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FORM 10-Q
(Mark One)
/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 30, 2001
OR
/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 0-12695
INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE (State or Other Jurisdiction of Incorporation or Organization) | 94-2669985 (I.R.S. Employer Identification No.) | |
2975 STENDER WAY, SANTA CLARA, CALIFORNIA (Address of Principal Executive Offices) | 95054 (Zip Code) |
Registrant's Telephone Number, Including Area Code:(408) 727-6116
NONE
Former name, former address and former fiscal year (if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of January 25, 2002, was approximately 104,362,600.
PART I FINANCIAL INFORMATION
ITEM1. FINANCIAL STATEMENTS
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
| Three months ended | Nine months ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 30, 2001 | Dec. 31, 2000 | Dec. 30, 2001 | Dec. 31, 2000 | ||||||||||
Revenues | $ | 80,171 | $ | 278,889 | $ | 293,196 | $ | 778,892 | ||||||
Cost of revenues | 53,555 | 107,158 | 185,678 | 311,150 | ||||||||||
Restructuring, asset impairment and other | 18,571 | — | 20,872 | — | ||||||||||
Gross profit | 8,045 | 171,731 | 86,646 | 467,742 | ||||||||||
Operating expenses: | ||||||||||||||
Research and development | 31,542 | 32,922 | 97,184 | 95,678 | ||||||||||
Selling, general and administrative | 20,176 | 31,947 | 65,280 | 96,220 | ||||||||||
Acquired in-process research and development | — | — | 16,000 | — | ||||||||||
Amortization of intangibles | 1,681 | — | 5,043 | — | ||||||||||
Total operating expenses | 53,399 | 64,869 | 183,507 | 191,898 | ||||||||||
Operating income (loss) | (45,354 | ) | 106,862 | (96,861 | ) | 275,844 | ||||||||
Gain (loss) on equity investments, net | 36,160 | (11,938 | ) | 36,160 | 228,932 | |||||||||
Interest expense | (153 | ) | (512 | ) | (1,035 | ) | (2,659 | ) | ||||||
Interest income and other, net | 7,136 | 14,426 | 32,285 | 33,518 | ||||||||||
Income (loss) before income taxes | (2,211 | ) | 108,838 | (29,451 | ) | 535,635 | ||||||||
Provision (benefit) for income taxes | (2,425 | ) | 19,428 | (3,239 | ) | 92,744 | ||||||||
Net income (loss) | $ | 214 | $ | 89,410 | $ | (26,212 | ) | $ | 442,891 | |||||
Basic net income (loss) per share | $ | 0.00 | $ | 0.84 | $ | (0.25 | ) | $ | 4.27 | |||||
Diluted net income (loss) per share | $ | 0.00 | $ | 0.80 | $ | (0.25 | ) | $ | 4.01 | |||||
Weighted average shares: | ||||||||||||||
Basic | 104,111 | 105,977 | 104,630 | 103,628 | ||||||||||
Diluted | 107,680 | 111,581 | 104,630 | 110,434 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS)
| Dec. 30, 2001 | Apr. 1, 2001 | ||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 223,500 | $ | 397,709 | ||||
Marketable securities | 303,727 | 280,620 | ||||||
Accounts receivable, net | 30,224 | 94,362 | ||||||
Inventories, net | 76,880 | 75,614 | ||||||
Deferred tax assets | 81,975 | 81,370 | ||||||
Prepayments and other current assets | 17,515 | 25,542 | ||||||
Total current assets | 733,821 | 955,217 | ||||||
Property, plant and equipment, net | 235,476 | 284,702 | ||||||
Marketable securities | 167,479 | 160,273 | ||||||
Goodwill and other intangibles | 59,748 | — | ||||||
Other assets | 77,716 | 70,209 | ||||||
TOTAL ASSETS | $ | 1,274,240 | $ | 1,470,401 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 21,573 | $ | 45,915 | ||||
Accrued compensation and related expenses | 15,709 | 53,543 | ||||||
Deferred income on shipments to distributors | 38,399 | 91,374 | ||||||
Income taxes payable | 15,720 | 24,122 | ||||||
Other accrued liabilities | 21,525 | 39,532 | ||||||
Total current liabilities | 112,926 | 254,486 | ||||||
Other liabilities | 80,470 | 76,018 | ||||||
Total liabilities | 193,396 | 330,504 | ||||||
Stockholders' equity: | ||||||||
Preferred stock | — | — | ||||||
Common stock and additional paid-in capital | 789,383 | 759,341 | ||||||
Deferred stock compensation | (6,291 | ) | — | |||||
Treasury stock | (131,477 | ) | (73,216 | ) | ||||
Retained earnings | 428,639 | 454,851 | ||||||
Accumulated other comprehensive income | 590 | (1,079 | ) | |||||
Total stockholders' equity | 1,080,844 | 1,139,897 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,274,240 | $ | 1,470,401 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
| Nine Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
| Dec. 30, 2001 | Dec. 31, 2000 | |||||||
OPERATING ACTIVITIES: | |||||||||
Net income (loss) | $ | (26,212 | ) | $ | 442,891 | ||||
Adjustments: | |||||||||
Asset impairment | 17,433 | — | |||||||
Depreciation and amortization | 67,374 | 67,904 | |||||||
Amortization of intangible assets | 7,401 | — | |||||||
Acquired in-process research and development | 16,000 | — | |||||||
Merger-related stock compensation | 3,201 | — | |||||||
Gain on sale of property, plant and equipment | (4,610 | ) | (780 | ) | |||||
Gain on equity investments, net | (36,160 | ) | (228,932 | ) | |||||
Changes in assets and liabilities: | |||||||||
Accounts receivable | 64,138 | (33,203 | ) | ||||||
Inventories | (1,266 | ) | (1,765 | ) | |||||
Prepayments and other assets | 1,099 | (5,310 | ) | ||||||
Accounts payable | (24,342 | ) | 26,402 | ||||||
Accrued compensation and related expenses | (37,834 | ) | 29,977 | ||||||
Deferred income on shipments to distributors | (52,975 | ) | 29,822 | ||||||
Income taxes payable | (8,402 | ) | 85,786 | ||||||
Other accrued liabilities | (8,014 | ) | (230 | ) | |||||
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES | (23,169 | ) | 412,562 | ||||||
INVESTING ACTIVITIES: | |||||||||
Purchases of property, plant and equipment | (40,088 | ) | (93,068 | ) | |||||
Proceeds from sales of property, plant and equipment | 9,030 | 1,387 | |||||||
Acquisition, net of acquired cash | (74,249 | ) | — | ||||||
Purchases of investments | (516,955 | ) | (562,125 | ) | |||||
Proceeds from sales of investments | 525,927 | 291,061 | |||||||
NET CASH USED FOR INVESTING ACTIVITIES | (96,335 | ) | (362,745 | ) | |||||
FINANCING ACTIVITIES: | |||||||||
Issuance of common stock, net | 18,059 | 33,330 | |||||||
Repurchases of common stock | (58,261 | ) | (36,333 | ) | |||||
Payments on capital leases and other debt | (14,503 | ) | (8,779 | ) | |||||
NET CASH USED FOR FINANCING ACTIVITIES | (54,705 | ) | (11,782 | ) | |||||
Net (decrease) increase in cash and cash equivalents | (174,209 | ) | 38,035 | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 397,709 | 372,606 | |||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 223,500 | $ | 410,641 | |||||
Supplemental schedule of non-cash activities: | |||||||||
Conversion of subordinated notes to equity | — | $ | 183,436 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1—Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Integrated Device Technology, Inc. (IDT or the Company) contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information included therein.
These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended April 1, 2001. The results of operations for the three- and nine-month periods ended December 30, 2001 are not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to prior-period balances, none of which affected the Company's financial position or results of operations, to present the financial statements on a consistent basis.
Note 2—Earnings Per Share
Basic and diluted net income per share are computed using weighted-average common shares outstanding in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Diluted net income per share also includes the effect of stock options.
Diluted net income per share for the three-month period ended December 30, 2001 includes incremental shares related to stock options of 3,569 (thousand). Net loss per share for the nine-month period ended December 30, 2001 is based only on weighted-average common shares outstanding; the inclusion of 3,810 (thousand) common stock equivalents would have been antidilutive. The computation of diluted net income per share for the three- and nine-month periods ended December 31, 2000 includes incremental shares related to stock options of 5,604 (thousand) and 6,806 (thousand), respectively.
Total stock options outstanding, including antidilutive options, were 16.4 million and 14.0 million at December 30, 2001 and December 31, 2000, respectively.
Note 3—New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 141, all business combinations initiated after June 30, 2001 must be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually for impairment (or more frequently if indicators of impairment arise). Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, IDT is required to adopt SFAS No. 142 effective April 1, 2002. In connection with the adoption of SFAS No. 142, IDT will be required to perform a transitional goodwill impairment assessment, and the Company is currently evaluating the effect that adoption of the provisions of SFAS No. 142 will have on its results of operations and financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and associated asset retirement costs. SFAS No. 143 is effective for fiscal years
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beginning after June 15, 2002. The Company does not expect adoption to have a material impact on its financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. In addition, SFAS No. 144 amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. Adoption of SFAS No. 144 is required during our fiscal year beginning April 1, 2002. The Company is currently evaluating the potential impact of adoption of SFAS No. 144 on its financial position and results of operations.
Note 4—Restructuring and Asset Impairment
During the third quarter of fiscal 2002, in light of continuing overcapacity and adverse business conditions in the semiconductor industry, the Company performed impairment reviews of its manufacturing facilities. IDT determined that future undiscounted cash flows related to its older wafer fabrication facility located in Salinas, Calif. would not be sufficient to recover the carrying values of the assets in that facility. The Company accordingly wrote down the assets to their fair values on the basis of appraisals and management estimates, resulting in a charge of $17.4 million in the third quarter of fiscal 2002.
The Company also incurred and paid $4.6 million in expenses related to separate, earlier restructuring actions, consisting mainly of reductions in force, in the first and third quarters of fiscal 2002. Expenses in the first quarter of fiscal 2002 were recorded as cost of goods sold ($2.3 million) and operating expenses ($0.2 million). Expenses in the third quarter of fiscal 2002 were recorded as cost of goods sold ($1.2 million) and operating expenses ($0.9 million). Of the $4.6 million accrued in connection with these earlier actions, the Company had paid out $4.5 million in cash as of December 30, 2001.
In January 2002, IDT announced plans to consolidate its wafer fabrication manufacturing operations. Under the plan, production at the Salinas facility will be phased out during the first half of fiscal 2003, and approximately 250 manufacturing and support personnel will be terminated.
The Company expects to accrue certain employee termination benefits and exit costs related to the Salinas facility in the fourth quarter of fiscal 2002.
Note 5—Gain (Loss) on Equity Investments, Net
During the second quarter of fiscal 2001, as a result of the merger between PMC-Sierra, Inc. (PMC) and Quantum Effect Devices, Inc. (QED,) IDT exchanged its QED shares for shares of PMC. The Company recorded a pretax net gain of $240.9 million based on the difference between the $238.06 closing price of PMC on August 24, 2000, the date of the merger, and our prior carrying value for each QED share, which was zero.
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In the third quarter of fiscal 2001, IDT sold 375,000 PMC shares at an average price of $204.00 per share and realized a loss of $11.9 million.
In the fourth quarter of fiscal 2001, IDT recorded a $141.9 million impairment charge for certain equity investments, principally its investment in PMC, that it judged to have experienced an other than temporary decline in value.
In the third quarter of fiscal 2002, IDT sold 370,000 PMC shares at an average price of $26.21 per share and realized a pretax gain of $0.5 million.
In June 2001, Monolithic System Technology (MoSys) completed an initial public offering at $10 per share. IDT's carrying value for the 2.6 million MoSys shares held in its investment portfolio was previously zero. During the third quarter, the Company sold all of its MoSys shares at an average price of $13.70 and realized a pretax gain of $35.7 million.
Note 6—Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
| Three months ended | Nine months ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Dec. 30, 2001 | Dec. 31, 2000 | Dec. 30, 2001 | Dec. 31, 2000 | |||||||||
Net income (loss) | $ | 214 | $ | 89,410 | $ | (26,212 | ) | $ | 442,891 | ||||
Currency translation adjustments | (721 | ) | (292 | ) | (253 | ) | 1,598 | ||||||
Change in unrealized gain on foreign exchange contracts | 45 | — | 38 | — | |||||||||
Net gain (loss) on investments* | (8,715 | ) | (52,555 | ) | 1,884 | (290,410 | ) | ||||||
Comprehensive income (loss) | $ | (9,177 | ) | $ | 36,563 | $ | (24,543 | ) | $ | 154,079 | |||
*Unrealized investment gain (loss) | 23,468 | (52,555 | ) | 34,067 | (85,671 | ) | |||||||
*Reclassification adjustment, net | (32,183 | ) | — | (32,183 | ) | (204,739 | ) |
The components of accumulated other comprehensive income (loss) were as follows:
(in thousands) | Dec. 30, 2001 | Apr. 1, 2001 | |||||
---|---|---|---|---|---|---|---|
Cumulative translation adjustments | $ | (2,524 | ) | $ | (2,271 | ) | |
Unrealized gain on foreign exchange contracts | 38 | — | |||||
Unrealized gain on available-for-sale investments | 3,076 | 1,192 | |||||
$ | 590 | $ | (1,079 | ) | |||
Note 7—Business Combination
On April 18, 2001, the Company acquired Newave Semiconductor Corp. (Newave), a privately held designer and marketer of integrated circuits for the telecommunications market. Newave was based in Santa Clara, Calif., with design operations in Shanghai, China. The acquisition is expected to provide technology expertise that supports IDT's communications IC strategy, and to provide additional
7
telecommunications products to extend the Company's offerings in the telecommunications marketplace.
The Company paid approximately $73.2 million in cash and issued options to purchase approximately 0.47 million shares of IDT stock in exchange for outstanding employee options to acquire Newave stock.
The Newave combination was accounted for as a purchase. Accordingly, the Company's consolidated condensed financial statements include the estimated fair values of assets acquired and liabilities assumed from Newave as of April 18, 2001, the effective date of the purchase, and Newave's results of operations subsequent to April 18, 2001. There were no significant differences between the accounting policies of the Company and Newave.
The total purchase price for Newave was $75.5 million. The components of the purchase price were as follows:
(in thousands) | | |||
---|---|---|---|---|
Cash price | $ | 73,235 | ||
Less: contingent consideration | (2,422 | ) | ||
Fair value of options assumed | 13,214 | |||
Deferred stock compensation | (10,257 | ) | ||
Direct costs of acquisition | 1,685 | |||
Total purchase price | $ | 75,455 | ||
On July 1, 2000, the Company adopted FASB Interpretation No. 44 (FIN No. 44), "Accounting For Certain Transactions Involving Stock Compensation—an Interpretation of APB 25." In accordance with FIN No. 44, the intrinsic value of the options assumed as part of the Newave transaction and not vested as of the closing date were recorded as deferred compensation to be amortized over the respective vesting periods of the options.
The fair value of the options assumed was determined using the Black-Scholes model with a volatility assumption of 83% and a stock price of $33.15, which represents the average IDT stock price for the trading period beginning three days before and ending three days after the signing of the merger. The fair value included deferred stock compensation of $10.26 million which was associated with approximately 0.41 million unvested options assumed as part of the transaction. The value of the unvested options was determined using the closing IDT stock price of $36.88 on April 18, 2001, the date of the acquisition. The deferred compensation is presented as a component of stockholders' equity and is being amortized over the options' remaining vesting periods of one to four years.
Direct costs of acquisition consisted primarily of investment banking, legal and accounting fees.
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The total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed based on independent appraisals and management estimates as follows:
(in thousands) | | |||
---|---|---|---|---|
Fair value of tangible net assets acquired | $ | 2,291 | ||
In-process research and development | 16,000 | |||
Existing technology | 22,000 | |||
Other identified intangibles | 3,150 | |||
Deferred taxes | (9,985 | ) | ||
Excess of purchase price over net assets acquired | 41,999 | |||
Total purchase price | $ | 75,455 | ||
The Company recorded a $16.0 million charge to in-process research and development during the first quarter of fiscal 2002. The amount was determined by identifying research projects which (1) had not yet proven to be technically feasible, (2) were developed to a point where they had future value associated with them and (3) did not have alternative future uses. Estimated future revenues were allocated to in-process and existing technology, and appropriate estimated expenses were deducted and economic rents charged for the use of other assets. Based on this analysis, a present value calculation of estimated after-tax cash flows attributable to the technology was computed.
The amount allocated to existing technology and goodwill is being amortized over estimated useful lives of seven years using the straight-line method. Other identified intangibles are being amortized over estimated useful lives of two to seven years, also using the straight-line method. As a result of adoption of SFAS No. 142 (see Note 3), the Company expects that amortization of certain intangibles, primarily goodwill, will cease on April 1, 2002.
Supplemental pro forma information for the third quarter and first nine months of fiscal 2001, which assumes that Newave had been acquired at the beginning of fiscal 2001, appears below. The pro forma information includes amortization of goodwill and other intangibles from that date.
(in thousands, except per share amounts) | | ||
---|---|---|---|
Three months ended December 31, 2000 | |||
Revenues | $ | 279,539 | |
Net income | 85,245 | ||
Diluted earnings per share | $ | 0.76 | |
Nine months ended December 31, 2000 | |||
Revenues | $ | 781,833 | |
Net income | 431,503 | ||
Diluted earnings per share | $ | 3.89 |
Pro forma information for fiscal 2002 is not presented, because the differences from reported amounts would not be significant.
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Note 8—Inventories, Net
Inventories, net of reserves, consisted of the following:
(in thousands) | Dec. 30, 2001 | Apr. 1, 2001 | ||||
---|---|---|---|---|---|---|
Raw materials | $ | 4,045 | $ | 9,586 | ||
Work-in-process | 60,213 | 45,601 | ||||
Finished goods | 12,622 | 20,427 | ||||
$ | 76,880 | $ | 75,614 | |||
Note 9—Debt
In the first quarter of fiscal 2002, the Company repaid the mortgage payable related to its Salinas, Calif. wafer manufacturing facility. The Company paid approximately $5.7 million, including a 5% prepayment premium, to retire the debt.
Also, during the first quarter of fiscal 2001, the Company called for redemption of its 5.5% Convertible Subordinated Notes (Notes). Substantially all holders elected to convert their Notes into IDT common stock. As a result of the conversion, shares outstanding increased by approximately 6.3 million and stockholders' equity increased by $183.4 million. The Company paid $0.4 million to holders who selected the cash option.
Note 10—Derivative Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective April 2, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized as either assets or liabilities at fair value. Derivatives that are not designated as hedges are adjusted to fair value through earnings. If the derivative is designated as a hedge, depending on the nature of the exposure being hedged, changes in fair value will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the hedge is recognized in earnings immediately. The cumulative transition adjustment upon adoption of SFAS No. 133 was not material to the Company's financial position or results of operations.
As a result of its significant international operations, sales and purchase transactions, the Company is subject to risks associated with fluctuating currency exchange rates. The Company uses derivative financial instruments, principally foreign currency forward contracts, to attempt to minimize the impact of currency exchange rate movements on its operating results and on the cost of capital equipment purchases. The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company's major foreign currency exchange exposures and related hedging programs are described below.
Forecasted transactions. The Company uses foreign currency forward contracts to hedge exposures related to forecasted sales denominated in Japanese yen. These contracts are designated as cash flow hedges when the transactions are forecasted and in general closely match the underlying forecasted transactions in duration. The contracts are carried on the balance sheet at fair value and the effective
10
portion of the contracts' gains and losses is recorded as other comprehensive income until the forecasted transaction occurs. For the third quarter of fiscal 2002, the Company recorded $0.06 million as part of other comprehensive income and expects to reclassify this amount to earnings during the next quarter as the underlying sales transactions occur.
If the underlying forecasted transactions do not occur, or it becomes probable that they will not occur, the gain or loss on the related cash flow hedge is recognized immediately, in other income. During the first nine months of fiscal 2002, the Company did not record any gains or losses related to forecasted transactions that did not occur or became improbable.
The Company measures the effectiveness of hedges of forecasted transactions on at least a quarterly basis by comparing the fair values of the designated foreign currency forward contracts with the fair values of the forecasted transactions. No ineffectiveness was recognized in earnings during the first nine months of fiscal 2002.
Firm commitments. The Company uses foreign currency forward contracts to hedge certain foreign currency purchase commitments, primarily in Japanese yen and the euro. These contracts are designated as fair value hedges, and changes in the fair value of the contracts are offset against changes in the fair value of the commitment being hedged, through earnings. Net gains and losses included in earnings during the quarter and nine months ended December 30, 2001 were not material.
For firm commitment hedges, the Company excludes the time value of foreign currency forward contracts from effectiveness testing, as permitted under SFAS No. 133. For the first nine months of fiscal 2002, the time value of these contracts was recorded as other income and was not significant.
Balance sheet. The Company also utilizes foreign currency forward contracts to hedge currency exchange rate fluctuations related to certain foreign currency assets and liabilities. Gains and losses on these undesignated derivatives offset gains and losses on the assets and liabilities being hedged and the net amount is included in earnings. An immaterial amount of net gains and losses were included in earnings during the quarter and nine months ended December 30, 2001.
Equity investments. The Company's policies allow for the use of derivative financial instruments to hedge the fair values of investments in publicly traded equity securities. As of December 30, 2001, the Company had not entered into this type of hedge.
Note 11—Industry Segments
The Company operates in two segments: (1) Communications and High-Performance Logic and (2) SRAMs and Other. The Communications and High-Performance Logic segment includes FIFOs and multi-ports, communications applications-specific standard products (ASSPs) and high-performance logic and clock management devices. The SRAMs and Other segment consists mainly of high-speed SRAMs.
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The tables below provide information about these segments for the three- and nine-month periods ended December 30, 2001 and December 31, 2000:
Revenues by Segment
(in thousands)
| Three months ended | Nine months ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 30, 2001 | Dec. 31, 2000 | Dec. 30, 2001 | Dec. 31, 2000 | ||||||||
Communications and High-Performance Logic | $ | 65,767 | $ | 189,509 | $ | 239,610 | $ | 536,815 | ||||
SRAMs and Other | 14,404 | 89,380 | 53,586 | 242,077 | ||||||||
Total consolidated revenues | $ | 80,171 | $ | 278,889 | $ | 293,196 | $ | 778,892 | ||||
Profit (loss) by Segment
(in thousands)
| Three months ended | Nine months ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec. 30, 2001 | Dec. 31, 2000 | Dec. 30, 2001 | Dec. 31, 2000 | |||||||||
Communications and High-Performance Logic | $ | (3,616 | ) | $ | 78,050 | $ | 4,047 | $ | 209,560 | ||||
SRAMs and Other | (18,489 | ) | 28,812 | (51,974 | ) | 66,284 | |||||||
Restructuring and asset impairment | (18,571 | ) | — | (20,872 | ) | — | |||||||
Amortization of intangible assets | (2,467 | ) | — | (7,401 | ) | — | |||||||
Acquired in-process R&D | — | — | (16,000 | ) | — | ||||||||
Other operating expenses | (2,211 | ) | — | (4,661 | ) | — | |||||||
Interest income and other | 43,296 | 2,488 | 68,445 | 262,450 | |||||||||
Interest expense | (153 | ) | (512 | ) | (1,035 | ) | (2,659 | ) | |||||
Income (loss) before income taxes | $ | (2,211 | ) | $ | 108,838 | $ | (29,451 | ) | $ | 535,635 | |||
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references are to our fiscal quarters ended December 30, 2001 (Q3 2002), September 30, 2001 (Q2 2002) and December 31, 2000 (Q3 2001), unless otherwise indicated. Quarterly financial results may not be indicative of the financial results of future periods.
This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve a number of risks and uncertainties. These include, but are not limited to: operating results; new product introductions and sales; competitive conditions; capital expenditures and resources; manufacturing capacity utilization; customer demand and inventory levels; protection of intellectual property; and the risk factors set forth in the section "Factors Affecting Future Results." As a result of these risks and uncertainties, actual results could differ from those anticipated in the forward-looking statements. Unless otherwise required by law, we undertake no obligation to publicly revise these statements for future events or new information after the date of this Quarterly Report on Form 10-Q.
Forward-looking statements, which are generally identified by words such as "anticipate," "expect," "plan," and similar terms, include statements related to revenues and gross profit, research and development activities, selling, general, and administrative expenses, interest expense, interest income and other, taxes, capital spending and financing transactions, as well as statements regarding successful development and market acceptance of new products, industry and overall economic conditions and demand, and capacity utilization.
RESULTS OF OPERATIONS
REVENUES
Revenues for Q3 2002 were $80.2 million, a decrease of $16.9 million and $198.7 million compared to Q2 2002 and Q3 2001, respectively. In percentage terms, our revenues for Q3 2002 declined by 17.4% and 71.3% compared to Q2 2002 and Q3 2001, respectively. For the first nine months of fiscal 2002, our revenues decreased by 62.4% compared to the same period in fiscal 2001.
In Q3 2002, revenues for our Communications and High Performance Logic segment, which includes FIFOs and multi-ports, communications applications-specific standard products (ASSPs) and high-performance logic and clock management devices, declined by 14.3% and 65.3% compared to Q2 2002 and Q3 2001, respectively. Revenues in Q3 2002 for our SRAMs and Other segment, which consists mainly of high-speed SRAMs, decreased by 29.2% and 83.9% compared to Q2 2002 and Q3 2001, respectively.
The decreases from Q3 2001 to Q3 2002 are due primarily to lower unit volumes, although lower average selling prices are also a contributing factor. The decreases from Q2 2002 to Q3 2002 relate approximately equally to lower unit volumes and lower average selling prices (particularly for SRAM and certain logic components). Average selling prices for certain SRAM components have declined by over 50% since Q3 2001. While management expects further declines in SRAM component prices to occur, we estimate that the pace of further SRAM price erosion may slow down and return to more normal average historical rates.
The decreased unit demand in Q3 2002 reflects both current lower end-demand in the communications infrastructure equipment markets that our customers serve, and, in response, our customers' efforts to reduce component inventories carried in our distributor, CEM and OEM sales channels. The current weak demand environment for communications equipment is being exacerbated by broadly weaker economic conditions across multiple industries and geographies. Global economic conditions have a direct impact on demand in our customers' markets, which are sensitive to both
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capital and consumer spending trends. We believe that when cyclical global economic conditions and the semiconductor supply and demand balance improve, demand for our products will also improve.
While excess sales channel inventories and weak customer end-market conditions persist, we believe that some stabilization of demand for our products is beginning to occur. However, customers continue to delay placing committed purchase orders for products for as long as possible, and to demand that products be delivered on very short lead times. This behavior results in a backlog of firm, committed orders below normal levels, and makes it difficult to forecast with certainty either the timing or the magnitude of any recovery in demand from current depressed levels.
GROSS PROFIT
Our gross profit for Q3 2002 was $8.0 million, compared to $36.9 million and $171.7 million in Q2 2002 and Q3 2001, respectively. Gross margin for Q3 2002 was 10.0% (33.2% before restructuring and asset impairment charges), compared to 38.0% and 61.6% for Q2 2002 and Q3 2001, respectively.
The declines in gross margin (before restructuring and asset impairment charges) in Q3 2002 are due primarily to lower levels of revenues and the corresponding reduced utilization of our fixed manufacturing infrastructure. In comparison to Q2 2002, gross margin in Q3 2002 was adversely impacted by reduced numbers of units sold, further reductions in carrying value of excess inventories recorded during the period, and by lower average selling prices, particularly for SRAM and certain logic components. These pressures were partially offset by reductions in manufacturing spending, as the cost of revenues declined by over $6 million from Q2 2002 to Q3 2002. Significant cost savings included lower depreciation expenses; lower variable spending on assembly and test operations, related to reduced business volumes; and lower personnel expenses as a result of the headcount reductions we implemented at our wafer fabrication facilities early in Q3 2002.
The $381.1 million decrease in our gross profit for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001 is generally attributable to the same factors as described above: principally the lower levels of revenue and corresponding poorer asset utilization, and lower average selling prices, particularly for SRAM and certain logic products.
RESTRUCTURING AND ASSET IMPAIRMENT
During Q3 2002, in light of continuing overcapacity and adverse business conditions in the semiconductor industry, we performed impairment reviews of our manufacturing facilities. We determined that future undiscounted cash flows related to our older wafer fabrication facility, located in Salinas, Calif., would not be sufficient to recover the carrying values of the assets in that facility. We accordingly wrote down the assets to their fair values on the basis of appraisals and management estimates, resulting in a Q3 2002 charge of $17.4 million. We plan to evaluate our ability to realize the carrying value of these assets at the end of each quarter until the assets are sold or disposed of, and there can be no assurance that further adjustments will not be necessary in future periods.
We also incurred $4.6 million in expenses in connection with separate, earlier restructuring actions related to our worldwide operations in Q1 2002 and Q3 2002. These expenses were primarily related to headcount reductions, as approximately 1,150 positions were eliminated. In Q1 2002, we recorded restructuring expenses as part of cost of goods sold ($2.3 million) and operating expenses ($0.2 million). In Q3 2002, we recorded restructuring expenses as part of cost of goods sold ($1.2 million) and operating expenses ($0.9 million).
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In January 2002, we announced plans to consolidate our wafer fabrication operations into our Hillsboro, Ore. facility. The planned action, which reflects the continued evolution of our manufacturing efforts toward the higher process technologies required for next-generation products, was accelerated by weak business conditions in the semiconductor industry. Under the plan, production at our Salinas facility will be phased out during the first half of fiscal 2003, and our workforce will be reduced by approximately 250 personnel.
We expect to finalize a detailed exit plan for the Salinas manufacturing facility and to accrue certain restructuring costs, primarily employee termination benefits, in Q4 2002. Our current estimate of these costs is $3.5-4.5 million.
In addition, we expect to incur certain other costs over the next several quarters, such as retention incentives during the Salinas phase-out period, and costs to transfer certain products to be manufactured in the Hillsboro facility. These additional costs, which we currently project to be in the $9-11 million range, will be expensed as incurred and recorded as operating costs and expenses.
Upon completion of the Salinas actions, we expect cost savings of $6-8 million per quarter, based on preliminary estimates.
RESEARCH AND DEVELOPMENT EXPENSES
For Q3 2002, our research and development (R&D) expenses decreased by $1.0 million and $1.4 million compared to Q2 2002 and Q3 2001.
The decrease from Q2 2002 was driven by declines in product tooling, reduced equipment expenses, and lower allocations of manufacturing costs to R&D activities. The $1.4 million decrease from Q3 2001 to Q3 2002 relates primarily to lower performance-related personnel expenses and reduced product tooling costs, partially offset by Newave-related stock-based compensation, which did not exist in fiscal 2001, and by higher allocations of manufacturing costs to R&D activities.
Our R&D expenses for the first nine months of fiscal 2002 increased by $1.5 million compared to the first nine months of fiscal 2001. A total of $3.4 million was charged to R&D for Newave stock-based compensation during the first nine months of fiscal 2002. This increase was partially offset by lower performance-related personnel expenses and reduced product tooling expenditures.
We expect R&D spending to increase slightly in Q4 2002 compared with Q3 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For Q3 2002, our selling, general and administrative (SG&A) expenses decreased by $1.0 million and $11.8 million compared to Q2 2002 and Q3 2001, respectively. The decrease from Q2 2002 relates primarily to lower personnel-related costs and continued tight control over discretionary spending. The $11.8 million decrease from Q3 2001 reflects significant reductions in revenue-related commissions and bonuses and profit-dependent personnel expenses. We also reduced other discretionary operating expenses such as recruiting, advertising, travel and other outside services, in response to the weak business environment.
For the first nine months of fiscal 2002, SG&A expenses decreased by $30.9 million compared to the same period in fiscal 2001, due mainly to overall cost controls in the current year and the other factors described above.
We expect SG&A spending to increase slightly in Q4 2002 compared with Q3 2002.
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ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with our acquisition of Newave (see Note 7 to the Condensed Consolidated Financial Statements), we recorded a $16.0 million charge for acquired in-process research and development (IPR&D) in Q1 2002. The $16.0 million allocation of the purchase price to IPR&D was determined by identifying technologies that (1) had not been proved to be technologically feasible, (2) had been developed to a point where future value could be associated with them and (3) did not have future alternative uses. Estimated future revenues were allocated to in-process and existing technology, and appropriate estimated expenses were deducted and economic rents charged for the use of other assets. Based on this analysis, a present value calculation of estimated after-tax cash flows attributable to the technology was computed.
AMORTIZATION OF INTANGIBLES
Residual goodwill related to the Newave transaction is being amortized over an estimated useful life of seven years using the straight-line method. Other identified intangibles are being amortized over estimated useful lives of two to seven years, also using the straight-line method.
We recorded $2.5 million in quarterly amortization in Q3 2002, including $0.8 million of acquired existing technology which is being amortized to cost of goods sold, and we expect to amortize the same amount in Q4 2002.
The Financial Accounting Standards Board has issued new standards pertaining to business combinations and goodwill and intangibles which are effective for IDT at the beginning of Q1 2003 (see Note 3 to the Condensed Consolidated Financial Statements). We are continuing to evaluate the impact of these standards, but we estimate that had they been in effect during the first nine months of fiscal 2002, our pretax loss would have been reduced by $6.9 million.
INTEREST EXPENSE
Interest expense in Q3 2002 was essentially unchanged from Q2 2002. The slight decrease in interest expense for Q3 2002 compared to Q3 2001 is primarily attributable to the payoff of a mortgage and certain leases. For the first nine months of fiscal 2002, interest expense decreased by $1.6 million in comparison to the same period in fiscal 2001. The decrease is due mainly to the payoff of a mortgage and certain leases and, to a lesser extent, the conversion of substantially all of our 5.5% Convertible Subordinated Notes to common stock (see Note 9 to the Condensed Consolidated Financial Statements). Our remaining interest-bearing liabilities consist mainly of secured equipment financing agreements, which amortize over the terms of the agreements.
INTEREST INCOME AND OTHER, NET
For Q3 2002, interest income and other, net, decreased by $6.3 million and $7.3 million compared to Q2 2002 and Q3 2001, respectively.
(in thousands) | Q3 2002 | Q2 2002 | Q3 2001 | ||||||
---|---|---|---|---|---|---|---|---|---|
Interest income | $ | 7,216 | $ | 8,967 | $ | 13,974 | |||
Other income (loss), net | (80 | ) | 4,453 | 452 | |||||
Total | $ | 7,136 | $ | 13,420 | $ | 14,426 | |||
Interest income declined by $1.8 million in Q3 2002 compared to Q2 2002, mainly due to lower average interest rates. Interest income declined by $6.8 million in Q3 2002 compared to Q3 2001, also due mainly to lower average interest rates.
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Other income, net, for Q2 2002 includes a gain of $5.1 million related to our exercise of an option to purchase land adjacent to our wafer manufacturing facility in Hillsboro, Ore. Immediately following the option exercise, we sold most of the underlying property and recognized a pretax gain of $5.1 million.
The decrease in interest income and other, net for the first nine months of fiscal 2002 compared to the same period in fiscal 2001 is primarily attributable to the same factors as described above.
(in thousands) | 9 months fiscal 2002 | 9 months fiscal 2001 | ||||
---|---|---|---|---|---|---|
Interest income | $ | 27,636 | $ | 31,419 | ||
Other income, net | 4,649 | 2,099 | ||||
Total | $ | 32,285 | $ | 33,518 | ||
We expect interest income to decline further in Q4 2002, as existing investments mature and proceeds are reinvested in a lower interest-rate environment.
GAIN (LOSS) ON EQUITY INVESTMENTS, NET
During Q2 2001, as a result of the merger between PMC-Sierra, Inc. (PMC) and Quantum Effect Devices, Inc. (QED,) we exchanged our QED shares for shares of PMC. As required by applicable accounting standards, we recorded a pretax net gain of $240.9 million based on the difference between the $238.06 closing price of PMC on August 24, 2000, the date of the merger, and our prior carrying value for each QED share, which was zero.
In Q3 2001, we sold a portion of our PMC shares and realized a pretax loss of $11.9 million.
In Q4 2001, we recorded a $141.9 million impairment charge for certain equity investments, principally our investment in PMC, that we judged to have experienced an other than temporary decline in value.
In Q3 2002, we sold additional PMC shares and realized a pretax gain of $0.5 million. As of December 30, 2001, we continued to hold approximately 338,000 PMC shares in our portfolio of available-for-sale marketable securities.
During Q3 2002, we sold all of our shares of Monolithic System Technology (MoSys) and realized a pretax gain of $35.7 million.
TAXES
Our effective tax rate for the first nine months of fiscal 2002 was 11%, compared to 17.3% for the first nine months of fiscal 2001. The change in rate is mainly the result of the lack of profitability in fiscal 2002 and nondeductible merger-related items.
The tax benefit for Q3 2002 includes an interim-period adjustment to reflect the expected full-year rate of 11%, which is based on revised estimates. Our estimates are based on existing tax laws and our projections of income and distributions of income among different entities and tax jurisdictions, and are subject to change, based primarily on varying levels of profitability.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents and short- and long-term investments, excluding IDT's equity investments in PMC and MoSys, increased from $676.6 million at the end of Q2 2002 to $687.0 million at the end of Q3 2002.
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We used $23.2 million in cash for operating activities during the first nine months of fiscal 2002; operating activities provided $412.6 million during the comparable period in fiscal 2001. In addition to lower net income in fiscal 2002, major factors in the year-to-year change in cash flows related to operating activities included the following:
- •
- decreased accounts payable and deferred income on shipments to distributors due to lower levels of business activity in fiscal 2002;
- •
- decreased accrued compensation due to payouts of profit dependent personnel expenses accrued in fiscal 2001 and paid in fiscal 2002; and
- •
- decreased income taxes payable, primarily reflecting lower profitability in fiscal 2002.
The above factors were partially offset by the effects of lower accounts receivable balances due to collections and lower sales.
During the first nine months of fiscal 2002, we used $96.3 million in net cash for investing activities, including $74.2 million related to the Newave cash acquisition. Purchases of short- and long-term investments were largely offset by sales of maturing investments. We have curtailed capital spending, and purchases of property, plant and equipment were only $40.1 million in the first nine months of fiscal 2002, compared to $93.1 million during the same period of fiscal 2001.
We used $54.7 million in net cash for financing activities during the first nine months of fiscal 2002. Primary uses of cash during the nine-month period included $58.3 million for repurchases of our common stock.
We anticipate capital expenditures of approximately $10-15 million during Q4 2002. We currently expect capital expenditures to remain at or near the fiscal 2002 level in fiscal 2003, or $50-55 million, depending on business conditions. We plan to finance these expenditures primarily through cash generated by operations and existing cash and investments balances.
We believe that existing cash and cash equivalents, together with cash flows from operations, will be sufficient to meet our working capital and capital expenditure needs through fiscal 2003 and 2004. We may also investigate other financing alternatives; however, we cannot be certain that additional financing will be available on satisfactory terms.
FACTORS AFFECTING FUTURE RESULTS
Our operating results can fluctuate dramatically. For example, we had net income of $415.2 million and $130.6 million for fiscal 2001 and 2000, respectively, compared to a net loss of $298.9 million for fiscal 1999. For the first nine months of fiscal 2002, we had a net loss of $26.2 million. Fluctuations in operating results can result from a wide variety of factors, including:
- •
- timing of new product and process technology announcements and introductions from us or our competitors;
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- competitive pricing pressures, particularly in the SRAM market;
- •
- fluctuations in manufacturing yields;
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- changes in the mix of products sold;
- •
- availability and costs of raw materials, and of foundry and other manufacturing services;
- •
- the cyclical nature of the semiconductor industry and industry-wide wafer processing capacity;
- •
- political and economic conditions in various geographic areas;
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- changes in demand for our products in the markets we serve; and
- •
- costs associated with other events, such as underutilization or expansion of production capacity, intellectual property disputes, or other litigation.
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In addition, many of these factors also impact the recoverability of the cost of manufacturing, tax, goodwill and other intangibles and other assets. As business conditions change, future writedowns or abandonment of these assets may occur. Further, we may be unable to compete successfully in the future against existing or potential competitors, and our operating results could be harmed by increased competition. Our operating results are also impacted by changes in overall economic conditions, both domestically and abroad. Should economic conditions deteriorate, domestically or overseas, our sales and business results could be harmed.
The cyclicality of the semiconductor industry exacerbates the volatility of our operating results. The semiconductor industry is highly cyclical. Market conditions characterized by excess supply relative to demand and resultant pricing declines have occurred in the past and may occur in the future. Such pricing declines adversely affect our operating results and force us and our competitors to modify capacity expansion programs. As an example, in prior years, a significant increase in manufacturing capacity allocated to industry standard SRAM components caused significant downward trends in pricing, which adversely affected our gross margins and operating results. We are unable to accurately estimate the amount of worldwide production capacity dedicated to or planned for the industry-standard products, such as SRAM, that we produce. Our operating results can be adversely affected by such factors in the semiconductor industry as: a material increase in industry-wide production capacity; a shift in industry capacity toward products competitive with our products; and reduced demand or other factors that may result in material declines in product pricing.
Although we are continuing to try to reduce our dependence on revenue derived from the sale of industry-standard products, and while we carefully manage costs, these efforts may not be sufficient to offset the adverse effect the above or other industry related factors can have on our results.
Demand for our products depends on demand in the communications, and to a lesser extent, computer markets. The majority of our products are incorporated into customers' systems in enterprise/carrier class network, wireless infrastructure and access network applications. A percentage of our products, including high-performance logic components, serve in customers' computer storage, computer-related, and other applications. Customer applications for our products have historically been characterized by rapid technological change and significant fluctuations in demand. Demand for most of our products, and therefore potential increases in revenue, depends upon growth in the communications market, particularly in the data networking and wireless telecommunications infrastructure markets and, to a lesser extent, the computer-related markets. Any slowdown in these communications or computer-related markets could materially adversely affect our operating results. In addition, when all channels of distribution are considered, one customer in the communications market, Cisco Systems, Inc., represents more than 10% of our total revenues.
Our product manufacturing operations are complex and subject to interruption. From time to time, we have experienced production difficulties, including reduced manufacturing yields or products that do not meet our or our customers' specifications, that have caused delivery delays and quality problems. While production delivery delays have been infrequent and generally short in duration, we could experience manufacturing problems, capacity constraints and/or product delivery delays in the future as a result of, among other things, complexity of manufacturing processes, changes to our process technologies (including die size reduction efforts), and ramping production and installing new equipment at our facilities.
Substantially all of our revenues are derived from products manufactured at facilities which are exposed to the risk of natural disasters. We have wafer fabrication facilities in Hillsboro, Ore. and Salinas, Calif., and assembly and test facilities in the Philippines and Malaysia. We have announced plans to phase out production at the Salinas facility, but a significant portion of our total revenues in fiscal 2003 is expected to be derived from products manufactured in Salinas, which is located near a major earthquake fault. Once the closure of our Salinas facility is completed, we expect that over 90%
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of our revenues will be derived from silicon fabricated at our Hillsboro facility. If we were unable to use our facilities, as a result of a natural disaster or otherwise, our operations would be materially adversely affected until we were able to obtain other production capability. We do not carry earthquake insurance on our California facilities or related to our business operations, as we do not believe that adequate protection is available at economically justifiable rates.
We are dependent upon electric power generated by public utilities where we operate our manufacturing facilities. Utility power interruptions can occur at any time in any location. We have periodically experienced electrical power interruptions in the Philippines and California because utilities in these geographies have failed to provide an adequate power infrastructure. We maintain limited backup generating capability, but the amount of electric power that we can generate on our own is insufficient to fully operate these facilities and prolonged power interruptions at any of our locations could have a significant adverse impact on our business. We do not maintain insurance coverage that would help protect against the impact of power interruptions, because we do not believe that such coverage is available on cost-effective terms.
As part of our plan to phase out manufacturing operations in Salinas, we intend to redesign certain high-volume products and transfer their wafer manufacturing to Hillsboro. If we experience production difficulties, insufficient or inappropriate mix of inventories, quality problems or delivery delays associated with transferring production, our operating results could be adversely affected.
Historically, we have utilized subcontractors for the majority of our incremental assembly requirements, typically at higher costs than at our own Malaysian and Philippines assembly and test operations. We expect to continue utilizing subcontractors to supplement our own production volume capacity. Due to production lead times and potential subcontractor capacity constraints, any failure on our part to adequately forecast the mix of product demand could adversely affect our operating results.
Our results are dependent on the success of new products. New products and process technology associated with the Hillsboro fabrication facility will continue to require significant R&D expenditures.
If we are unable to develop new products in a timely manner, and to sell them at gross margins comparable to or better than our current products, our future results of operations could be adversely impacted.
We are dependent on a limited number of suppliers. Our manufacturing operations depend upon obtaining adequate raw materials on a timely basis. The number of vendors of certain raw materials, such as silicon wafers, ultra-pure metals and certain chemicals and gases, is very limited. In addition, certain packages used by us require long lead times and are available from only a few suppliers. From time to time, vendors have extended lead times or limited supply to us due to capacity constraints. Our results of operations would be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if there were significant increases in the costs of raw materials.
Intellectual property claims could adversely affect our business and operations. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which have resulted in significant and often protracted and expensive litigation. In recent years, there has been a growing trend by companies to resort to litigation to protect their semiconductor technology from unauthorized use by others. We have been involved in patent litigation in the past, which adversely affected our operating results. Although we have obtained patent licenses from certain semiconductor manufacturers, we do not have licenses from a number of semiconductor manufacturers that have broad patent portfolios. Claims alleging infringement of intellectual property rights have been asserted against us and could be asserted against us in the future. These claims could result in our having to discontinue the use of certain processes; cease the manufacture, use and sale of infringing products; incur significant litigation costs and damages; and develop non-infringing technology. We might not be able to obtain such licenses on acceptable terms or to develop non-infringing technology. Further, the
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failure to renew or renegotiate existing licenses on favorable terms, or the inability to obtain a key license, could adversely affect us.
International operations add increased volatility to our operating results. A substantial percentage of our revenues are derived from non-U.S. sales, as summarized below:
Percentage of total revenues | First nine months of fiscal 2002 | Twelve months of fiscal 2001 | Twelve months of fiscal 2000 | ||||
---|---|---|---|---|---|---|---|
North America | 49 | % | 58 | % | 62 | % | |
Asia Pacific | 16 | % | 11 | % | 10 | % | |
Japan | 15 | % | 12 | % | 11 | % | |
Europe | 20 | % | 19 | % | 17 | % | |
Total | 100 | % | 100 | % | 100 | % | |
In addition, our offshore assembly and test facilities in Malaysia and the Philippines incur payroll, facility and other expenses in local currencies. Accordingly, movements in foreign currency exchange rates can impact our cost of goods sold, as well as both pricing and demand for our products. Our offshore manufacturing sites and export sales are also subject to risks associated with foreign operations, including:
- •
- political instability and acts of war or terrorism, which could disrupt our manufacturing activities;
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- currency controls and fluctuations;
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- changes in local economic conditions; and
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- changes in tax laws, import and export controls, tariffs and freight rates.
Contract pricing for raw materials used in the fabrication and assembly processes, as well as for subcontract assembly services, can also be impacted by currency exchange rate fluctuations. We also purchase certain semiconductor manufacturing tools, such as photolithography equipment, from overseas vendors. Such tools are typically quoted at a foreign-currency price, often equivalent to several million U.S. dollars per unit. Although we seek to mitigate currency risks through the use of hedge instruments, currency exchange rate fluctuations can have a substantial impact on our net U.S.-dollar cost for these tools.
Current global economic and political factors, including terrorism, could harm our business. Weak economic conditions, terrorist actions, and the effects of ongoing military actions against terrorists could lead to significant business disruptions. If such disruptions result in cancellations of customer orders, a general decrease in corporate spending on information technology, or direct impacts on IDT's marketing, manufacturing, financial and logistics functions, our results of operations and financial condition could be adversely affected.
We are subject to a variety of environmental and other regulations related to hazardous materials used in our manufacturing processes. Any failure by us to control the use or discharge of hazardous materials under present or future regulations could subject us to substantial liability or cause our manufacturing operations to be suspended.
Our common stock has experienced substantial price volatility. Such volatility may occur in the future, particularly as a result of quarter-to-quarter variations in the actual or anticipated financial results of our company, other semiconductor companies, or customers. Announcements by us or by our competitors regarding new product introductions may also lead to volatility. In addition, our stock price can fluctuate due to price and volume fluctuations in the stock market, especially in the technology
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sector. Stock price volatility may also result from changes in perceptions about the various types of products we manufacture and sell, which employ a variety of semiconductor design technologies and include both proprietary or limited-source products and industry-standard or multiple-source products.
We are exposed to fluctuations in the market price of our investment in PMC-Sierra, Inc. We currently hold approximately 338,000 shares of PMC-Sierra, Inc. (PMC). The PMC stock, which we acquired in connection with PMC's merger with Quantum Effect Devices (QED) (see Note 5 to the Condensed Consolidated Financial Statements), is highly volatile. The amount of income and cash flow that we ultimately realize from this investment in future periods cannot be determined at this time and may vary materially from the current unrealized amount.
We may have difficulty integrating acquired companies. We acquired Newave Semiconductor Corp. (Newave) in April 2001, and we may pursue other acquisitions in the future. Failure to successfully integrate acquired companies into our business could adversely affect our results of operations. Integration risks and issues may include, but are not limited to, personnel retention and assimilation, management distraction, technology development, and unexpected costs and liabilities. In addition, we are required to perform a transitional impairment assessment of Newave-related goodwill upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." (see Note 3 to the Condensed Consolidated Financial Statements).
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of interest rate and foreign currency risks, please refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in our Annual Report on Form 10-K for the year ended April 1, 2001. For information on our derivative instruments and hedging activities, also see Note 10 to the Consolidated Condensed Financial Statements of this Form 10-Q.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- (a)
- The following exhibits are filed herewith:
Exhibit number | Description | |
---|---|---|
10.22 | Employment Contract between IDT and Gregory Lang.*** |
- (b)
- Reports on Form 8-K:
***Confidential treatment has been requested for certain portions of this document pursuant to an application for confidential treatment sent to the Securities and Exchange Commission. Such portions have been redacted and marked with a triple asterisk. The non-redacted version of this document has been sent to the Securities and Exchange Commission.
No reports were filed on Form 8-K during this quarter.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTEGRATED DEVICE TECHNOLOGY, INC. | ||
Date: February 11, 2002 | /s/ JERRY G. TAYLOR Jerry G. Taylor President and Chief Executive Officer (duly authorized officer) | |
Date: February 11, 2002 | /s/ ALAN F. KROCK Alan F. Krock Vice President, Chief Financial Officer (principal accounting officer) |
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INTEGRATED DEVICE TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEGRATED DEVICE TECHNOLOGY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED; IN THOUSANDS)
INTEGRATED DEVICE TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED; IN THOUSANDS)
INTEGRATED DEVICE TECHNOLOGY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIGNATURES