focus on those areas that
have shown potential for viable and profitable market opportunities, which may
require additional investment in equipment and will require continued, and
perhaps additional, investment in design and application engineers aimed at
developing new products. Certain of these expenditures, particularly the
addition of design engineers, do not generate significant payback in the
short-term. We plan to finance these expenditures with cash generated by our
operations and our existing cash balances.
A meaningful portion of our capital resources, and the liquidity they represent,
are held by our foreign subsidiaries. As of January 29, 2012, our foreign
subsidiaries held approximately $271.4 million of cash, cash equivalents, and
short-term investments compared to 165.7 million at January 30, 2011. If we
needed these funds for investment in domestic operations, any repatriation, such
as that which occurred in fiscal year 2010 to partially fund the acquisition of
SMI, could result in increased tax liabilities.
One of our primary goals is to constantly improve the cash flows from our
existing business activities. Our cash, cash equivalents and investments noted
above, give us the flexibility to leverage our free cash flow to return value to
shareholders (in the form of stock repurchases) while also pursuing business
improvement opportunities.
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Additionally, we will continue to seek to maintain and improve our existing
business performance with necessary capital expenditures and, potentially,
acquisitions that may further improve our base business with prospects of a
proper return. Acquisitions might be made for either cash or stock
consideration, or a combination of both.
Operating Activities
Net cash provided by operating activities is primarily due to net income
adjusted by non-cash items plus fluctuations in operating assets and
liabilities.
Investing Activities
Cash used for investing activities is primarily attributable to capital
expenditures, purchases of investments, offset by proceeds from the
sales/maturities of investments. Our marketable securities investment portfolio
is invested primarily in highly rated securities, generally with a minimum
rating of A/A2 or equivalent.
Capital expenditures, net proceeds from disposals, were $21.5 million for fiscal
year 2012 compared to 25.5 million for fiscal year 2011.
Financing Activities
Cash provided by financing activities is primarily attributable to the proceeds
from stock option exercises offset by the repurchase of common stock under our
stock repurchase program and the payment of statutory tax withholding
obligations related to the vesting of restricted stock, and stock repurchases.
For fiscal year 2012, cash from the exercise of stock options were $42.7 million
compared with $29.8 million in fiscal year 2011.
We do not directly control the timing of the exercise of stock options. Such
exercises are decisions made by those grantees and are influenced most directly
by the level of our stock price and the expiration dates of stock awards. Such
proceeds are difficult to forecast, resulting from several factors which are
outside our control. We believe that such proceeds will remain an important
secondary source of cash after cash flow from operating activities.
We currently have in effect a stock repurchase program. This program represents
one of our principal efforts to return value to our shareholders. In fiscal year
2012, we repurchased 2.3 million shares under this program for $50 million. In
fiscal year 2011, we repurchased 75,000 shares under this program for $1.3
million. On August 24, 2011 we announced a $36 million expansion of our existing
stock repurchase program. Refer to Exhibit 99.1 of our current report on Form
8-K files with the SEC on August 24, 2011 for the complete announcement. On
November 30, 2011 we announced an additional $50 million expansion of our
existing stock repurchase program. Refer to Exhibit 99.1 of our current report
on Form 8-K filed with the SEC on November 30, 2011 for the complete
announcement.
In addition to the stock repurchase program, shares valued at $0.7 million and
$1.6 million were withheld in connection with the vesting of restricted stock to
cover statutory tax withholding obligations in fiscal years 2012 and 2011,
respectively.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as those arrangements are
defined by the SEC, that are reasonably likely to have a current or future
material effect on our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
We do not have any unconsolidated subsidiaries or affiliated entities. We have
no special purpose or limited purpose entities that provide off-balance sheet
financing, liquidity or market or credit risk support. We do not engage in
leasing, hedging, research and development services, or other relationships that
expose us to liability that is not reflected on the face of the financial
statements.
Noted below under "Contractual Obligations" are various commitments we have
associated with our business, such as lease commitments and open purchase
obligations, which are not recorded as liabilities on our balance sheet because
we have not yet received the related goods or services as of January 29, 2012.
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Contractual Obligations
Presented below is a summary of our contractual obligations as of January 29,
2012.
Payments due by period (1)
Less than 1
(in thousands) year 1-3 years 4-5 years After 5 years Total
Operating leases $ 5,198 $ 5,929 $ 1,368 $ 261 $ 12,756
Open capital purchase commitments 1,288 - - - 1,288
Other open purchase commitments 23,831 - - - 23,831
Other vendor commitments - - - - -
Deferred compensation 901 983 594 8,645 11,123
Other long-term liabilities - 6,770 - - 6,770
Total contractual cash obligations $ 31,218 $ 13,682 $
1,962 $ 8,906 $ 55,768
(1) The table above excludes the $350 million term loan entered into on March 20,
2012 to finance the Gennum acquisition.
Capital purchase commitments, other open purchase commitments and other vendor
commitments are for the purchase of plant, equipment, raw material, supplies and
services. They are not recorded as liabilities on our balance sheet as of
January 29, 2012, as we have not yet received the related goods or taken title
to the property.
We maintain a deferred compensation plan for certain officers and key executives
that allow participants to defer a portion of their compensation for future
distribution at various times permitted by the plan. Our liability for deferred
compensation under this plan was $11.1 million as of January 29, 2012 and $10.2
million as of January 30, 2011, and is included in accrued liabilities and other
long-term liabilities on the balance sheet and in the table above. The plan
provides for a discretionary Company match up to a defined portion of the
employee's deferral, with any match subject to a vesting period.
We have purchased whole life insurance on the lives of some of our current and
former deferred compensation plan participants. This Company-owned life
insurance is held in a grantor trust and is intended to cover a majority of our
costs of the deferred compensation plan. The cash surrender value of our
Company-owned life insurance was $10.2 million as of January 29, 2012 and $6.1
million as of January 30, 2011, and is included in other assets.
We have $13.8 million of accrued taxes for uncertain tax positions. We believe
that it is reasonably possible that the amount of unrecognized tax benefits will
decrease by approximately $0.5 million within twelve months as a result of
expiring statutes.
Inflation
Inflationary factors have not had a significant effect on our performance over
the past several years. A significant increase in inflation would affect our
future performance.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP"). In connection with the preparation of
our financial statements, we are required to make assumptions and estimates
about future events, and apply judgments that affect the reported amounts of
assets, liabilities, revenue, expenses and the related disclosures. We base our
assumptions, estimates and judgments on historical experience, current trends
and other factors that management believes to be relevant at the time our
consolidated financial statements are prepared. On a regular basis, management
reviews the accounting policies, assumptions, estimates and judgments to ensure
that our financial statements are presented fairly and in accordance with GAAP.
However, because future events and their effects cannot be determined with
certainty, actual results could differ from our assumptions and estimates, and
such differences could be material.
Our significant accounting policies are discussed in Note 2 to our consolidated
financial statements, included in Item 8, of this report on Form 10-K. We
believe that the following accounting estimates are the most critical to aid in
fully understanding and evaluating our reported financial results, and they
require our most difficult, subjective or complex judgments, resulting from the
need to make estimates about the effect of matters that are inherently
uncertain. We have reviewed these critical accounting estimates and related
disclosures with the Audit Committee of our Board of Directors.
Accounting for Temporary and Long-Term Investments
Our temporary and long-term investments consist of government, corporate
obligations and bank time deposits. Temporary investments mature within twelve
months of the balance sheet date. Long-term investments have maturities in
excess of one year from the date of the balance sheet. We classify our
investments as "available for sale" because we expect to possibly sell some
securities prior to maturity. We include any unrealized gain or loss, net of
tax, in the comprehensive income portion of our Consolidated Statements of
Stockholders' Equity.
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After determining the fair value of our available-for-sale investments,
unrealized gains or losses on these investments are recorded to other
comprehensive income, until either the investment is sold or we determine that a
decline in value is other-than-temporary. Determining whether a decline in fair
value is other-than-temporary requires management judgment based on the specific
facts and circumstances of each investment. For investments in debt instruments,
these judgments primarily consider: the financial condition and liquidity of the
issuer, the issuer's credit rating, and any specific events that may cause us to
believe that the debt instrument will not mature and be paid in full; and our
ability and intent to hold the investment to maturity. If management decides not
to hold an investment until maturity, it may result in the recognition of
other-than-temporary impairment.
Allowance for Doubtful Accounts
We evaluate the collectability of our accounts receivable based on a combination
of factors. If we are aware of a customer's inability to meet its financial
obligations to us, we record an allowance to reduce the net receivable to the
amount we reasonably believe we will be able to collect from the customer. For
all other customers, we recognize allowances for doubtful accounts based on the
length of time the receivables are past due, the current business environment,
the size and number of certain large accounts and our historical experience. If
the financial condition of our customers were to deteriorate or if economic
conditions worsen, additional allowances may be required in the future.
Revenue and Cost of Sales
We recognize product revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collectability is
probable. Product design and engineering revenue is recognized during the period
in which services are performed. We record a provision for estimated sales
returns in the same period as the related revenues are recorded. We base these
estimates on historical sales returns and other known factors. Actual returns
could be different from our estimates and current provisions for sales returns
and allowances, resulting in future charges to earnings.
We defer revenue recognition on shipment of products to certain customers,
principally distributors, under agreements which provide for limited pricing
credits or product return privileges, until these products are sold through to
end-users or the return privileges lapse. For sales subject to certain pricing
credits or return privileges, the amount of future pricing credits or inventory
returns cannot be reasonably estimated given the relatively long period in which
a particular product may be held by the customer. Therefore, we have concluded
that sales to customers under these agreements are not fixed and determinable at
the date of the sale and revenue recognition has been deferred. We estimate the
deferred gross margin on these sales by applying an average gross profit margin
to the actual gross sales. The average gross profit margin is calculated for
each category of material using current standard costs. The deferred gross
margin does not include any adjustments for sales returns. The estimated
deferred gross margin on these sales, where there are no outstanding
receivables, is recorded on the balance sheet under the heading of "Deferred
Revenue." There were no significant impairments of deferred cost of sales in
fiscal year 2012 or fiscal year 2011.
The following table summarizes the deferred net revenue balance:
Deferred revenue
(in thousands)
January 29, January 30,
2012 2011
Deferred revenue $ 4,964 $ 6,369
Deferred cost of revenue 1,243 1,560
Deferred revenue, net $ 3,721 $ 4,809
Deferred product design and engineering recoveries 132 211
Total deferred revenue $ 3,853 $ 5,020
Inventory Valuation
Our inventories are stated at lower of cost or market and consist of materials,
labor and overhead. We determine the cost of inventory by the first-in,
first-out method. At each balance sheet date, we evaluate our ending inventories
for excess quantities and obsolescence. This evaluation includes analyses of
sales levels by product and projections of future demand. In order to state our
inventory at lower of cost or market, we maintain specific reserves against our
inventory which serve to write-down our inventories to a new cost basis. If
future demand or market conditions are less favorable than our projections, a
write-down of inventory may be required, and would be reflected in cost of goods
sold in the period the revision is made.
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Contingencies and Litigation
We record accruals for contingencies when it is probable that a liability has
been incurred and the amount can be reasonably estimated. These accruals are
adjusted periodically as assessments change or additional information becomes
available. Individually significant contingent losses are accrued when probable
and reasonably estimable.
Legal defense costs expected to be incurred in connection with a loss
contingency are accrued when probable and reasonably estimable. The amount we
accrue is based on reviews by outside counsel, in-house counsel and management
and some of the significant factors considered in the review of these reserves
are as follows: the actual costs incurred by the Company; the development of the
Company's legal defense strategy and structure in light of the scope of its
litigation; the number of cases being brought against the Company; the costs and
outcomes of completed trials and the most current information regarding
anticipated timing, progression, and related costs of pre-trial activities and
trials in the associated litigation. The amount of accrued reserves would
represent our best estimate of the minimum amount of defense costs to be
incurred in connection with its outstanding litigation; however, events such as
additional trials and other events that could arise in the course of its
litigation could affect the ultimate amount of legal defense costs to be
incurred by the Company. We will continue to monitor our legal defense costs and
review the adequacy of the associated reserves and may determine to increase the
reserves at any time in the future if, based upon the factors set forth, it
believes it would be appropriate to do so.
At January 29, 2012, our accrued liabilities in connection with an environmental
matter include approximately $58,000 of fees payable in connection with pending
testing and monitoring activities at the site. While it is reasonably possible
that losses exceeding the amounts already accrued may be incurred, because of
the uncertainties associated with environmental assessment and the remediation
activities, we have concluded that we are unable to reasonably estimate a range
of potential expenses, if any, of future site clean-up costs that may be
directed by the regulatory agency following the current site assessments and
surveys. However, any such potential expenses are not expected to be material to
our financial statements, as a whole. See Note 12 "Commitments and
Contingencies."
Stock-Based Compensation
We measure compensation cost for all share-based payments (including stock
options) at fair value using a valuation model, which considers, among other
things, estimates and assumptions on the rate of forfeiture, expected life of
options and stock price volatility. If any of the assumptions used in the
valuation model change significantly, stock-based compensation expense may
differ materially in the future from that recorded in the current period and
actual results may differ from estimates.
Impairment of Goodwill, Other Intangibles and Long-Lived Assets
We test goodwill and other indefinite-lived intangible assets for impairment in
the fourth quarter of each fiscal year or more frequently if we believe
indicators of impairment exist. The value of our intangible assets, including
goodwill, could be impacted by future adverse changes such as: (i) any future
declines in our operating results, (ii) a decline in the valuation of technology
company stocks, including the valuation of our common stock, (iii) a significant
slowdown in the worldwide economy and the semiconductor industry or (iv) any
failure to meet the performance projections included in our forecasts of future
operating results. For our annual impairment review, we primarily use a
multi-period excess earnings approach methodology of valuation that includes the
discounted cash flow method as well as other generally accepted valuation
methodologies to determine the fair value of the assets. Our assumptions
incorporate judgments as to the price received to sell a reporting unit as a
whole in an orderly transaction between market participants at the measurement
date. Considering the integration of our operations, we have assumed that the
highest and best use of a reporting unit follows an "in-use" valuation premise.
Significant management judgment is required in the forecasts of future operating
results that are used in the discounted cash flow method of valuation. The
estimates we have used are consistent with the plans and estimates that we use
to manage our business. It is possible, however, that the plans and estimates
used may be incorrect. If our actual results, or the plans and estimates used in
future impairment analysis, are lower than the original estimates used to assess
the recoverability of these assets, we could incur impairment charges in a
future period.
In fiscal years 2012 and 2011, we reorganized our reporting structure in a
manner that changed the composition of our reporting units. As a result of the
change in fiscal year 2011, the goodwill associated with Xemics SA and Sierra
Monolithics Inc. acquisitions have been aggregated. As of January 30, 2011 all
of the goodwill reported was associated with the Advanced Communications and
Sensing reporting unit.
In fiscal year 2012, the components of the Advanced Communications and Sensing
reporting unit were split into two reporting units consisting of the Advanced
Communications and the Wireless and Sensing reporting units. As a result of the
change, in fiscal year 2012, goodwill was reassigned to the reporting units
affected using a relative fair value allocation approach. Subsequent to the
reorganization in the fourth quarter of fiscal year 2012, the goodwill
associated with the Advanced Communications and Sensing
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reporting unit was reassigned such that 10% of goodwill is allocated to the
Wireless and Sensing reporting unit and 90% of the goodwill is allocated to the
Advanced Communications reporting unit. The measurement date used to reassign
goodwill was November 30, 2011. In connection with the reorganizations in fiscal
year 2012 and 2011, the Company assessed whether an indicator of impairment
existed prior to the reorganizations and concluded that no such indicators were
present in fiscal year 2012 and 2011.
Goodwill was tested for impairment as of November 30, 2011, the date of the
Company's annual impairment review. The Company concluded that the fair value of
this reporting unit exceeded the carrying value and no impairment existed. Our
analysis included sensitivity analysis of key assumptions such as a 10% increase
in the weighted-average cost of capital, a 10% increase in the effective tax
rate or a 5% decline in our compound annual growth rate noting the fair value of
the goodwill associated with the Advanced communications and Sensing reporting
unit exceeded the carrying value and no impairment existed.
We record impairment losses on long-lived assets used in operations when
indicators of impairment, such as reductions in demand or significant economic
slowdowns in the semiconductor industry, are present. Reviews are performed to
determine whether the carrying value of an asset is impaired, based on
comparisons to undiscounted expected future cash flows. If this comparison
indicates that there is impairment, the impaired asset is written down to fair
value, which is typically calculated using: (i) quoted market prices and/or
(ii) discounted expected future cash flows utilizing a discount rate. Impairment
is based on the excess of the carrying amount over the fair value of those
assets.
Accounting for Income Taxes
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 liability
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheet.
We must 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 must establish a valuation allowance. Generally, to the extent we
change a valuation allowance; the change is recorded through the tax provision
in the statement of operations. Management periodically evaluates our deferred
tax assets to assess whether it is likely that the deferred tax assets will be
realized. In determining whether a valuation allowance is required, we consider
projected taxable income. The most significant assumptions used in preparing
projections of taxable income include forecasting the levels of income by region
and the amount of deductible stock based compensation.
We are subject to income taxes in both the United States and numerous foreign
jurisdictions. Significant management estimates are required in determining our
worldwide provision for income taxes. In the ordinary course of our business,
there are many transactions and calculations where the ultimate tax impact is
uncertain. The calculation of tax liabilities involves dealing with
uncertainties in the application of complex tax laws. We recognize liabilities
for uncertain tax positions based on a two-step process. The first step is to
evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step requires us to estimate and
measure the tax benefit as the largest amount that is more than 50% likely of
being realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as this requires us to determine the
probability of various possible outcomes. We reevaluate these uncertain tax
positions on a quarterly basis. This evaluation is based on factors including,
but not limited to, changes in facts or circumstances, changes in tax law,
effectively settled issues under audit, and new audit activity. Such 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 of change. Although we
believe the estimates are reasonable, no assurance can be given that the final
outcome of these matters will not be different than what is reflected in the
historical income tax provisions and accruals. Should additional taxes be
assessed as a result of an audit or litigation, a material effect on our income
tax provision and net income in the period or periods for which that
determination is made could result.
The income tax effects of share-based payments are recognized for financial
reporting purposes only if such awards are expected to result in a tax
deduction. We do not recognize a deferred tax asset for an excess tax benefit
(that is, a tax benefit that exceeds the amount of compensation cost recognized
for the award for financial reporting purposes) that has not been realized. In
determining when an excess tax benefit is realized, we have elected to follow
the ordering provision of the tax law.
In addition to the risks to the effective tax rate discussed above, the
effective tax rate reflected in forward-looking statements is based on current
enacted tax law. Significant changes in enacted tax law could materially affect
these estimates.
In general, the amount of taxes we pay will differ from our reported tax
provision as a result of differences between accounting for income under U.S.
GAAP and accounting for taxable income. Typical book-tax differences include
expense related to equity compensation, deemed dividends, depreciation,
litigation expense and amortization of intangible assets. As a result of these
book-tax differences, our tax payments are expected to exceed our tax provision
during the next three years.
For intra-entity differences between the tax basis of an asset in the buyer's
tax jurisdiction and their cost as reported in the consolidated financial
statements, we do not recognize a deferred tax asset. Income taxes paid on
intra-entity profits on assets remaining within the group are accounted for as
prepaid taxes.
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In fiscal year 2010, we concluded that $120 million of foreign subsidiary
earnings were no longer considered to be permanently reinvested offshore. In
connection with the acquisition of Gennum, we reviewed this prior assertion and
concluded that only $50 million of foreign subsidiary earnings were no longer
permanently reinvested offshore. This change in assertion will result in
recording a discrete adjustment to its tax provision in the first quarter of
fiscal year 2013. The impact of this change in assertion is expected to result
in the recognition of a $23 million tax benefit in the first quarter of fiscal
year 2013.
New Accounting Standards
In September 2011, the Financial Accounting Standards Board ("FASB") issued
updated guidance that simplifies goodwill impairment testing by allowing a
qualitative review to assess whether a quantitative impairment analysis is
necessary as a first step to the testing. Under this guidance, a company will
not be required to calculate the fair value of a reporting unit that contains
recorded goodwill unless it concludes, based on the qualitative assessment, that
it is more likely than not that the fair value of that reporting unit is less
than its book value. If a decline in fair value is deemed more likely than not
to have occurred, then the quantitative goodwill impairment test that is
provided under U.S. GAAP must be completed; otherwise, goodwill is deemed not to
be impaired and no further testing is required until the next annual test date
(or sooner if conditions or events before that date raise concerns of potential
impairment in the reporting unit). The amended goodwill impairment guidance does
not affect the manner in which a company estimates fair value. The new standard
is effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011, with early adoption permitted.
The Company does not expect the adoption of this guidance to have a material
impact on its financial condition, results of operations, cash flows, or
disclosures.
In June 2011, the FASB issued a final standard requiring presentation of net
income and other comprehensive income in either a single continuous statement or
in two, consecutive statements of net income and other comprehensive income.
Under both alternatives, an entity is required to present each component of net
income and other comprehensive income, their respective totals, and totals for
comprehensive income. This standard eliminates the option to present the
components of other comprehensive income as part of the statement of changes in
shareholders' equity. The amendment is effective for interim and annual periods
beginning after December 15, 2011. The Company does not expect the adoption of
this guidance to have a material impact on its financial condition, results of
operations, cash flows, or disclosures.
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