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ATMEL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion and analysis in conjunction with the
Condensed Consolidated Financial Statements and related Notes thereto contained
elsewhere in this Quarterly Report on Form 10-Q. The information contained in
this Quarterly Report on Form 10-Q is not a complete description of our business
or the risks associated with an investment in our common stock. We urge you to
carefully review and consider the various disclosures made by us in this
Quarterly Report on Form 10-Q and in our other reports filed with the SEC,
including our Annual Report on Form 10-K for the year ended December 31, 2011.
Atmel's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current
reports on Form 8-K, and amendments to such reports are available, free of
charge, through the "Investors" section of www.atmel.com. We make these reports
available as soon as reasonably practicable after we electronically file them
with, or furnish them to, the SEC. The SEC also maintains a website located at
www.sec.gov that contains Atmel's SEC filings. The information disclosed on our
website is not incorporated herein and does not form a part of this Quarterly
Report on Form 10-Q.
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This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, particularly statements
regarding our outlook for fiscal 2012, the expansion of the market for
microcontrollers, revenue for our maXTouchTM products, expectations for our new
XSense product, our gross margin, anticipated revenue by geographic area,
operating expenses and capital expenditures, cash flow and liquidity measures,
factory utilization, new product introductions, access to independent foundry
capacity and the quality issues associated with the use of third party
foundries, the effects of our strategic transactions and restructuring efforts,
estimates related to the amount and/or timing of the expensing of unearned
stock-based compensation expense and similar estimates related to our
performance-based restricted stock units, our expectations regarding tax
matters, the outcome of litigation (including intellectual property litigation
in which we may be involved in which our customers may be involved, especially
in the mobile device sector) and the expenses involved and the effects of
exchange rates and our ongoing efforts to manage exposure to exchange rate
fluctuation. Our actual results could differ materially from those projected in
any forward-looking statements as a result of a number of factors, risks and
uncertainties, including the risk factors set forth in this discussion and in
Part II Item 1A - Risk Factors, and elsewhere in this Quarterly Report on Form
10-Q. Generally, the words "may," "will," "could," "should," "would,"
"anticipate," "expect," "intend," "believe," "seek," "estimate," "plan," "view,"
"continue," the plural of such terms, the negatives of such terms, or other
comparable terminology and similar expressions identify forward-looking
statements. The information included in this Quarterly Report on Form 10-Q is
provided as of the filing date with the Securities and Exchange Commission and
future events or circumstances could differ significantly from the
forward-looking statements included herein. Accordingly, we caution readers not
to place undue reliance on such statements. We undertake no obligation to update
any forward-looking statements in this Quarterly Report on Form 10-Q.
OVERVIEW
We are one of the world's leading designers, developers and suppliers of
microcontrollers, which are self-contained computers-on-a-chip. Microcontrollers
are generally less expensive, consume less power and offer enhanced programming
capabilities compared to traditional microprocessors. Our microcontrollers and
related products are used today in many of the world's leading smart phones,
tablet devices and other consumer and industrial electronics to provide core
functionality for touch sensing, security, wireless and communication
applications and battery management. We offer an extensive portfolio of
capacitive touch products that integrate our microcontrollers with fundamental
touch-focused intellectual property, or IP, we have developed and we continue to
leverage our market and technology advantages to expand our product portfolio
within the touch-related eco-system. Toward that end, and as a natural extension
of our touch controller business, we recently announced our "XSense" product, a
new type of touch sensor based on proprietary metal mesh technologies. We also
design and sell products that are complementary to our microcontroller business,
including nonvolatile memory and flash memory products, radio frequency and
mixed-signal components and application specific integrated circuits. Our
semiconductors also enable applications in many other fields, such as
smart-metering for utility monitoring and billing, buttons, sliders and wheels
found on the touch panels of appliances, various aerospace, industrial, and
military products and systems, and electronic-based automotive components, such
as keyless ignition, access, engine control, lighting and entertainment systems,
for standard and hybrid vehicles. Over the past several years, we transitioned
our business to a "fab-lite" model, lowering our fixed costs and capital
investment requirements, and we currently own and operate one manufacturing
facility in Colorado Springs, Colorado.
During the three months ended March 31, 2012, we repurchased 9.5 million shares
of our common stock in the open market and subsequently retired those shares
under our existing stock repurchase program. As of March 31, 2012, $10.6
million remained available for repurchase under this program. On April 30, 2012,
our Board of Directors authorized an additional $200 million for this program.
RESULTS OF OPERATIONS
Three Months Ended
March 31, 2012 March 31, 2011
(in thousands, except percentage of net revenue)
Net revenue $ 357,837 100.0 % $ 461,427 100.0 %
Gross profit 152,367 42.6 % 235,385 51.0 %
Research and development 66,289 18.5 % 62,383 13.5 %
Selling, general and
administrative 69,855 19.5 % 70,786 15.3 %
Acquisition-related charges 1,956 0.5 % 1,031 0.2 %
Restructuring charges - 0.0 % 21,210 4.6 %
Credit from reserved grant
income (10,689 ) -
Gain on sale of assets - 0.0 % (1,882 ) -0.4 %
Income from operations $ 24,956 7.0 % $ 81,857 17.7 %
Net Revenue
Our net revenue totaled $357.8 million for the three months ended March 31,
2012, a decrease of 22%, or $103.6 million, from $461.4 million in net revenue
for the three months ended March 31, 2011. Revenue decreased primarily
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due to reduced sales of our products as a result of difficult global economic
conditions that adversely affected the industrial and consumer markets into
which our products are sold. In the three months ended March 31, 2012, our
distributors, which accounted for approximately 50% of our sales in that period,
reduced their aggregate inventories of our products by 19% as compared to the
three months ended December 31, 2011.
Included in revenue in the three months ended March 31, 2012, is $7.6 million of
payments made from an Asian distributor recognized on a cash basis, which had
been deferred at December 31, 2011, and not included in our net revenue at year
end.
Net revenue denominated in Euros was 21% and 23% for the three months ended
March 31, 2012 and 2011, respectively. Average exchange rates utilized to
translate foreign currency revenue and expenses in Euros were approximately 1.31
and 1.34 Euros to the dollar for the three months ended March 31, 2012 and 2011,
respectively.
Net Revenue - By Operating Segment
Our net revenue by operating segment is summarized as follows:
Three Months Ended
March 31, March 31,
2012 2011 Change % Change
(in thousands, except for percentages)
Microcontroller $ 217,802 $ 293,826 $ (76,024 ) -26 %
Nonvolatile Memory 47,733 63,372 (15,639 ) -25 %
RF and Automotive 43,510 50,853 (7,343 ) -14 %
ASIC 48,792 53,376 (4,584 ) -9 %
Total net revenue $ 357,837 $ 461,427 $ (103,590 ) -22 %
Microcontroller
Microcontroller segment net revenue decreased 26% to $217.8 million for the
three months ended March 31, 2012 from $293.8 million for the three months ended
March 31, 2011. Revenue decreased primarily due to decreased sales of our 8-bit
and 32-bit microcontrollers as a result of reduced demand in the industrial end
markets. Microcontroller net revenue represented 61% and 64% of total net
revenue for the three months ended March 31, 2012 and 2011, respectively.
Nonvolatile Memory
Nonvolatile Memory segment net revenue decreased 25% to $47.7 million for the
three months ended March 31, 2012 from $63.4 million for the three months ended
March 31, 2011. The decline in our memory business resulted primarily from
reduced market demand, a weaker pricing environment and the end of life for
several flash products, including Serial EE and Serial Flash products, which saw
revenue decrease by 18% and 49%, respectively.
RF and Automotive
RF and Automotive segment net revenue decreased 14% to $43.5 million for the
three months ended March 31, 2012 from $50.9 million for the three months ended
March 31, 2011. This decrease was primarily related to continued decline in
demand for our non-automotive products within this segment during the first
three months of 2012 partially offset by an increase of 11% in net revenue from
sales of our high voltage products, which are used primarily for automotive
airbag controllers.
ASIC
ASIC segment net revenue decreased 9% to $48.8 million for the three months
ended March 31, 2012 from $53.4 million for the three months ended March 31,
2011. Our military and aerospace business revenue, which is approximately 32% of
overall ASIC revenue, decreased approximately 14% during the three months ended
March 31, 2012 compared to the three months ended March 31, 2011.
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Net Revenue by Geographic Area
Our net revenue by geographic area for the three months ended March 31, 2012,
compared to the same period in 2011, is summarized as follows. Revenue is
attributed to countries based on the location to which we ship. See Note 9 of
Notes to Condensed Consolidated Financial Statements for further discussion.
Three Months Ended
March 31, March 31,
2012 2011 Change % Change
(in thousands, except for percentages)
Asia $ 202,900 $ 266,828 $ (63,928 ) -24 %
Europe 99,374 119,765 (20,391 ) -17 %
United States 48,190 69,527 (21,337 ) -31 %
Other* 7,373 5,307 2,066 39 %
Total net revenue $ 357,837 $ 461,427 $ (103,590 ) -22 %
--------------------------------------------------------------------------------* Primarily includes South Africa, and Central and South
America
Net revenue outside the United States accounted for 87% and 85% of our net
revenue for the three months ended March 31, 2012 and 2011, respectively.
Our net revenue in Asia decreased $63.9 million, or 24%, for the three months
ended March 31, 2012, compared to the same period in 2011. The decrease in this
region for the three months ended March 31, 2012, compared to the three months
ended March 31, 2011 was primarily due to lower shipments of our microcontroller
products as a result of difficult global economic conditions that adversely
affected the industrial and consumer markets into which these products are sold.
In the three months ended March 31, 2012, our distributors in Asia reduced their
inventory of our products by 18% as compared to the three months ended December
31, 2011. Net revenue for the Asia region was 57% of total net revenue for the
three months ended March 31, 2012 compared to 58% of total net revenue for the
three months ended March 31, 2011.
Our net revenue in Europe decreased $20.4 million, or 17%, for the three months
ended March 31, 2012, compared to the three months ended March 31, 2011. The
decrease in this region for the three months ended March 31, 2012, compared to
the three months ended March 31, 2011 was primarily a result of the continued
decline in industrial markets. Net revenue for the Europe region was 28% of
total net revenue for the three months ended March 31, 2012 compared to 26% of
total net revenue for the three months ended March 31, 2011.
Our net revenue in the United States decreased by $21.3 million, or 31%, for the
three months ended March 31, 2012, compared to the three months ended March 31,
2011. This decrease resulted primarily from reduced demand for smart metering
and consumer-based products. Net revenue for the United States region was 13% of
total net revenue for the three months ended March 31, 2012, compared to 15% of
total net revenue for the three months ended March 31, 2011.
Revenue and Costs - Impact from Changes to Foreign Exchange Rates
Changes in foreign exchange rates have historically had an effect on our net
revenue and operating costs. Net revenue denominated in foreign currencies was
21% and 23% of our total net revenue for the three months ended March 31, 2012
and 2011, respectively. Costs denominated in foreign currencies were 18% and 20%
of our total costs for the three months ended March 31, 2012 and 2011,
respectively.
Net revenue denominated in Euros was 21% and 23% for the three months ended
March 31, 2012 and 2011, respectively. Costs denominated in Euros were 11% and
14% of our total costs for the three months ended March 31, 2012 and 2011,
respectively.
Average exchange rates utilized to translate foreign currency revenue and
expenses in Euros were approximately 1.31 and 1.34 Euros to the dollar for the
three months ended March 31, 2012 and 2011, respectively.
For the three months ended March 31, 2012, changes in foreign exchange rates had
an unfavorable overall effect on our operating results. Our net revenue for the
three months ended March 31, 2012 would have been approximately $1.9 million
higher had the average exchange rate in the current year remained the same as
the average rate in effect for the
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three months ended March 31, 2011. In addition, in the three months ended March
31, 2012, our operating expenses would have been approximately $1.2 million
higher. The net effect, had average foreign currency rates remained the same
during the three months ended March 31, 2012 as in the same period in 2011,
would have been that income from operations would have increased approximately
$0.7 million in the three months ended March 31, 2012.
Cost of Revenue and Gross Margin
Gross margin declined to 42.6% for the three months ended March 31, 2012,
compared to 51.0% for the three months ended March 31, 2011. Gross margin in
the three months ended March 31, 2012 was negatively affected by lower sales,
lower utilization of our remaining wafer fabrication facility in Colorado as a
result of decreased business levels and higher inventory write-downs.
We experienced an increase in inventory to $357.5 million at March 31, 2012 from
$318.5 million at March 31, 2011, although our inventories declined by
approximately $20.0 million from $377.4 million at the end of 2011. While we
expect inventory levels to continue to decline, as builds are adjusted and as
demand recovers, our inventory levels, and related write-downs, may require
further adjustments during 2012 to reflect revised demand forecasts or product
lifecycles. Inventory adjustments, if undertaken, may affect our results of
operations, including gross margin, in a positive or negative manner, depending
on the nature of those adjustments. If the demand for certain semiconductor
products declines or does not materialize as we expect, we could be required to
record additional write-downs, which would adversely affect our gross margin.
For the three months ended March 31, 2012, we manufactured approximately 56% of
our products in our own wafer fabrication facility compared to 49% for the three
months ended March 31, 2011.
Our cost of revenue includes the costs of wafer fabrication, assembly and test
operations, changes in inventory write-downs, royalty expense, freight costs and
stock compensation expense. Our gross margin as a percentage of net revenue
fluctuates depending on product mix, manufacturing yields, utilization of
manufacturing capacity, reserves for our excess and obsolete inventory, and
average selling prices, among other factors.
Research and Development
Research and development ("R&D") expenses increased 6%, or $3.9 million, to
$66.3 million for the three months ended March 31, 2012 from $62.4 million for
the three months ended March 31, 2011. R&D expenses increased for the three
months ended March 31, 2012, primarily due to increased employee related
expenses of $2.7 million related to product development staffing and increased
stock-based compensation expense of $0.8 million. R&D expenses, including the
items described above, for the three months ended March 31, 2012, were favorably
affected by approximately $0.7 million due to foreign exchange rate
fluctuations, compared to rates in effect and the related expenses incurred for
the three months ended March 31, 2011. As a percentage of net revenue, R&D
expenses totaled 19% and 14% for the three months ended March 31, 2012 and 2011,
respectively.
Our internally developed process technologies are an important part of new
product development. We continue to invest in developing process technologies
emphasizing wireless, high voltage, analog, digital, and embedded memory
manufacturing processes. Our technology development groups, in partnership with
certain external foundries, are developing new and enhanced fabrication
processes, including architectures utilizing advanced processes at the 65
nanometer line width node. We believe this investment allows us to bring new
products to market faster, add innovative features and achieve performance
improvements. We believe that continued strategic investments in process
technology and product development are essential for us to remain competitive in
the markets we serve.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses decreased 1%, or $0.9
million, to $69.9 million for the three months ended March 31, 2012 from $70.8
million for the three months ended March 31, 2011. SG&A expenses were favorably
affected by approximately $0.4 million due to foreign exchange rate
fluctuations, compared to rates in effect and the related expenses incurred for
the three months ended March 31, 2011. As a percentage of net revenue, SG&A
expenses totaled 20% and 15% of net revenue for the three months ended March 31,
2012 and 2011, respectively.
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Stock-Based Compensation
We primarily issue restricted stock units to our employees as equity
compensation. Employees may also participate in an Employee Stock Purchase
Program that offers the ability to purchase stock through payroll withholdings
at a discount to market price.
Stock-based compensation cost for stock options is based on the fair value of
the award at the measurement date (grant date). The compensation amount for
those options is calculated using a Black-Scholes option valuation model. For
restricted stock unit awards, the compensation amount is determined based upon
the market price of our common stock on the grant date. Stock-based compensation
for restricted stock units, other than performance-based units described below,
is recognized as an expense over the applicable vesting term for each employee
receiving restricted stock units.
The recognition as expense of the fair value of performance-related stock-based
awards is determined based upon management's estimate of the probability and
timing for achieving the associated performance criteria, utilizing the fair
value of the common stock on the grant date. Stock-based compensation for
performance-related awards is recognized over the estimated performance period,
which may vary from period to period based upon management's estimates of the
timing to achieve the related performance goals. These awards vest once the
performance criteria are met.
The following table summarizes the distribution of stock-based compensation
expense by function for the three months ended March 31, 2012 and 2011:
Three Months Ended
March 31, March 31,
2012 2011
(in thousands)
Cost of revenue $ 2,255 $ 2,293
Research and development 6,763 5,982
Selling, general and administrative 10,309 10,614
Total stock-based compensation expense, before
income taxes 19,327 18,889
Tax benefit (2,790 ) (2,644 )
Total stock-based compensation expense, net of
income taxes $ 16,537 $ 16,245
In May 2011, we adopted the 2011 Long-Term Performance Based Incentive Plan (the
"2011 Plan"), which provides for the grant of restricted stock units to eligible
employees; vesting of these restricted stock units is subject to the
satisfaction of specified performance metrics tied to relative revenue growth
rankings and operating margin over the designated performance periods. The
performance periods for the 2011 Plan run from January 1, 2011 through December
31, 2013, consisting of three one year performance periods (calendar years 2011,
2012 and 2013) and a three year cumulative performance period. We issued 0.2
million performance-based restricted stock units in the three months ended March
31, 2012. We recorded total stock-based compensation expense related to
performance-based restricted stock units of $4.3 million under the 2011 Plan in
the three months ended March 31, 2012.
The 2011 Plan performance metrics include revenue growth rankings for us
relative to a semiconductor peer group or a microcontroller peer group, as
determined by the Compensation Committee. In addition, in order for a
participant to receive credit for a performance period, we must achieve a
minimum operating margin during such performance period, measured on a pro forma
basis, subject to adjustment by the Compensation Committee. We evaluate, on a
quarterly basis, the likelihood of meeting our performance metrics in
determining stock-based compensation expense for performance share plans.
We recorded total stock based compensation expense related to performance based
restricted stock units of $6.5 million under the 2008 Plan in the three months
ended March 31, 2011.
Until restricted stock units are vested, they do not have the voting rights of
common stock and the shares underlying the awards are not considered issued and
outstanding.
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Acquisition-Related Charges
We recorded total acquisition-related charges of $2.0 million for the three
months ended March 31, 2012, related to our acquisitions of Advanced Digital
Design and Quantum Research Group Ltd.
We recorded amortization of intangible assets of $1.4 million and $1.1 million
in the three months ended March 31, 2012 and 2011, respectively, associated with
customer relationships, developed technology, trade name, non-compete agreements
and backlog. We estimate amortization of intangible assets will be approximately
$5.5 million for 2012.
Restructuring Charges
The following table summarizes the activity related to the accrual for
restructuring charges detailed by event for the three months ended March 31,
2012 and 2011:
January 1, March 31,
2012 Foreign Exchange 2012
Accrual Charges Payments Gain Accrual
(in thousands)
Third quarter of 2008
Employee termination costs $ 301 $ - $ - $ - $ 301
Second quarter of 2010
Employee termination costs 1,846 - (741 ) (226 ) 879
Total 2012 activity $ 2,147 $ - $ (741 ) $ (226 ) $ 1,180
January 1, Currency March 31,
2011 Translation 2011
Accrual Charges Payments Adjustment Accrual
(in thousands)
Third quarter of 2002
Termination of contract
with supplier $ 1,592 $ - $ - $ - $ 1,592
Second quarter of 2008
Employee termination costs 3 - - - 3
Third quarter of 2008
Employee termination costs 460 - - 16 476
First quarter of 2009
Other restructuring
charges 136 - (45 ) - 91
Second quarter of 2010
Employee termination costs 1,286 21,210 (1,972 ) 735 21,259
Total 2011 activity $ 3,477 $ 21,210 $ (2,017 ) $ 751 $ 23,421
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2011 Restructuring Charges
For the three months ended March 31, 2011, we implemented cost reduction
activities, primarily targeting research and development labor costs. We
incurred restructuring charges of $21 million related to severance costs
resulting from involuntary termination of employees at our subsidiary located in
Rousset, France. Employee severance costs were recorded in accordance with the
accounting standard related to costs associated with exit or disposal
activities. We paid $0.7 million related to employee termination costs for the
three months ended March 31, 2012.
Credit from Reserved Grant Income
In March 2012, a ministerial decision of the Greek government was executed
related to outstanding state grants previously made to a Greek subsidiary of the
Company. As a result, the Company recognized a benefit of $10.7 million in its
results for the three month period ended March 31, 2012 resulting from the
reversal of a reserve previously established for that grant.
Gain on Sale of Assets
DREAM
On February 15, 2011, we sold our DREAM business, including our French
subsidiary, Digital Research in Electronics, Acoustics and Music SAS (DREAM),
which sold custom designed ASIC chips for karaoke and other entertainment
machines, for $2.3 million. We recorded a gain of $1.9 million, which is
reflected in gain on sale of assets in the condensed consolidated statements of
operations.
Interest and Other (Expense) Income, Net
Three Months Ended
March 31, March 31,
2012 2011
(in thousands)
Interest and other income $ 182 $ 390
Interest expense (1,170 ) (1,701 )Foreign exchange transaction gains 764 3,802
Total
$ (224 ) $ 2,491
Interest and other (expense) income, net, resulted in an expense of $0.2 million
for the three months ended March 31, 2012 compared to the three months ended
March 31, 2011, primarily as a result of a decrease in foreign exchange from our
foreign exchange exposures relating to intercompany balances between our
subsidiaries. We continue to have balance sheet exposures in foreign currencies
subject to exchange rate fluctuations and may incur further gains or losses in
the future.
Included in interest expense for the three months ended March 31, 2012 and 2011
was approximately $0.8 million and $1.3 million, respectively, of interest
expense related to our manufacturing services agreement with LFoundry.
Provision for Income Taxes
We recorded a provision for income taxes of $4.3 million and $9.8 million for
the three months ended March 31, 2012 and 2011, respectively.
We estimate our annual effective tax rate at the end of each quarter. In making
these estimates, we, in consultation with our tax advisors, consider, among
other things, annual pre-tax income, the geographic mix of pre-tax income and
the application and interpretations of tax laws, treaties and judicial
developments and the possible outcomes of audits.
Our effective tax rate for the three months ended March 31, 2012 was lower than
the statutory federal income tax rate of 35%. Our tax provision was lower than
it otherwise would have been due to income recognized in lower tax rate
jurisdictions as a result of a global reorganization of our subsidiary structure
implemented on January 1, 2011 and the
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recognition of certain refundable R&D credits. The effective tax rate for the
three months ended March 31, 2011 was lower than the statutory federal income
tax rate of 35% primarily due to tax rate benefits of certain earnings from our
operations in jurisdictions with lower tax rates than the U.S. These benefits
result primarily from the January 1, 2011 global reorganization of our
subsidiary structure.
We file U.S., state, and foreign income tax returns in jurisdictions with
varying statutes of limitations. The 2001 through 2011 tax years generally
remain subject to examination by federal and most state tax authorities. For
significant foreign jurisdictions, the 2001 through 2011 tax years generally
remain subject to examination by their respective tax authorities.
Currently, we have tax audits in progress in various other foreign
jurisdictions. To the extent the final tax liabilities are different from the
amounts originally accrued, the increases or decreases are recorded as income
tax expense or benefit in the consolidated statements of operations. While we
believe that the resolution of these audits will not have a material adverse
impact on our results of operations, the outcome is subject to uncertainty.
At March 31, 2012 and December 31, 2011, we had $23.9 million and $25.2 million,
respectively of unrecognized tax benefits which, if recognized, would affect the
effective tax rate. Also at March 31, 2012 and December 31, 2011, we had $43.5
million and $42.8 million, respectively, of unrecognized tax benefits, which, if
recognized, would result in adjustments to other tax accounts, primarily
deferred tax assets.
Increases or decreases in unrecognized tax benefits could occur over the next 12
months due to tax law changes relating to unrecognized tax benefits established
in the normal course of business or due to the conclusion of ongoing tax audits
in various jurisdictions around the world. While it is reasonably possible that
some or all of these events may occur within the next 12 months, we are not able
to estimate accurately the range of any potential change in unrecognized tax
benefits that would result from the occurrence of such events. The calculation
of unrecognized tax benefits involves dealing with uncertainties in the
application of complex global tax regulations. We regularly assess our tax
positions in light of legislative, bilateral tax treaty, regulatory and judicial
developments in the countries in which we do business.
Liquidity and Capital Resources
At March 31, 2012, we had $299.1 million of cash, cash equivalents and
short-term investments, compared to $332.5 million at December 31, 2011. Our
current asset to liability ratio, calculated as total current assets divided by
total current liabilities, was 3.44 at March 31, 2012 compared to 3.14 at
December 31, 2011. Working capital, calculated as total current assets less
total current liabilities, decreased to $674.4 million at March 31, 2012,
compared to $708.6 million at December 31, 2011. Cash provided by operating
activities was $60.6 million and $74.1 million for the three months ended March
31, 2012 and 2011, respectively, and capital expenditures totaled $7.4 million
and $30.9 million for the three months ended March 31, 2012 and 2011,
respectively, with the decrease resulting primarily from a reduction in the
purchase of testing equipment in the 2012 fiscal year.
As of March 31, 2012, of the $299.1 million aggregate cash and cash equivalents
and short-term investments held by us, the amount of cash and cash equivalents
held by our foreign subsidiaries was $216.7 million. If the funds held by our
foreign subsidiaries were needed for our operations in the United States, the
repatriation of some of these funds could give rise to tax exposure.
Operating Activities
Net cash provided by operating activities was $60.6 million for the three months
ended March 31, 2012, compared to $74.1 million for the three months ended March
31, 2011. Net cash provided by operating activities for the three months ended
March 31, 2012 was determined primarily by adjusting net income of $20.4 million
for certain non-cash charges for depreciation and amortization of $18.6 million
and stock-based compensation charges of $19.3 million.
Accounts receivable decreased by 4% or $7.9 million to $205.0 million at March
31, 2012, from $212.9 million at December 31, 2011. The average days of accounts
receivable outstanding increased to 52 days for the three months ended March 31,
2012 from 51 days for the three months ended December 31, 2011. The decrease in
receivable balances is related to lower shipments during the quarter.
Inventories decreased to $357.5 million at March 31, 2012 from $377.4 million at
December 31, 2011. Our days of inventory decreased to 158 days for the three
months ended March 31, 2012 from 173 days for the three months ended December
31, 2011. Inventories consist of raw wafers, purchased foundry wafers,
work-in-process and finished units. While
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we expect inventory levels to continue to decline, as builds are adjusted and as
demand recovers, our inventory levels, and related reserves, may require further
adjustments during 2012 to reflect revised demand forecasts or product
lifecycles.
Investing Activities
Net cash used in investing activities was $7.4 million for the three months
ended March 31, 2012, compared to $27.3 million for the three months ended
March 31, 2011. For the three months ended March 31, 2012, we paid $7.4 million
for acquisitions of fixed assets and $1.0 million for intangible assets.
We anticipate expenditures for capital purchases in 2012 to be in the range of
$40 million to $50 million, depending on business levels. We expect to use those
investments principally to maintain existing manufacturing operations, expand
manufacturing capacity for our "XSense" products and provide additional testing
capacity.
Financing Activities
Net cash used in financing activities was $92.9 million and $73.0 million for
the three months ended March 31, 2012 and 2011, respectively. The cash used was
primarily related to stock repurchases of $96.2 million in the three months
ended March 31, 2012, compared to stock repurchases of $85.2 million in the
three months ended March 31, 2011 and tax payments related to shares withheld
for vested restricted stock units of $5.4 million for the three months ended
March 31, 2012, compared to $5.9 million for the three months ended March 31,
2011. During the three months ended March 31, 2012, we repurchased 9.5 million
shares of our common stock in the open market and subsequently retired those
shares under our existing stock repurchase program. As of March 31, 2012, $10.6
million remained available for repurchase under this program. On April 30, 2012,
our Board of Directors authorized an additional $200 million for this program.
Proceeds from the issuance of common stock in respect of stock options and our
employee stock purchase plan totaled $5.4 million and $4.1 million for the three
months ended March 31, 2012 and 2011, respectively.
We believe our existing balances of cash, cash equivalents and short-term
investments, together with anticipated cash flow from operations, available
equipment lease financing, and other short-term and medium-term bank borrowings
that we believe would be available to us, will be sufficient to meet our
liquidity and capital requirements over the next twelve months.
Since a substantial portion of our operations are conducted through our foreign
subsidiaries, our cash flow, ability to service debt, and payments to vendors
are partially dependent upon the liquidity and earnings of our subsidiaries as
well as the distribution of those earnings, or repayment of loans or other
payments of funds by those subsidiaries, to us. Our foreign subsidiaries are
separate and distinct legal entities and may be subject to local legal or tax
requirements, or other restrictions that may limit their ability to transfer
funds to other group entities including the U.S. parent entity, whether by
dividends, distributions, loans or other payments.
During the next twelve months, we expect our operations to continue to generate
positive cash flow. However, a portion of cash balances may be used to make
capital expenditures, repurchase common stock, or make acquisitions. Remaining
debt obligations totaled $4.9 million at March 31, 2012. We paid $0.7 million in
restructuring payments, primarily for employee severance for the three months
ended March 31, 2012. During the remainder of 2012 and in future years, our
ability to make necessary capital investments or strategic acquisitions will
depend on our ability to continue to generate sufficient cash flow from
operations and to obtain adequate financing if necessary. We believe we have
sufficient working capital to fund operations with $299.1 million in cash, cash
equivalents and short-term investments as of March 31, 2012 together with
expected future cash flows from operations.
Off-Balance Sheet Arrangements (Including Guarantees)
See the paragraph under the heading "Guarantees" in Note 6 of Notes to Condensed
Consolidated Financial Statements for a discussion of off-balance sheet
arrangements.
Recent Accounting Pronouncements
See Note 1 of Notes to Condensed Consolidated Financial Statements for
information regarding recent accounting pronouncements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon our Condensed Consolidated Financial Statements, which
we have prepared in accordance with U.S. generally accepted
30
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accounting principles. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. Management bases its estimates on historical experience
and on various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe that the estimates, assumptions and judgments involved in provisions
for revenue, excess and obsolete inventory, sales return reserves and
allowances, stock-based compensation expense, allowances for doubtful accounts
receivable, warranty reserves, estimates for useful lives associated with
long-lived assets, recoverability of goodwill and intangible assets,
restructuring (credits) charges, liabilities for uncertain tax positions,
deferred tax asset valuation allowances and litigation have the greatest
potential impact on our Condensed Consolidated Financial Statements, so we
consider these to be our critical accounting policies. Historically, our
estimates, assumptions and judgments relative to our critical accounting
policies have not differed materially from actual results, although there can be
no assurance that results may, in the future, differ. The critical accounting
estimates associated with these policies are described in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" of our Annual Report on Form 10-K filed with the SEC on February 28,
2012.
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