Basis of Presentation (Policies) | 3 Months Ended |
Mar. 31, 2013 |
Consolidation | ' |
Consolidation |
The condensed consolidated financial statements are prepared in accordance with U.S. GAAP and include the consolidated accounts of the Company and its majority owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. |
Use of Estimates | ' |
Use of Estimates |
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting period. Significant estimates made by management include: the fair values of identifiable assets acquired and liabilities assumed in business combinations; the useful lives of property, plant and equipment and intangible assets as well as future cash flows to be generated by those assets; allowances for doubtful accounts; valuation allowances for deferred tax assets; write off of excess and obsolete inventories and the valuations of stock-based compensation, among others. Actual results could differ from these estimates. |
Business Combinations-Acquisition Accounting | ' |
Business Combinations—Acquisition Accounting |
Under the acquisition method of accounting, the Company allocates the purchase price of acquired companies to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The Company records the excess of purchase price over the aggregate fair values of the tangible and identifiable intangible assets as goodwill. The Company determines the fair values of assets acquired and liabilities assumed. To establish fair value, the Company measures the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants. The measurement assumes the highest and best use of the asset by the market participants that would maximize the value of the asset or the group of assets within which the asset would be used at the measurement date, even if the intended use of the asset is different. |
The Company estimates the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expenses. The Company estimates the future cash flows to be derived from such assets, and these estimates are used to determine the fair value of the assets. If any of these estimates change, depreciation or amortization expenses could be changed and/or the value of our intangible assets could be impaired. |
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Acquisition related costs, including real estate transaction taxes, finder’s fees, advisory, legal, accounting, valuation and other professional or consulting fees are accounted for as expenses in the periods in which the costs are incurred or the services are received. |
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Recent Accounting Pronouncements | ' |
Recent accounting pronouncements |
In February 2013, the Financial Accounting Standard Board (“FASB”) issued amendments to the FASB Accounting Standard Codification to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments require new disclosures for items reclassified out of accumulated other comprehensive income (“AOCI”), including (1) changes in AOCI balances by component and (2) significant items reclassified out of AOCI. The guidance does not amend any existing requirements for reporting net income or OCI in the financial statements. As this guidance only requires expanded disclosures, the adoption of this guidance did not have a material effect on the Company’s consolidated financial statements. |
In March 2013, the FASB issued amendments to the FASB Accounting Standard Codification, which indicates that the entire amount of a cumulative translation adjustment related to an entity’s investment in a foreign entity should be released when there has been a (i) sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, (ii) loss of a controlling financial interest in an investment in a foreign entity, or (iii) step acquisition for a foreign entity. The amendments are effective prospectively for fiscal years beginning after December 15, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact to the Company’s consolidated financial statements. |
Cash and Cash Equivalents and Short-term Investments | ' |
The Company may sell its security investments in the future to fund future operation needs. As a result, the Company recorded all its marketable securities in short-term investment as of March 31, 2013 and December 31, 2012, regardless of the contractual maturity date of the securities. |
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Realized gains and losses on the sale of marketable securities during the three months ended March 31, 2013 and 2012 were immaterial. The Company did not recognize any impairment losses on its marketable securities during the three months ended March 31, 2013 and 2012. As of March 31, 2013, the Company did not have any investments in marketable securities that were in an unrealized loss position for a period in excess of 12 months. |
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Earnings Per Share, Policy | ' |
Shares of common stock subject to repurchase resulting from the early exercise of employee stock options are not considered participating securities and are therefore excluded from the basic weighted average common shares outstanding. |
Business Combination Policy | ' |
Assets Acquired and Liabilities Assumed |
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The Company accounted for its acquisition of the OCU assets and assumed liabilities as a business combination. The OCU’s tangible and identifiable intangible assets acquired and liabilities assumed were recorded based upon their estimated fair values as of the closing date of the acquisition. After consideration of the purchase accounting corrections (see Note 2) the estimated fair values of the identifiable assets acquired and liabilities assumed approximated the purchase price; therefore, no goodwill was recorded. A preliminary assessment of the fair value of assets acquired and liabilities assumed (“initial preliminary fair value assessment”) was made as of March 29, 2013. |
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During the quarter ended September 30, 2013 the Company updated its initial preliminary fair value assessment and has reflected the resulting measurement period adjustments as Revisions in the accompanying March 31, 2013 condensed consolidated balance sheet. These adjustments were based on additional information received subsequent to the Company’s initial assessment that had a significant impact on a number of assumptions, including those related to inventory obsolescence, gross margin and working capital. The adjustments include a decrease in the fair value of inventory of $6.7 million and increases in the fair value of property, plant and equipment of $2.8 million and customer relationships of $1.7 million. |
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The following table summarizes the acquisition accounting and the tangible and intangible assets acquired (in thousands): |
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Total purchase consideration: | | | | | | | | |
Cash paid upon closing | | $ | 14,087 | | | | | |
Net receivable from Lapis | | | (959 | ) | | | | |
Notes payable | | | 11,130 | | | | | |
| | $ | 24,258 | | | | | |
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Liabilities assumed: | | | | | | | | |
Pension and retirement obligations | | $ | 6,471 | | | | | |
Other compensation-related liabilities | | | 1,083 | | | | | |
Other current liabilities | | | 1,265 | | | | | |
| | $ | 8,819 | | | | | |
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Fair value of assets acquired: | | | | | | | | |
Inventory | | $ | 13,309 | | | | | |
Other current assets | | | 35 | | | | | |
Land, property, plant and equipment(1) | | | 14,433 | | | | | |
Intangible assets acquired: | | | | | | | | |
Developed technology | | | 2,120 | | | | | |
Customer relationships | | | 3,180 | | | | | |
| | $ | 33,077 | | | | | |
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-1 | Includes land of $3.5 million, buildings of $3.9 million and machinery, equipment, furniture and fixtures of $7.0 million. | | | | | | | |
The approach for measuring the fair value of the assets acquired and liabilities assumed is described below: |
Net Tangible Assets |
The OCU’s tangible assets acquired and liabilities assumed as of March 29, 2013 were recorded at estimated fair value with the exception of the pension and retirement obligations. The Company estimated fair value by adjusting the OCU’s historical value of property, plant and equipment to an estimate of depreciated replacement cost, adjusted for economic obsolescence. The Company depreciates property, plant and equipment over estimated lives of 2 to 10 years, and records the expense to cost of goods sold and operating expense. The fair value of inventory acquired was determined using a net realizable value approach based upon the expected sales value of the inventory, less any costs to complete and selling costs along with a reasonable profit margin based on historical and expected results. The fair value of accrued liabilities approximated the amounts due under the arrangements with employees and vendors due to short maturity. Pensions and retirement obligations are recorded to the extent the projected benefit obligation exceeded the fair value of the plan assets estimated as of March 29, 2013. The projected benefit obligation is measured at the actuarial present value of all benefits attributed by the plan's benefit formula to employee service rendered before March 29, 2013. |
Intangible Assets |
Developed technology represents products that have reached technological feasibility. The OCU’s current product offerings include high speed semiconductor and high speed laser and photodetector devices for communication networks. The fair value of developed technology intangibles acquired was determined by using a royalty-avoidance method. The share of future revenue relating to current technology was forecasted, using an estimate for obsolescence such that the share declines over time. A royalty rate of two percent was used to calculate royalty savings on that revenue that are avoided since the Company owns the technology and does not need to license it from other parties. The after-tax royalty savings was then discounted to present value using the Company’s discount rate. The Company amortizes the developed technology intangible assets over estimated lives of 4 to 5 years, and amortization expense is recorded to cost of goods sold. |
The customer relationships asset represents the value of the ability to sell existing, in-process, and future versions of the technology to the OCU existing customer base. The Company utilized the excess earnings method, estimating future cash flows that will result from existing customers given assumed retention rates, and then discounting those flows to their present value using the Company’s discount rate. The Company amortizes the customer relationships intangible asset over an average estimated life of 6 years, and amortization expense is recorded to operating expenses. |
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The weighted average amortization period for the total amount of intangible assets acquired is 5.4 years. |
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Standard Product Warranty, Policy | ' |
Warranty Accrual |
The Company provides warranties to cover defects in workmanship, materials and manufacturing for a period of one to two years to meet the stated functionality as agreed to in each sales arrangement. Products are tested against specified functionality requirements prior to delivery, but the Company nevertheless from time to time experiences claims under its warranty guarantees. The Company accrues for estimated warranty costs under those guarantees based upon historical experience, and for specific items, at the time their existence is known and the amounts are determinable. |
Share-based Compensation, Option and Incentive Plans Policy | ' |
The Company estimated the fair value of all employee stock options using a Black-Scholes valuation model with the following assumptions: |
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| | Three months ended | |
March 31, |
Stock Options | | 2013 | | | 2012 | |
Weighted-average expected term (years) | | | 6.55 | | | | 6.71 | |
Weighted-average volatility | | | 76 | % | | | 71 | % |
Risk-free interest rate | | | 1.08 | % | | | 1.81 | % |
Expected dividends | | | 0 | % | | | 0 | % |
Expected term. The expected term was estimated using the Company’s historical and expected future exercise behavior. |
Volatility. Due to the limited history of the trading of the Company’s common stock since the initial public offering in February 2011, the expected volatility used by the Company is based on the actual volatility of similar entities. In evaluating similarity, factors such as industry, stage of life cycle, size, and financial leverage are taken into consideration. The term over which volatility was measured was commensurate with the expected term. |
Risk-free interest rate. The risk-free rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. |
Expected dividends. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model. |
The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. |
Stock appreciation units |
Stock appreciation units are remeasured each period at fair value. The following table summarizes the expense (credit) recognized for stock appreciation units for the three months ended March 31, 2013 (in thousands): |
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| | Three months ended | |
March 31, |
| | 2013 | | | 2012 | |
Cost of goods sold | | $ | (24 | ) | | $ | (5 | ) |
Research and development | | | (32 | ) | | | (9 | ) |
Sales and marketing | | | (13 | ) | | | (4 | ) |
General and administrative | | | (9 | ) | | | (3 | ) |
| | $ | (78 | ) | | $ | (21 | ) |
As of March 31, 2013 and December 31, 2012, the liabilities for the settlement of the stock appreciation units were $0.3 million and $0.4 million, respectively and were included in accrued and other current liabilities on the condensed consolidated balance sheet. |
Based on the fair value of the stock appreciation units as of March 31, 2013, the Company had $0.05 million of unrecognized stock-based compensation expense that would be recognized over the remaining weighted-average period of 1.10 years. The Company estimated the fair value of all employee stock appreciation units using a Black-Scholes valuation model with the following assumptions: |
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| | Three months ended | | | | |
March 31, | | | |
Stock appreciation units | | 2013 | | 2012 | | | | |
Weighted-average expected term (years) | | 2.61 | | 3.39 | | | | |
Weighted-average volatility | | 63% | | 69% | | | | |
Risk-free interest rate | | 0.20 - 0.46% | | 0.42 - 1.04% | | | | |
Expected dividends | | 0% | | 0% | | | | |
Expected term. Vested stock appreciation units first become exercisable upon the expiration of the lock-up period associated with the initial public offering. Therefore, the Company estimated the term of the award based on an average of the weighted-average exercise period and the remaining contractual term. |
Volatility. Due to the limited history of the trading of the Company’s common stock since the initial public offering in February 2011, the expected volatility used by the Company is based on the actual volatility of similar entities. In evaluating similarity, factors such as industry, stage of life cycle, size, and financial leverage are taken into consideration. The term over which volatility was measured was commensurate with the expected term. |
Risk-free interest rate. The risk-free rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. |
Expected dividends. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model. |
Employee stock purchase plan (“ESPP”) |
The following tables summarize the components of ESPP expense for the three months ended March 31, 2013 and 2012, respectively (in thousands): |
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| | Three months ended | |
March 31, |
| | 2013 | | | 2012 | |
Cost of goods sold | | $ | 80 | | | $ | 67 | |
Research and development | | | 120 | | | | 176 | |
Sales and marketing | | | 38 | | | | 40 | |
General and administrative | | | 40 | | | | 37 | |
| | $ | 278 | | | $ | 320 | |
As of March 31, 2013 there was $0.4 million of unrecognized stock-based compensation expense for stock purchase rights that will be recognized over the remaining offering period, through November 2013. |
The value of the stock purchase right consists of: (1) the 15% discount on the purchase of the stock, (2) 85% of the call option and (3) 15% of the put option. The call option and put option were valued using the Black-Scholes option pricing model with the following assumptions: |
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| | Three months ended | | | | |
March 31, | | | |
Stock purchase rights | | 2013 | | 2012 | | | | |
Weighted-average expected term (years) | | 0.74 | | 0.72 | | | | |
Weighted-average volatility | | 48% | | 71% | | | | |
Risk-free interest rate | | 0.13 - 0.16% | | 0.04 - 0.11% | | | | |
Expected dividends | | 0% | | 0% | | | | |
Expected term. The expected term represents the period of time from the beginning of the offering period to the purchase date. |
Volatility. Due to the limited history of the trading of the Company’s common stock since the initial public offering in February 2011, the expected volatility used by the Company is based on the actual volatility of similar entities. In evaluating similarity, factors such as industry, stage of life cycle, size, and financial leverage are taken into consideration. The term over which volatility was measured was commensurate with the expected term. |
Risk-free interest rate. The risk-free rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. |
Expected dividends. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model. |