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IXYS CORP /DE/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
This discussion contains forward-looking statements, which are subject to
certain risks and uncertainties, including, without limitation, those described
elsewhere in this Form 10-Q and, in particular, in Item 1A of Part II hereof.
Actual results may differ materially from the results discussed in the
forward-looking statements. For a discussion of risks that could affect future
results, see "Item 1A. Risk Factors." All forward-looking statements included in
this document are made as of the date hereof, based on the information available
to us as of the date hereof, and we assume no obligation to update any
forward-looking statement, except as may be required by law.
Overview
We are a multi-market integrated semiconductor company. Our three principal
product groups are: power semiconductors; integrated circuits, or ICs; and
systems and radio frequency, or RF, power semiconductors.
Our power semiconductors improve system efficiency and reliability by converting
electricity at relatively high voltage and current levels into the finely
regulated power required by electronic products. We focus on the market for
power semiconductors that are capable of processing greater than 200 watts of
power.
We also design, manufacture and sell integrated circuits for a variety of
applications. Our analog and mixed signal ICs are principally used in
telecommunications applications. Our mixed signal application specific ICs, or
ASICs, address the requirements of the medical imaging equipment and display
markets. Our power management and control ICs are used in conjunction with power
semiconductors. Our microcontrollers provide application specific, embedded
system-on-chip, or SoC, solutions for the industrial and consumer markets.
Our systems include laser diode drivers, high voltage pulse generators and
modulators, and high power subsystems, sometimes known as stacks, that are
principally based on our high power semiconductor devices. Our RF power
semiconductors enable circuitry that amplifies or receives radio frequencies in
wireless and other microwave communication applications, medical imaging
applications and defense and space applications.
Over the past three quarters, our net revenues have declined. Our product
revenues from sales of power semiconductors decreased, while our product
revenues from sales of ICs and systems and RF power semiconductors fluctuated
from quarter to quarter. Geographically, our revenues fell across all major
geographic regions. Over the same period, our sales to the industrial and
commercial market and the telecommunication market declined, while our sales to
the consumer and medical markets varied from quarter to quarter. In addition,
our selling, general and administrative expenses, or SG&A expenses, decreased,
mainly because of reduced sales and personnel expenses. Our research,
development and engineering expenses, or R&D expenses, have remained relatively
flat. In general, our visibility regarding future performance has declined in
the face of the uncertain macroeconomic outlook.
Critical Accounting Policies and Significant Management Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an ongoing basis, management evaluates
the reasonableness of its estimates. Management bases its estimates on
historical experience and on various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily available from other sources. Actual results may differ materially
from these estimates under different assumptions or conditions.
We believe the following critical accounting policies require that we make
significant judgments and estimates in preparing our consolidated financial
statements.
Revenue recognition. We sell to distributors and original equipment
manufacturers. Approximately 57.6% of our net revenues in the nine months ended
December 31, 2012 and 55.8% of our net revenues in the nine months ended
December 31, 2011 were from distributors. We provide some of our distributors
with the following programs: stock rotation and ship and debit. Ship and debit
is a sales incentive program for products previously shipped to distributors. We
recognize revenue from product sales upon shipment provided that we have
received an executed purchase order, the price is fixed and determinable, the
risk of loss has transferred, collection of resulting receivables is reasonably
assured, there are no customer acceptance requirements and there are no
remaining significant obligations. Our shipping terms generally transfer the
risk of loss at the shipping point. Reserves for allowances are also recorded at
the time of shipment. Our management must make estimates of potential future
product returns and so called "ship and debit" transactions related to current
period product revenue. Our management analyzes historical returns and ship and
debit transactions, current economic trends and changes in customer demand and
acceptance of our products when evaluating the adequacy
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of the sales returns and ship and debit allowances. Significant management
judgments and estimates must be made and used in connection with establishing
the allowances in any accounting period. We have visibility into inventory held
by our distributors to aid in our reserve analysis. Different judgments or
estimates would result in material differences in the amount and timing of our
revenue for any period.
Accounts receivable from distributors are recognized and inventory is relieved
when title to inventories transfer, typically upon shipment from our company, at
which point we have a legally enforceable right to collection under normal
payment terms. Under certain circumstances, where our management is not able to
reasonably and reliably estimate the actual returns, revenues and costs relating
to distributor sales are deferred until products are sold by the distributors to
their end customers. Deferred amounts are presented net and included under
accrued expenses and other liabilities.
We state our revenues net of any taxes collected from customers that are
required to be remitted to various government agencies. The amount of taxes
collected from customers and payable to government agencies is included under
accrued expenses and other liabilities. Shipping and handling costs are included
in cost of sales.
Allowance for sales returns. We maintain an allowance for sales returns for
estimated product returns by our customers. We estimate our allowance for sales
returns based on our historical return experience, current economic trends,
changes in customer demand, known returns we have not received and other
assumptions. If we were to make different judgments or utilize different
estimates, the amount and timing of our revenue could be materially different.
Given that our revenues consist of a high volume of relatively similar products,
to date our actual returns and allowances have not fluctuated significantly from
period to period, and our returns provisions have historically been reasonably
accurate. This allowance is included as part of the accounts receivable
allowance on the balance sheet and as a reduction of revenues in the statement
of operations.
Allowance for stock rotation. We also provide "stock rotation" to select
distributors. The rotation allows distributors to return a percentage of the
previous six months' sales in exchange for orders of an equal or greater amount.
In the nine months ended December 31, 2012 and 2011, approximately $2.2 million
and $1.5 million, respectively, of products were returned to us under the
program. We establish the allowance for all sales to distributors except in
cases where the revenue recognition is deferred and recognized upon sale by the
distributor of products to the end-customer. The allowance, which is
management's best estimate of future returns, is based upon the historical
experience of returns and inventory levels at the distributors. This allowance
is included as part of the accounts receivable allowance on the balance sheet
and as a reduction of revenues in the statement of operations. Should
distributors increase stock rotations beyond our estimates, our statements would
be adversely affected.
Allowance for ship and debit. Ship and debit is a program designed to assist
distributors in meeting competitive prices in the marketplace on sales to their
end customers. Ship and debit requires a request from the distributor for a
pricing adjustment for a specific part for a customer sale to be shipped from
the distributor's stock. We have no obligation to accept this request. However,
it is our historical practice to allow some companies to obtain pricing
adjustments for inventory held. We receive periodic statements regarding our
products held by our distributors. Ship and debit authorizations may cover
current and future distributor activity for a specific part for sale to a
distributor's customer. At the time we record sales to distributors, we provide
an allowance for the estimated future distributor activity related to such sales
since it is probable that such sales to distributors will result in ship and
debit activity. The sales allowance requirement is based on sales during the
period, credits issued to distributors, distributor inventory levels, historical
trends, market conditions, pricing trends we see in our direct sales activity
with original equipment manufacturers and other customers, and input from sales,
marketing and other key management. We believe that the analysis of these inputs
enable us to make reliable estimates of future credits under the ship and debit
program. This analysis requires the exercise of significant judgments. Our
actual results to date have approximated our estimates. At the time the
distributor ships the part from stock, the distributor debits us for the
authorized pricing adjustment. This allowance is included as part of the
accounts receivable allowance on the balance sheet and as a reduction of
revenues in the statement of operations. If competitive pricing were to decrease
sharply and unexpectedly, our estimates might be insufficient, which could
significantly adversely affect our operating results.
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Additions to the ship and debit allowance are estimates of the amount of
expected future ship and debit activity related to sales during the period and
reduce revenues and gross profit in the period. The following table sets forth
the beginning and ending balances of, additions to, and deductions from, our
allowance for ship and debit during the nine months ended December 31, 2012 (in
thousands):
Balance at March 31, 2012 $ 1,101
Additions 1,636
Deductions (1,556 )
Balance at June 30, 2012 1,181
Additions 2,281
Deductions (1,862 )
Balance at September 30, 2012 1,600
Additions 691
Deductions (1,135 )
Balance at December 31, 2012 $ 1,156
Allowance for doubtful accounts. We maintain an allowance for doubtful accounts
for estimated losses from the inability of our customers to make required
payments. We evaluate our allowance for doubtful accounts based on the aging of
our accounts receivable, the financial condition of our customers and their
payment history, our historical write-off experience and other assumptions. If
we were to make different judgments of the financial condition of our customers
or the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. This allowance is reported on the balance sheet as part of the
accounts receivable allowance and is included on the statement of operations as
part of selling, general and administrative expenses. This allowance is based on
historical losses and management's estimates of future losses.
Inventories. Inventories are recorded at the lower of standard cost, which
approximates actual cost on a first-in-first-out basis, or market value. Our
accounting for inventory costing is based on the applicable expenditure
incurred, directly or indirectly, in bringing the inventory to its existing
condition. Such expenditures include acquisition costs, production costs and
other costs incurred to bring the inventory to its use. As it is impractical to
track inventory from the time of purchase to the time of sale for the purpose of
specifically identifying inventory cost, our inventory is, therefore, valued
based on a standard cost, given that the materials purchased are identical and
interchangeable at various production processes. We review our standard costs on
an as-needed basis but in any event at least once a year, and update them as
appropriate to approximate actual costs. The authoritative guidance provided by
FASB requires certain abnormal expenditures to be recognized as expenses in the
current period instead of capitalized in inventory. It also requires that the
amount of fixed production overhead allocated to inventory be based on the
normal capacity of the production facilities.
We typically plan our production and inventory levels based on internal
forecasts of customer demand, which are highly unpredictable and can fluctuate
substantially. The value of our inventories is dependent on our estimate of
future demand as it relates to historical sales. If our projected demand is
overestimated, we may be required to reduce the valuation of our inventories
below cost. We regularly review inventory quantities on hand and record an
estimated provision for excess inventory based primarily on our historical sales
and expectations for future use. We also recognize a reserve based on known
technological obsolescence, when appropriate. Actual demand and market
conditions may be different from those projected by our management. This could
have a material effect on our operating results and financial position. If we
were to make different judgments or utilize different estimates, the amount and
timing of our write-down of inventories could be materially different. For
example, during the fourth quarter of fiscal 2009, we examined our inventory and
as a consequence of the dramatic retrenchment in some of our markets, certain of
our inventory that normally would not be considered excess was considered as
such. Therefore, we booked additional charges of about $14.9 million to
recognize this exposure.
Excess inventory frequently remains saleable. When excess inventory is sold, it
yields a gross profit margin of up to 100%. Sales of excess inventory have the
effect of increasing the gross profit margin beyond that which would otherwise
occur, because of previous write-downs. Once we have written down inventory
below cost, we do not write it up when it is subsequently utilized, sold or
scrapped. We do not physically segregate excess inventory nor do we assign
unique tracking numbers to it in our accounting systems. Consequently, we cannot
isolate the sales prices of excess inventory from the sales prices of non-excess
inventory. Therefore, we are unable to report the amount of gross profit
resulting from the sale of excess inventory or quantify the favorable impact of
such gross profit on our gross profit margin.
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The following table provides information on our excess and obsolete inventory
reserve charged against inventory at cost (in thousands):
Balance at March 31, 2012 $ 28,138
Utilization or sale (592 )
Scrap (1,053 )
Additional accrual 607
Foreign currency translation adjustments (423 )
Balance at June 30, 2012 26,677
Utilization or sale (480 )
Scrap (473 )
Additional accrual 766
Foreign currency translation adjustments 216
Balance at September 30, 2012 26,706
Utilization or sale (519 )
Scrap (478 )
Additional accrual 883
Foreign currency translation adjustments 161
Balance at December 31, 2012 $ 26,753
The practical efficiencies of wafer fabrication require the manufacture of
semiconductor wafers in minimum lot sizes. Often, when manufactured, we do not
know whether or when all the semiconductors resulting from a lot of wafers will
sell. With more than 10,000 different part numbers for semiconductors, excess
inventory resulting from the manufacture of some of those semiconductors will be
continual and ordinary. Because the cost of storage is minimal when compared to
potential value and because our products do not quickly become obsolete, we
expect to hold excess inventory for potential future sale for years.
Consequently, we have no set time line for the utilization, sale or scrapping of
excess inventory.
In addition, our inventory is also being written down to the lower of cost or
market or net realizable value. We review our inventory listing on a quarterly
basis for an indication of losses being sustained for costs that exceed selling
prices less direct costs to sell. When it is evident that our selling price is
lower than current cost, inventory is marked down accordingly. At December 31,
2012, our lower of cost or market reserve was $819,000.
Furthermore, we perform an annual inventory count and periodic cycle counts for
specific parts that have a high turnover. We also periodically identify any
inventory that is no longer usable and write it off.
Income tax. As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating our actual
current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our unaudited condensed consolidated balance sheets. We then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is not likely, we establish a
valuation allowance. A valuation allowance reduces our deferred tax assets to
the amount that management estimates is more likely than not to be realized. In
determining the amount of the valuation allowance, we consider income over
recent years, estimated future taxable income, feasible tax planning strategies
and other factors in each taxing jurisdiction in which we operate. If we
determine that it is more likely than not that we will not realize all or a
portion of our remaining deferred tax assets, then we will increase our
valuation allowance with a charge to income tax expense. Conversely, if we
determine that it is likely that we will ultimately be able to utilize all or a
portion of the deferred tax assets for which a valuation allowance has been
provided, then the related portion of the valuation allowance will reduce income
tax expense. Significant management judgment is required in determining our
provision for income taxes and potential tax exposures, our deferred tax assets
and liabilities and any valuation allowance recorded against our net deferred
tax assets. In the event that actual results differ from these estimates or we
adjust these estimates in future periods, we may need to establish a valuation
allowance, which could materially impact our financial position and results of
operations. Our ability to utilize our deferred tax assets and the need for a
related valuation allowance are monitored on an ongoing basis.
Furthermore, computation of our tax liabilities involves examining uncertainties
in the application of complex tax regulations. We recognize liabilities for
uncertain tax positions based on the two-step process as prescribed by the
authoritative guidance provided by FASB. The first step is to evaluate the tax
position for recognition by determining if there is sufficient available
evidence to indicate if it is more likely than not that the position will be
sustained on audit, including resolution of any related appeals or litigation
processes. The second step requires us to measure and determine the approximate
amount of the tax benefit at the largest amount that is more than 50% likely of
being realized upon ultimate settlement with the tax authorities. It is
inherently difficult and requires significant judgment to estimate such amounts,
as this requires us to determine the probability of various possible outcomes.
We reexamine these uncertain tax positions on a quarterly basis. This
reassessment is based on various factors during the period including, but not
limited
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to, changes in worldwide tax laws and treaties, changes in facts or
circumstances, effectively settled issues under audit and any new audit
activity. A change in recognition or measurement would result in the recognition
of a tax benefit or an additional charge to the tax provision in the period.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected
dates of adoption and estimated effects, if any, on our consolidated condensed
financial statements, see Note 2, "Recent Accounting Pronouncements and
Accounting Changes" in the Notes to Unaudited Condensed Consolidated Financial
Statements of this Form 10-Q.
Results of Operations - Three and Nine Months Ended December 31, 2012 and 2011
The following table sets forth selected consolidated statements of operations
data for the fiscal periods indicated and the percentage change in such data
from period to period. These historical operating results may not be indicative
of the results for any future period.
Three Months Ended December 31, Nine Months Ended December 31,
2012 % change 2011 2012 % change 2011
(000) (000) (000) (000)
Net revenues $ 63,812 (20.3 ) $ 80,041 $ 213,130 (24.1 ) $ 280,823
Cost of goods sold 44,753 (21.3 ) 56,889 146,364 (23.4 ) 191,158
Gross profit $ 19,059 (17.7 ) $ 23,152 $ 66,766 (25.5 ) $ 89,665
Operating expenses:
Research, development and engineering $ 6,532 2.6 $ 6,368 $ 19,933 0.6 $ 19,805
Selling, general and administrative 9,490 (12.3 ) 10,827 30,582 (4.9 ) 32,142
Amortization of acquisition-related
intangible assets 559 (12.7 ) 640 1,683 (10.7 ) 1,885
Total operating expenses $ 16,581 (7.0 ) $ 17,835 $ 52,198 (3.0 ) $ 53,832
The following table sets forth selected statements of operations data as a
percentage of net revenues for the fiscal periods indicated. These historical
operating results may not be indicative of the results for any future period.
% of Net Revenues % of Net Revenues
Three Months Ended December 31, Nine Months Ended December 31,
2012 2011 2012 2011
Net revenues 100.0 100.0 100.0 100.0
Cost of goods sold 70.1 71.1 68.7 68.1
Gross profit 29.9 28.9 31.3 31.9
Operating expenses:
Research, development and engineering 10.2 8.0 9.4 7.1
Selling, general and administrative 14.9 13.5 14.3 11.4
Amortization of acquisition- related
intangible assets 0.9 0.8 0.8 0.6
Total operating expenses 26.0 22.3 24.5 19.1
Operating income 3.9 6.6 6.8 12.8
Other income (expense), net (0.8 ) 0.9 0.1 0.5
Income before income tax 3.1 7.5 6.9 13.3
Provision for income tax (1.2 ) (0.4 ) (2.4 ) (3.8 )
Net income 1.9 7.1 4.5 9.5
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Net Revenues.
The following tables set forth the revenues for each of our product groups for
the fiscal periods indicated:
Revenues (1) Three Months Ended December 31, Nine Months Ended December 31,
2012 % change 2011 2012 % change 2011
(000) (000) (000) (000)
Power semiconductors $ 45,011 (25.1 ) $ 60,101 $ 152,796 (27.7 ) $ 211,296
Integrated circuits 13,401 (1.8 ) 13,653 44,100 (9.5 ) 48,713
Systems and RF power semiconductors 5,400 (14.1 ) 6,287 16,234 (22.0 ) 20,814
Total $ 63,812 (20.3 ) $ 80,041 $ 213,130 (24.1 ) $ 280,823
(1) Includes $316,000 and $1.1 million of intellectual property revenues in
integrated circuits during the quarters ended December 31, 2012 and 2011,
respectively. Includes $1.7 million of intellectual property revenues in
integrated circuits during the nine months ended December 31, 2012. Includes
$2.0 million of intellectual property revenues in power semiconductors and
$2.8 million of intellectual property revenues in integrated circuits during
the nine months ended December 31, 2011.
The following tables set forth the average selling prices, or ASPs, and units
for the fiscal periods indicated:
Average Selling Prices Three Months Ended December 31, Nine Months Ended December 31,
2012 % change 2011 2012 % change 2011
Power semiconductors $ 2.15 1.4 $ 2.12 $ 2.24 6.2 $ 2.11
Integrated circuits $ 0.87 (7.4 ) $ 0.94 $ 0.88 (3.3 ) $ 0.91
Systems and RF power semiconductors $ 42.19 114.1 $ 19.71 $ 31.28 12.6 $ 27.77
Units Three Months Ended December 31, Nine Months Ended December 31,
2012 % change 2011 2012 % change 2011
(000) (000) (000) (000)
Power semiconductors 20,910 (26.1 ) 28,305 68,187 (31.2 ) 99,096
Integrated circuits 14,963 11.7 13,393 48,343 (4.1 ) 50,412
Systems and RF power semiconductors 128 (59.9 ) 319 519 (30.7 ) 749
Total 36,001 (14.3 ) 42,017 117,049 (22.1 ) 150,257
The following tables set forth the net revenue by geographic region for the
fiscal periods indicated:
Three Months Ended December 31, Nine Months Ended December 31,
2012 2011 2012 2011
Net % of Net Net % of Net Net % of Net Net % of Net
Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue
(000) (000) (000) (000)
Europe and Middle East $ 23,055 36.1 $ 30,992 38.7 $ 75,386 35.4 $ 105,457 37.6
Asia Pacific 18,423 28.9 24,452 30.5 63,017 29.6 86,456 30.8
Rest of world 2,903 4.5 2,846 3.6 10,133 4.7 11,892 4.2
International revenues $ 44,381 69.5 $ 58,290 72.8 $ 148,536 69.7 $ 203,805 72.6
USA 19,431 30.5 21,751 27.2 64,594 30.3 77,018 27.4
Total revenues $ 63,812 100.0 $ 80,041 100.0 $ 213,130 100.0 $ 280,823 100.0
The 20.3% decrease in net revenues in the three months ended December 31, 2012
as compared to the three months ended December 31, 2011 reflected a decrease of
$15.1 million, or 25.1%, in the sale of power semiconductors, a decrease of
$887,000, or 14.1%, in the sale of systems and RF power semiconductors and a
decrease of $252,000, or 1.8%, in the sale of ICs. The decrease in power
semiconductors included a $12.4 million decrease in the sale of bipolar
products, primarily from the industrial and commercial market, and a $2.4
million decrease in the sale of MOS products, principally from the medical
market and the industrial and commercial market. The revenues from the sale of
systems and RF power semiconductors declined primarily due to reduced sales of
subassemblies to the industrial and commercial market. The decrease in revenues
from the sale of ICs was primarily caused by a $1.0 million decrease in the sale
of application specific integrated circuits, or ASICs, offset by increased sales
of microcontrollers.
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The 24.1% decrease in net revenues in the nine months ended December 31, 2012 as
compared to the nine months ended December 31, 2011 reflected a decrease of
$58.5 million, or 27.7%, in the sale of power semiconductors, a decrease of $4.6
million, or 9.5%, in the sale of ICs and a decrease of $4.6 million, or 22%, in
the sale of systems and RF power semiconductors. The decrease in power
semiconductors included a $34.0 million decline in the sale of bipolar products,
primarily from the industrial and commercial market, and a $20.7 million
reduction in the sale of MOS products, principally from the medical market and
the industrial and commercial market. The decrease in revenues from the sale of
ICs was primarily caused by reduced sales of microcontrollers. The revenues from
the sale of systems and RF power semiconductors declined primarily due to a $4.2
million decrease in the sale of subassemblies to the industrial and commercial
market.
For the three and nine months ended December 31, 2012 as compared to the
comparable periods of the previous fiscal year, the changes in the ASPs of our
product lines were due to shifts in our product mix, rather than changes in
product prices.
For the three and nine months ended December 31, 2012 as compared to the three
and nine months ended December 31, 2011, the reductions in unit shipments were
broad-based, except for increased unit shipments of ICs in the comparison of the
three months ended December 31, 2012 to the three months ended December 31,
2011, which resulted from unit growth in microcontrollers.
Intellectual property revenues, consisting of sales, licensing fees and
royalties, for the three and nine months ended December 31, 2012 were $316,000
and $1.7 million, respectively, as compared to $1.1 million and $2.8 million for
the three and nine months ended December 31, 2011. Intellectual property sales
and licensing fees, which were nonrecurring in nature, were zero in the three
and nine months ended December 31, 2012 and were zero and $2.0 million in the
three and nine months ended December 31, 2011, respectively.
For the three and nine months ended December 31, 2012 as compared to the three
and nine months ended December 31, 2011, we experienced reduced sales in all
major geographic areas, including the U.S., Europe and the Middle East, and the
Asia Pacific area, and to all of our major market segments.
For the three and nine months ended December 31, 2012, one distributor accounted
for 13.6% and 13.3% of our net revenues, respectively. For the nine months ended
December 31, 2012, another distributor accounted for 10.5% of our net revenues.
For the three and nine months ended December 31, 2011, one distributor accounted
for 11.3% and 12.0% of our net revenues, respectively. For the nine months ended
December 31, 2011, another distributor accounted for 10.5% of our net revenues.
Our net revenues were reduced by allowances for sales returns, stock rotations
and ship and debit. See "Critical Accounting Policies and Significant Management
Estimates" elsewhere in this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Gross Profit.
Gross profit margin increased to 29.9% in the three months ended December 31,
2012 from 28.9% in the three months ended December 31, 2011, mainly because of
improvements in manufacturing efficiency. Gross profit margin fell to 31.3% in
the nine months ended December 31, 2012 from 31.9% in the nine months ended
December 31, 2011. The lower gross profit margin was primarily due to
underutilized capacity. For the three and nine months ended December 31, 2012 as
compared to the comparable periods of the preceding fiscal year, gross profit
decreased by $4.1 million and $22.9 million, respectively. For both periods,
gross profits in absolute dollars declined primarily because of reduced
revenues. For the nine months ended December 31, 2011, the gross profit margin
was positively affected by $2.0 million of nonrecurring intellectual property
revenues, which carry a gross profit margin approaching 100%.
Our gross profit and gross profit margin were positively affected by the sale of
excess inventory, which had previously been written down. See "Critical
Accounting Policies and Significant Management Estimates-Inventories" elsewhere
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Research, Development and Engineering.
R&D expenses typically consist of internal engineering efforts for product
design and development. As a percentage of net revenues, our R&D expenses for
the three and nine months ended December 31, 2012 were 10.2% and 9.4%,
respectively, as compared to 8.0% and 7.1% for the three and nine months ended
December 31, 2011. The increase in the percentages primarily resulted from
reduced net revenues. Expressed in dollars, for the three and nine months ended
December 31, 2012 as compared to the same periods of the prior year, our R&D
expenses remained relatively consistent.
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Selling, General and Administrative.
As a percentage of net revenues, our SG&A expenses for the three and nine months
ended December 31, 2012 were 14.9% and 14.3% as compared to 13.5% and 11.4% for
the three and nine months ended December 31, 2011. The increase in the
percentages primarily resulted from reduced net revenues. Expressed in dollars,
for the three months ended December 31, 2012 as compared to the three months
ended December 31, 2011, our SG&A expenses decreased primarily due to a
reduction in sales commissions related to reduced revenues, a decrease in stock
compensation expense and a decrease in bad debt expense. For the nine months
ended December 31, 2012 as compared to the same period in the prior fiscal year,
the decrease in SG&A expenses was primarily due to lower sales commissions
related to reduced revenues.
Amortization of Acquisition-Related Intangible Assets.
We recorded certain intangible assets during fiscal 2010 in connection with the
acquisitions of Zilog. These assets are amortized based upon their estimated
useful lives up to 72 months. For the three and nine months ended December 31,
2012, we recorded amortization expenses on acquisition-related intangible assets
of $559,000 and $1.7 million, respectively. For the three and nine months ended
December 31, 2011, we recorded amortization expenses on acquisition-related
intangible assets of $640,000 and $1.9 million, respectively.
Other Income (Expense), net.
In the quarter ended December 31, 2012, other expense, net was $392,000 as
compared to other income, net of $862,000 in the quarter ended December 31,
2011. For the three months ended December 31, 2012, other expense, net consisted
principally of $460,000 in losses associated with changes in exchange rates for
foreign currency transactions. For the three months ended December 31, 2011,
other income, net consisted principally of $751,000 in gains associated with
changes in exchange rates for foreign currency transactions.
For the nine months ended December 31, 2012, other income, net was $515,000, as
compared to other income, net of $2.1 million in the nine months ended
December 31, 2011. For the nine months ended December 31, 2012, other income,
net consisted principally of $215,000 in gains associated with changes in
exchange rates for foreign currency transactions. For the nine months ended
December 31, 2011, other income, net consisted principally of gains associated
with changes in exchange rates for foreign currency transactions of $1.7
million.
Provision for Income Tax.
For the three and nine months ended December 31, 2012, we recorded income tax
provisions of $782,000 and $5.1 million, reflecting effective tax rates of 39.7%
and 34.8%, respectively. For the three and nine months ended December 31, 2011,
we recorded income tax provisions of $311,000 and $10.8 million, reflecting
effective tax rates of 5.2% and 28.8%, respectively. For the three and nine
months ended December 31, 2012, the effective tax rates were affected by changes
in estimates of annual income in domestic and foreign jurisdictions. For the
three and nine months ended December 31, 2011, the effective tax rates were
affected by changes in the estimates of annual income in foreign jurisdictions
and by a valuation allowance release.
On January 2, 2013, the President signed into law the American Taxpayer Relief
Act of 2012, or the Taxpayer Relief Act. The Taxpayer Relief Act retroactively
extended the research and development tax credit for a two-year period from
January 1, 2012 through December 31, 2013. The research and development credit
had previously expired, effective December 31, 2011. The effects of changes in
tax laws are recognized in the period the new legislation is enacted. The
reinstatement of an expired provision in a later period, even if retroactive,
requires an entity to wait until the date of enactment before factoring the
effects of the legislation into its financial statements. We do not expect the
enactment of the research and development tax credit to have a material effect
on our condensed consolidated financial statements.
Liquidity and Capital Resources
At December 31, 2012, cash and cash equivalents were $106.6 million as compared
to $98.6 million at March 31, 2012.
Our cash provided by operating activities for the nine months ended December 31,
2012 was $27.3 million, a decrease of $10.8 million as compared to the $38.1
million of cash provided in the comparable period of the prior year. The change
in our operating cash flow was primarily due to reduced revenues, as net income
and adjustments to reconcile net income to net cash fell by $15.3 million,
offset by an increase of $4.5 million in net changes in operating assets and
liabilities.
The changes in operating assets and liabilities for the nine months ended
December 31, 2012 compared to the nine months ended December 31, 2011 were
primarily caused by the following: accounts receivables decreased because of
reduced revenues; inventory and accounts payable decreased due to the reduction
in inventory purchases; and accrued expenses and other liabilities declined
because of reduced income tax accrual.
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Our net cash used in investing activities for the nine months ended December 31,
2012 was $10.2 million, as compared to net cash used in investing activities of
$10.9 million during the nine months ended December 31, 2011. During the nine
months ended December 31, 2012, our uses of cash for investing activities
principally reflected an increase in marketable securities of $4.5 million and
purchases of property and equipment of $6.3 million. During the nine months
ended December 31, 2011, our principal use of cash was to purchase property and
equipment.
For the nine months ended December 31, 2012, net cash used in financing
activities was $9.2 million, as compared to net cash used in financing
activities of $8.0 million in the nine months ended December 31, 2011. During
the nine months ended December 31, 2012, we used $6.5 million for the purchase
of treasury stock, $3.4 million for principal repayment on capital lease and
loan obligations and $928,000 for dividends, offset by proceeds from employee
equity plans of $1.6 million. During the nine months ended December 31, 2011, we
used $7.6 million for the purchase of treasury stock and $3.5 million for
principal repayment on capital lease and loan obligations, offset by proceeds
from employee equity plans of $2.7 million.
At December 31, 2012, capital lease obligations and loans payable totalled $28.3
million. This represented 26.5% of our cash and cash equivalents and 10.9% of
our stockholders' equity.
We are obligated on a €5.2 million, or $6.8 million, loan. The loan has a term
ending in June 2020, and bears a variable interest rate, dependent upon the
current Euribor rate and the ratio of indebtedness to cash flow for the German
subsidiary. Each fiscal quarter a principal payment of €167,000, or about
$221,000, and a payment of accrued interest are required. Financial covenants
for a ratio of indebtedness to cash flow, a ratio of equity to total assets and
a minimum stockholders' equity for the German subsidiary must be satisfied for
the loan to remain in good standing. At December 31, 2012, we complied with all
of these financial covenants. The loan may be prepaid in whole or in part at the
end of a fiscal quarter without penalty. The loan is collateralized by a
security interest in the facility in Lampertheim, Germany, which is owned by our
U.S. parent.
On November 13, 2009, we entered into a credit agreement for a revolving line of
credit with BOW. Under the original terms, we could borrow up to $15.0 million
and all amounts owed under the credit agreement were due and payable on
October 31, 2011. On December 29, 2010, we entered into an amendment with BOW to
increase the line of credit to $20.0 million and to extend the expiration date
to October 31, 2013. Borrowings may be repaid and re-borrowed during the term of
the credit agreement. The obligations are guaranteed by two of our subsidiaries.
At December 31, 2012, the outstanding principal balance under the credit
agreement was $15.0 million. The credit agreement is subject to a set of
financial covenants, including minimum effective tangible net worth, the ratio
of cash, cash equivalents and accounts receivable to current liabilities,
profitability, a ratio of EBITDA to interest expense and a minimum amount of
U.S. domestic cash on hand. At December 31, 2012, we complied with all of these
financial covenants. See Note 8, "Borrowing Arrangements" in the Notes to
Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for
further information regarding the credit agreement. The credit agreement also
includes a $3.0 million letter of credit subfacility. See Note 16, "Commitments
and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial
Statements of this Form 10-Q for further information regarding the terms of the
subfacility.
During the quarter ended December 31, 2012, we paid $928,000 in dividends,
consisting of a quarterly cash dividend of $0.03 per share. The quarterly
dividend is at the discretion of the Board of Directors.
Additionally, we maintain three defined benefit pension plans: one in the United
Kingdom, one in Germany and one in the Philippines. Benefits are based on years
of service and the employees' compensation. We either deposit funds for these
plans, consistent with the requirements of local law, with financial
institutions or accrue for the unfunded portion of the obligations. The United
Kingdom and German plans have been curtailed. As such, the plans are closed to
new entrants and no credit is provided for additional periods of service. The
total pension liability accrued for the three plans at December 31, 2012 was
$14.3 million.
We believe that our cash and cash equivalents, together with cash generated from
operations, will be sufficient to meet our anticipated cash requirements for the
next 12 months. Our liquidity could be negatively affected by a decline in
demand for our products, increases in the cost of materials or labor,
investments in new product development or one or more acquisitions. From time to
time, we use derivative contracts in the normal course of business to manage our
foreign currency exchange and interest rate risks. We did not have any
significant open derivative contracts at December 31, 2012. There can be no
assurance that additional debt or equity financing will be available when
required or, if available, can be secured on terms satisfactory to us.
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