NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Business
.
Integrated Device Technology, Inc. (IDT or the Company) designs, develops, manufactures and markets a broad range of integrated circuits for the advanced communications, computing, consumer and automotive industries.
Basis of Presentation
.
The Company's fiscal year is the 52 or 53 week period ending on the Sunday closest to March 31. In a 52 week year, each fiscal quarter consists of 13 weeks. In a 53 week year, the additional week is usually added to the third quarter, making such quarter consist of 14 weeks. The first quarter of fiscal 2018 and fiscal 2017 were 13 week periods.
Principles of Consolidation
. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Use of Estimates
. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Significant Accounting Policies
.
For a description of significant accounting policies, see Note 1, Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's annual report on Form 10-K for the fiscal year ended April 2, 2017. On April 4, 2017, the Company completed its acquisition of GigPeak, Inc. (GigPeak), a publicly held company mainly operating in the United States, for a purchase price of
$250.1 million
(refer to Note 3 for details). As a result of new revenue sources from the GigPeak business, the Company adopted the following revenue recognition policy in addition to its existing revenue recognition policy prior to the GigPeak acquisition.
Revenue Recognition
The Company recognizes software royalty revenue based on reports received from customers during the quarter, assuming that all other revenue recognition criteria are met. The customers generally report shipment information typically within
45
days following the end of their respective quarters.
Other than the above, there have been no material changes to the Company's significant accounting policies since the filing of the annual report on Form 10-K.
In the opinion of management, these condensed consolidated financial statements, consisting only of normal recurring adjustments, reflect all adjustments which are necessary for the fair statement of the condensed consolidated financial statements for the interim period.
Recent Accounting Pronouncements
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The adoption of ASU No. 2016-15 is required to be applied retrospectively. The Company adopted the new guidance in the first quarter of fiscal 2018. There was no material impact upon adoption.
I
n July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which provides the guidance applying to inventory measured using any other method other than last-in, last-out method. Under this guidance, inventory is measured at the lower of cost and net realizable value. The net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted the new guidance prospectively in the first quarter of fiscal 2018. There was no material impact to the period of adoption.
Accounting Pronouncements Not Yet Effective for Fiscal 2018
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the requirements in GAAP related to accounting in changes to stock compensation awards. The guidance in ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted. The Company does not believe that the adoption of this new accounting guidance will have any material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which clarifies the definition of business. The update provides a more robust framework to use in determining when a set of assets and activities is a business. The new guidance provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new guidance becomes effective in fiscal years beginning after December 15, 2017, though early adoption is permitted. The new guidance should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not believe that the adoption of this new accounting guidance will have any material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to a third party or otherwise recovered through use. The new standard will be effective for the Company starting in the first quarter of fiscal 2019. Upon adoption, companies must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. As of July 2, 2017, the Company has a deferred tax charge of
$4.8 million
recorded in prepayments and other current assets and other assets, which represents the tax expense that was deferred in accordance with current GAAP. At adoption, the Company will recognize the unamortized portion of the deferred tax charge through a cumulative-effect adjustment to accumulated deficit. Additionally, a deferred tax asset will be recognized, through a cumulative-effect adjustment to accumulated deficit, for the unamortized tax basis in the assets, which as of July 2, 2017 would have been
$0.8 million
.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The new guidance will be effective for the Company starting in the first quarter of fiscal 2021. Early adoption is permitted starting in the first quarter of fiscal 2020. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.
In February 2016, the FASB issued an ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create a right-of-use asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. This ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. The Company is currently evaluating the effect this new guidance will have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes the current accounting related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. Most notably, ASU 2016-01 requires that equity investments, with certain exemptions, be measured at fair value with changes in fair value recognized in net income as opposed to other comprehensive income. The guidance further clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance is applied by means of cumulative-effect adjustment to the balance sheet as of the beginning of fiscal year of adoption and is effective for the Company in its first quarter of fiscal 2019. Early adoption is permitted only if certain criteria are met. The Company is currently evaluating the effect this new guidance will have on its consolidated financial statements.
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. The FASB also decided to allow early adoption of the standard, but not before the original effective date of December 15, 2016. In March, April and May 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a gross versus net basis, identifying performance obligations and licensing arrangements, and narrow-scope improvements and practical expedients, respectively. The new standard will be effective for the Company beginning April 2, 2018. The Company has elected to use the modified retrospective method as its transition method in adoption of the new revenue standard. The Company is still finalizing the analysis to quantify the overall potential impact of the new standard, including any impacts from recently issued amendments and the guidance issued by the FASB Transition Resource Group. Since the Company has certain distributors for which revenue is recognized upon shipment, with reserves recorded for the estimated return and pricing adjustment exposures, the Company does not expect the new standard to materially impact the timing of recognition of future revenue from such distributors. The Company has also started its assessment to determine the revenue recognition impact of its recent acquisition of GigPeak.
Note 2. Net Income Per Share
Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive potential common shares outstanding during the period. Potential common shares include employee stock options, restricted stock units and performance-based stock units. For purposes of computing diluted net income per share, weighted average potential common shares do not include potential common shares that are anti-dilutive under the treasury stock method.
The following table sets forth the computation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands, except per share amounts)
|
July 2,
2017
|
|
July 3,
2016
|
Numerator (basic and diluted):
|
|
|
|
Net income
|
$
|
16,714
|
|
|
$
|
20,947
|
|
Denominator:
|
|
|
|
Weighted average common shares outstanding, basic
|
133,302
|
|
|
133,934
|
|
Dilutive effect of employee stock options, restricted stock units and performance stock units
|
3,340
|
|
|
4,175
|
|
Weighted average common shares outstanding, diluted
|
136,642
|
|
|
138,109
|
|
|
|
|
|
Basic net income per share
|
$
|
0.13
|
|
|
$
|
0.16
|
|
Diluted net income per share
|
$
|
0.12
|
|
|
$
|
0.15
|
|
Potential dilutive common shares of
24 thousand
and
0.4 million
pertaining to employee stock options, restricted stock units and performance-based stock units were excluded from the calculation of diluted earnings per share for the three months ended
July 2, 2017
and
July 3, 2016
, respectively, because the effect would have been anti-dilutive.
The denominator for diluted net income per share for the three months ended July 2, 2017 does not include any effect from the
0.875%
Convertible Senior Notes due 2022, or the Convertible Notes. In accordance with ASC 260, Earnings per Share, the Convertible Notes will not impact the denominator for diluted net income per share unless the average price of our common stock, as calculated under the terms of the Convertible Notes, exceeds the conversion price of
$33.45
per share. Likewise, the denominator for diluted net income per share will not include any effect from the warrants unless the average price of our common stock, as calculated under the terms of the warrants, exceeds
$48.66
per share.
The denominator for diluted net income per share for three months ended July 2, 2017 also does not include any effect from the convertible note hedge transaction, or the Note Hedges. In future periods, the denominator for diluted net income per share will exclude any effect of the Note Hedges, as their effect would be anti-dilutive. In the event an actual conversion of any or all of the Convertible Notes occurs, the shares that will be delivered to us under the Note Hedges are designed to neutralize the dilutive effect of the shares that the Company will issue under the Convertible Notes. Refer to Note 16 for further discussion regarding the Convertible Notes.
Note 3. Business Combination
Acquisition of GigPeak, Inc.
On April 4, 2017, the Company completed its purchase all of the outstanding shares of GigPeak, Inc, a publicly held company mainly operating in the United States, for approximately
$250.1 million
(the "Acquisition"). GigPeak was a global supplier of semiconductor integrated circuits and software solutions for high-speed connectivity and high-quality video compression over the network and the cloud. The Company funded the Acquisition from its available cash on hand and net proceeds from borrowings under its credit facility entered into on April 4, 2017 with JP Morgan Chase Bank, N.A. as administrative agent and the various lenders signatory thereto (the "Credit Agreement"). The Credit Agreement provides for a
$200 million
term loan facility (the "Initial Term B Loan"). Refer to Note 17 for details.
Total consideration consisted of the following:
|
|
|
|
|
(in thousands)
|
|
Cash paid to GigPeak shareholders
|
$
|
246,717
|
|
Fair value of partially vested employee equity awards related to pre-combination services
|
3,400
|
|
Total purchase price
|
250,117
|
|
Less: cash acquired
|
(9,001
|
)
|
Total purchase price, net of cash acquired
|
$
|
241,116
|
|
In connection with the Acquisition, the Company assumed unvested restricted stock units ("RSUs") originally granted by GigPeak and converted them into IDT RSUs. IDT included
$3.4 million
, representing the portion of the fair value of the assumed GigPeak unvested equity awards associated with service rendered through the date of the Acquisition, as a component of the total estimated acquisition consideration. As of April 4, 2017, the total unrecognized stock-based compensation expense, net of estimated forfeitures, was also
$3.4 million
, which is expected to be recognized over the remaining weighted average service period of
2.6
years. See Note 7 for details.
The Company allocated the preliminary purchase price to the tangible and intangible assets acquired and liabilities assumed based on their preliminary estimated fair values. The excess purchase price over those fair values was recorded as goodwill. Because the Acquisition was structured as a stock acquisition for income tax purposes, none of the asset step-up or asset recognition required by purchase accounting, including the goodwill described below, is deductible for tax purposes.
The fair value of accounts receivable, other current assets, accounts payable, and other accrued liabilities were generally determined using historical carrying values given the short-term nature of these assets and liabilities. The fair values for acquired inventory, property, plant and equipment and intangible assets were determined with the assistance of a third-party valuation using discounted cash flow analysis, and estimate made by management. The fair values of certain other assets and liabilities were determined internally using historical carrying values and estimates made by management. As additional information becomes available, the Company may revise preliminary purchase price allocation during the remainder of the measurement period (which will not exceed
12
months from the acquisition date). Any such revisions or changes may be material.
The financial results of the GigPeak business have been included in the Company’s Condensed Consolidated Statements of Operations from April 4, 2017, the closing date of the acquisition. The Company's results of operations for the first quarter of fiscal 2018 include
$15.1 million
of net revenues attributable to GigPeak. The Company incurred approximately
$2.2 million
of acquisition related costs for the first quarter of fiscal 2018 which were included in Selling, General and Administrative Expenses in the Condensed Consolidated Statements of Operations. Goodwill is primarily attributable to the assembled workforce of GigPeak, anticipated synergies and economies of scale expected from the operations of the combined company.
The Company's preliminary purchase price allocation is as follows:
|
|
|
|
|
(in thousands)
|
Estimated Fair Value
|
Cash and cash equivalents
|
$
|
9,001
|
|
Accounts receivable, net
|
14,703
|
|
Inventories
|
19,247
|
|
Prepayments and other current assets
|
2,641
|
|
Property, plant and equipment, net
|
2,434
|
|
Goodwill
|
113,192
|
|
Intangible assets, net
|
97,860
|
|
Deferred tax assets
|
6,714
|
|
Other assets
|
1,501
|
|
Accounts payable
|
(5,753
|
)
|
Accrued compensation and related expenses
|
(3,154
|
)
|
Other accrued liabilities
|
(3,512
|
)
|
Other long-term liabilities
|
(4,757
|
)
|
Total purchase price
|
$
|
250,117
|
|
A summary of the preliminary estimated fair value of the intangible assets, net acquired and their estimated useful lives is as follows:
|
|
|
|
|
|
(in thousands)
|
Estimated Fair Value
|
Estimated Useful Life
|
Developed technology
|
$
|
56,000
|
|
5 years
|
Customer contracts and related relationships
|
28,900
|
|
5 years
|
Order backlog
|
200
|
|
1 year
|
Software licenses
|
2,560
|
|
less than a year
|
In-process research and development ("IPR&D")
|
10,200
|
|
|
Total
|
$
|
97,860
|
|
|
Identifiable Tangible Assets and Liabilities:
Assets and liabilities were reviewed and adjusted, if required, to their estimated fair value.
Inventory:
The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less reasonable selling margin.
Property, Plant and Equipment:
The value allocated to plant, property and equipment, which will be used by the Company, represents the estimated price that would be realized upon sale to a market participant.
I
ntangible Assets:
The allocation of the purchase price to tangible and identified intangible assets acquired was based on the Company's best estimate of the fair value of such assets as of the acquisition date. The fair value of acquired tangible and identified intangible assets was determined based on inputs that are unobservable and significant to the overall fair value measurement.
Developed technology consists of GigPeak's products that have reached technological feasibility. The Company valued the developed technology utilizing a multi-period excess earnings (MPEE) method, which uses the discounted future earnings specifically attributed to this intangible asset that is in excess of returns for other assets that contributed to those earnings. The economic useful life was determined based on the technology cycle related to the products and its expected contribution to forecasted revenue. The Company utilized a discount rate of
16%
in estimating the fair value of the developed technology.
Customer relationships represent the fair value of future projected revenue that is expected to be derived from sales of products to existing customers of the acquired company. Customer contracts and related relationships value has been estimated utilizing a with-and-without method, which uses projected cash flows with and without the intangible asset in place. Cash flow differentials are then discounted to present value to arrive at an estimate of fair value for the asset. The economic useful life was determined based on the life of the developed technology, assuming that the existing customers will remain with the Company until the developed technology becomes obsolete. The Company utilized a discount rate of
17%
in estimating the fair value of the customer relationships.
Order backlog represents business under existing contractual obligations as of the acquisition date. The fair value of backlog was determined using the MPEE method under the income approach based on expected operating cash flows from future contractual revenue. The economic useful life was determined based on the expected life of the backlog and the cash flows over the forecast period. The Company utilized a discount rate of
4.6%
in estimating the fair value of the order backlog.
IPR&D represents the fair value of incomplete research and development projects that had not reached technological feasibility as of the date of acquisition. IPR&D consisted of various projects, which are expected to be completed in fiscal 2018. The estimated remaining costs to complete the IPR&D projects were approximately
$7.5 million
as of the acquisition date. The IPR&D projects will either be amortized or impaired depending upon whether the project is completed or abandoned. The fair value of IPR&D was determined using the MPEE method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. A discount rate of
17%
was used to discount the cash flows to the present value. The acquired IPR&D will not be amortized until completion of the related products which is determined by when the underlying projects reach technological feasibility and commence commercial production. Upon completion, each IPR&D project will be amortized over its estimated useful life.
Pro Forma Financial Information (unaudited):
The following unaudited pro forma financial information present combined results of operations for each of the periods presented, as if GigPeak had been acquired as of the beginning of fiscal year 2017. The pro forma financial information primarily includes the business combination effect of the amortization charges from acquired intangible assets, the amortization of the fair value inventory, interest expenses and the acquisition-related expenses. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2017 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(Unaudited in thousands, except per share data)
|
July 2, 2017
|
July 3, 2016
|
Revenues
|
$
|
196,713
|
|
$
|
207,496
|
|
Net income
|
$
|
22,869
|
|
$
|
11,391
|
|
Basic net income per share
|
$
|
0.17
|
|
$
|
0.09
|
|
Diluted net income per share
|
$
|
0.17
|
|
$
|
0.08
|
|
Acquisition of Synkera Technologies, Inc.
On July 22, 2016, IDT purchased substantially all of the assets and liabilities of Synkera Technologies, Inc. (Synkera), a company engaged in developing and marketing metal oxide gas sensor technology, for total purchase consideration of approximately
$2.8 million
, of which
$1.5 million
was paid in cash at closing and
$1.3 million
was recorded as a liability representing the fair value of contingent cash consideration of up to
$1.5 million
. The contingent cash consideration will be paid based upon the achievement of certain milestones to be completed within
3.5
years from the date of acquisition.
Pro forma and historical results of operations for this acquisition have not been presented because the effect of the acquisition was not material to the Company's financial results.
Note 4. Divestitures (not accounted for as discontinued operations)
Fox Enterprises, Inc.
In the first quarter of fiscal 2017, the Company reclassified certain assets and liabilities of its wholly-owned subsidiary Fox Enterprises, Inc. (the "Disposal Group") as held for sale. As a result, the long-lived assets (comprised of goodwill, intangible assets and fixed assets) included in the Disposal Group were fully impaired and the Company recorded total impairment charge of
$0.8 million
during the quarter ended July 3, 2016.
On October 3, 2016, the Company completed the sale of the Disposal Group for approximately
$1.2 million
and recorded a loss on divestiture (included in interest income and other, net in the Condensed Consolidated Statement of Operations) of approximately
$0.7 million
in fiscal 2017.
Note 5. Fair Value Measurements
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of
July 2, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at Reporting Date Using
|
(in thousands)
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Total
|
Cash Equivalents and Short-Term Investments:
|
|
|
|
|
|
US government treasuries and agencies securities
|
$
|
73,475
|
|
|
$
|
—
|
|
|
$
|
73,475
|
|
Money market funds
|
61,920
|
|
|
—
|
|
|
61,920
|
|
Asset-backed securities
|
—
|
|
|
14,516
|
|
|
14,516
|
|
Corporate bonds
|
—
|
|
|
107,609
|
|
|
107,609
|
|
International government bonds
|
—
|
|
|
5,415
|
|
|
5,415
|
|
Bank deposits
|
—
|
|
|
12,646
|
|
|
12,646
|
|
Repurchase agreement
|
—
|
|
|
38
|
|
|
38
|
|
Total assets measured at fair value
|
$
|
135,395
|
|
|
$
|
140,224
|
|
|
$
|
275,619
|
|
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of
April 2, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at Reporting Date Using
|
(in thousands)
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Total
|
Cash Equivalents and Short-Term Investments:
|
|
|
|
|
|
US government treasuries and agencies securities
|
$
|
61,556
|
|
|
$
|
—
|
|
|
$
|
61,556
|
|
Money market funds
|
140,425
|
|
|
—
|
|
|
140,425
|
|
Asset-backed securities
|
—
|
|
|
13,847
|
|
|
13,847
|
|
Corporate bonds
|
—
|
|
|
96,376
|
|
|
96,376
|
|
International government bonds
|
—
|
|
|
5,410
|
|
|
5,410
|
|
Corporate commercial paper
|
—
|
|
|
4,898
|
|
|
4,898
|
|
Bank deposits
|
—
|
|
|
12,305
|
|
|
12,305
|
|
Repurchase agreements
|
—
|
|
|
173
|
|
|
173
|
|
Total assets measured at fair value
|
$
|
201,981
|
|
|
$
|
133,009
|
|
|
$
|
334,990
|
|
The deferred compensation plan assets of
$16.3 million
and
$16.0 million
as of
July 2, 2017
and
April 2, 2017
, are carried on the Condensed Consolidated Balance Sheets at their fair value which were determined on the basis of market prices observable for similar instruments and are considered Level 2 in the fair value hierarchy. See Note 15 for additional information on the Employee Benefit Plans.
The Convertible Notes are carried on the Condensed Consolidated Balance Sheets at their original issuance value including accreted interest, net of unamortized debt discount and issuance cost. The Convertible Notes are not marked to fair value at the end of each reporting period. The fair value of Convertible Notes was
$399.4 million
and
$376.9 million
as of
July 2, 2017
and
April 2, 2017
, which was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. See Note 16 for additional information on the Convertible Notes.
As of July 2, 2017, the fair value of the Initial Term B Loan was
$201.9 million
. The Company classified the Initial Term B Loan as Level 2 fair value measurement hierarchy as the debt is not actively traded and has variable interest structure based upon market rates currently available to the Company for debt with similar terms and maturities. Refer to Note 17 for details.
U.S. government treasuries and U.S. government agency securities as of
July 2, 2017
and
April 2, 2017
do not include any U.S. government guaranteed bank issued paper.
The securities in Level 1 are highly liquid and actively traded in exchange markets or over-the-counter markets. Level 2 fixed income securities are priced using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data. There were no transfers into or out of Level 1 or Level 2 financial assets during the three months ended July 2, 2017.
In connection with the acquisition of Synkera, a liability was recognized for the Company’s estimate of the fair value of contingent consideration on the acquisition date based on probability-based attainment of certain milestones. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement, which reflects the Company’s own assumptions concerning the milestones related to the acquired business in measuring fair value. The fair value of the liability measured using significant unobservable inputs (Level 3) was approximately
$1.3 million
as of both
July 2, 2017
and April 2, 2017.
Cash equivalents are highly liquid investments with original maturities of three months or less at the time of purchase. The Company maintains its cash and cash equivalents with reputable major financial institutions. Deposits with these banks may exceed the FDIC insurance limits or similar limits in foreign jurisdictions. These deposits typically may be redeemed upon demand and, therefore, bear minimal risk. While the Company monitors daily the cash balances in its operating accounts and adjusts the balances as appropriate, these balances could be affected if one or more of the financial institutions with which the Company deposits fails or is subject to other adverse conditions in the financial markets. As of
July 2, 2017
, the Company has not experienced any losses in its operating accounts.
All of the Company’s available-for-sale investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The Company did not record any impairment charges related to its available-for-sale investments in the three months ended July 2, 2017 and July 3, 2016.
Note 6. Investments
Available-for-Sale Securities
The amortized cost and fair value of available-for-sale investments as of
July 2, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated Fair
Value
|
U.S. government treasuries and agencies securities
|
$
|
73,974
|
|
|
$
|
10
|
|
|
$
|
(509
|
)
|
|
$
|
73,475
|
|
Money market funds
|
61,920
|
|
|
—
|
|
|
—
|
|
|
61,920
|
|
Asset-backed securities
|
14,526
|
|
|
9
|
|
|
(19
|
)
|
|
14,516
|
|
Corporate bonds
|
107,764
|
|
|
71
|
|
|
(226
|
)
|
|
107,609
|
|
International government bonds
|
5,424
|
|
|
4
|
|
|
(13
|
)
|
|
5,415
|
|
Bank deposits
|
12,646
|
|
|
—
|
|
|
—
|
|
|
12,646
|
|
Repurchase agreements
|
38
|
|
|
—
|
|
|
—
|
|
|
38
|
|
Total available-for-sale investments
|
276,292
|
|
|
94
|
|
|
(767
|
)
|
|
275,619
|
|
Less amounts classified as cash equivalents
|
(61,958
|
)
|
|
—
|
|
|
—
|
|
|
(61,958
|
)
|
Short-term investments
|
$
|
214,334
|
|
|
$
|
94
|
|
|
$
|
(767
|
)
|
|
$
|
213,661
|
|
The amortized cost and fair value of available-for-sale investments as of
April 2, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated Fair
Value
|
U.S. government treasuries and agencies securities
|
$
|
62,048
|
|
|
$
|
16
|
|
|
$
|
(508
|
)
|
|
$
|
61,556
|
|
Money market funds
|
140,425
|
|
|
—
|
|
|
—
|
|
|
140,425
|
|
Asset-backed securities
|
13,865
|
|
|
5
|
|
|
(23
|
)
|
|
13,847
|
|
Corporate bonds
|
96,660
|
|
|
42
|
|
|
(326
|
)
|
|
96,376
|
|
International government bonds
|
5,423
|
|
|
2
|
|
|
(15
|
)
|
|
5,410
|
|
Corporate commercial paper
|
4,898
|
|
|
—
|
|
|
—
|
|
|
4,898
|
|
Bank deposits
|
12,305
|
|
|
—
|
|
|
—
|
|
|
12,305
|
|
Repurchase agreements
|
173
|
|
|
—
|
|
|
—
|
|
|
173
|
|
Total available-for-sale investments
|
335,797
|
|
|
65
|
|
|
(872
|
)
|
|
334,990
|
|
Less amounts classified as cash equivalents
|
(143,498
|
)
|
|
—
|
|
|
—
|
|
|
(143,498
|
)
|
Short-term investments
|
$
|
192,299
|
|
|
$
|
65
|
|
|
$
|
(872
|
)
|
|
$
|
191,492
|
|
The cost and estimated fair value of available-for-sale securities as of
July 2, 2017
, by contractual maturity, were as follows:
|
|
|
|
|
|
|
|
|
(
in thousands
)
|
Amortized
Cost
|
|
Estimated Fair
Value
|
Due in 1 year or less
|
$
|
106,516
|
|
|
$
|
106,505
|
|
Due in 1-2 years
|
59,650
|
|
|
59,527
|
|
Due in 2-5 years
|
110,126
|
|
|
109,587
|
|
Total investments in available-for-sale securities
|
$
|
276,292
|
|
|
$
|
275,619
|
|
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of
July 2, 2017
, aggregated by investment category and length of time that individual securities have been in a continuous loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
(in thousands)
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
Corporate bonds
|
$
|
58,957
|
|
|
$
|
(226
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,957
|
|
|
$
|
(226
|
)
|
Asset-backed securities
|
8,958
|
|
|
(19
|
)
|
|
—
|
|
|
—
|
|
|
8,958
|
|
|
(19
|
)
|
U.S. government treasuries and agencies securities
|
68,311
|
|
|
(509
|
)
|
|
—
|
|
|
—
|
|
|
68,311
|
|
|
(509
|
)
|
International government bonds
|
2,637
|
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
2,637
|
|
|
(13
|
)
|
Total
|
$
|
138,863
|
|
|
$
|
(767
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
138,863
|
|
|
$
|
(767
|
)
|
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, as of
April 2, 2017
, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
(in thousands)
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
Corporate bonds
|
$
|
71,308
|
|
|
$
|
(326
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71,308
|
|
|
$
|
(326
|
)
|
Asset-backed securities
|
11,294
|
|
|
(23
|
)
|
|
—
|
|
|
—
|
|
|
11,294
|
|
|
(23
|
)
|
U.S. government treasuries and agencies securities
|
55,497
|
|
|
(508
|
)
|
|
—
|
|
|
—
|
|
|
55,497
|
|
|
(508
|
)
|
International government bonds
|
2,634
|
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
2,634
|
|
|
(15
|
)
|
Total
|
$
|
140,733
|
|
|
$
|
(872
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
140,733
|
|
|
$
|
(872
|
)
|
Currently, a significant portion of the Company’s available-for-sale investments that it holds are high grade instruments. As of
July 2, 2017
, the unrealized losses on the Company’s available-for-sale investments represented an insignificant amount in relation to its total available-for-sale portfolio. Substantially all of the Company’s unrealized losses on its available-for-sale marketable debt instruments can be attributed to fair value fluctuations in an unstable credit environment that resulted in a decrease in the market liquidity for debt instruments. Because the Company has the ability to hold these investments until a recovery of fair value, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired as of
July 2, 2017
and
April 2, 2017
.
Non-marketable Equity Securities
As of
July 2, 2017
and
April 2, 2017
, the Company holds capital stock of privately-held companies with total amount of
$14.4 million
and
$13.2 million
, respectively. These investments in stocks (included in Other Assets on the Condensed Consolidated Balance Sheet) are accounted for as cost-method investments, as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of each entity. The Company did not record any impairment charge for these investments during the three months ended July 2, 2017 and July 3, 2016.
Note 7. Stock-Based Employee Compensation
Equity Incentive Programs
The Company currently issues awards under
two
equity-based plans in order to provide additional incentive and retention to directors and employees who are considered to be essential to the long-range success of the Company. These plans are further described below.
2008 GigPeak Equity Incentive Plan (2008 Plan)
On April 4, 2017, as a result of the acquisition of GigPeak, the Company assumed the 2008 Plan, including outstanding and unvested RSUs of GigPeak that converted into the Company's RSUs covering
0.3 million
shares of IDT's common stock and GigPeak shares reserved for future issuance under the 2008 Plan which converted into
0.5 million
shares of IDT's common stock reserved for issuance under the 2008 Plan. As of July 2, 2017, there were
0.4 million
shares available for future grant under the 2008 Plan.
2004 Equity Plan (2004 Plan)
In September 2004, the Company’s stockholders approved the 2004 Plan. On July 21, 2010, the Board of Directors of the Company approved an amendment to the Company’s 2004 Plan to increase the number of shares of common stock reserved for issuance thereunder from
28,500,000
shares to
36,800,000
shares (an increase of
8,300,000
shares), provided, however, that the aggregate number of common shares available for issuance under the 2004 Plan is reduced by
1.74
shares for each common share delivered in settlement of any full value award, which are awards other than stock options and stock appreciation rights, that are granted under the 2004 Plan on or after September 23, 2010. On September 23, 2010, the stockholders of the Company approved the proposed amendment described above, which also includes certain other changes to the 2004 Plan, including an extension of the term of the 2004 Plan. Options granted by the Company under the 2004 Plan generally expire
seven
years from the date of grant and generally vest over a
four
-year period from the date of grant, with one-quarter of the shares of common stock vesting on the
1
year anniversary of the grant date and the remaining shares vesting monthly for the
36
months thereafter. The exercise price of the options granted by the Company under the 2004 Plan shall not be less than
100%
of the fair market value for a common share subject to such option on the date the option is granted. Full value awards made under the 2004 Plan shall become vested over a
period of not less than
3 years
(or, if vesting is performance-based, over a period of not less than
one year
) following the date such award is made; provided, however, that full value awards that result in the issuance of an aggregate of up to
5%
of common stock available under the 2004 Plan may be granted to any one or more participants without respect to such minimum vesting provisions. As of July 2, 2017, there were
5.7 million
shares available for future grant under the 2004 Plan.
Compensation Expense
The following table summarizes stock-based compensation expense by line items appearing in the Company’s Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(in thousands)
|
July 2,
2017
|
|
July 3,
2016
|
|
Cost of revenue
|
$
|
632
|
|
|
$
|
779
|
|
|
Research and development
|
5,963
|
|
|
4,308
|
|
|
Selling, general and administrative
|
5,225
|
|
|
5,428
|
|
|
Total stock-based compensation expense
|
$
|
11,820
|
|
|
$
|
10,515
|
|
|
The amount of stock-based compensation that was capitalized during the periods presented above was not material.
Stock Options
The following is a summary of the Company's stock option activity and related weighted average exercise prices for each category:
|
|
|
|
|
|
|
|
|
Three Months Ended July 2, 2017
|
(shares in thousands)
|
Shares
|
|
Price
|
Beginning stock options outstanding
|
1,374
|
|
|
$
|
13.01
|
|
Exercised (1)
|
(89
|
)
|
|
7.09
|
|
Canceled
|
(9
|
)
|
|
24.60
|
|
Ending stock options outstanding
|
1,276
|
|
|
$
|
13.35
|
|
Ending stock options exercisable
|
985
|
|
|
$
|
11.94
|
|
|
|
(1)
|
Upon exercise, the Company issues new shares of common stock.
|
As of
July 2, 2017
, the unrecognized compensation cost related to nonvested stock options, net of estimated forfeitures, was
$0.5 million
and will be recognized over a weighted-average period of
0.75
years.
As of
July 2, 2017
, stock options vested and expected to vest totaled approximately
1.3 million
with a weighted-average exercise price of
$13.21
and a weighted-average remaining contractual life of
3.50
years. The aggregate intrinsic value was approximately
$15.7 million
.
As of
July 2, 2017
, fully vested stock options totaled approximately
1.0 million
with a weighted-average exercise price of
$11.94
and a weighted-average remaining contractual life of
3.24
years. The aggregate intrinsic value was approximately
$13.7 million
.
Restricted Stock Units (RSUs)
RSUs granted by the Company under the 2004 Plan generally vest over a
four
-year period from the grant date with one-fourth of RSUs vesting on each one-year anniversary. As of
July 2, 2017
,
4.6 million
and
0.3 million
RSU awards were outstanding under the 2004 Plan and the 2008 Plan, respectively.
The following table summarizes the Company's RSU activity and related weighted-average exercise prices for each category for the
three
months ended
July 2, 2017
:
|
|
|
|
|
|
|
|
|
Three Months Ended July 2, 2017
|
(shares in thousands)
|
Shares
|
|
Weighted-average grant date fair value per share
|
Beginning RSUs outstanding
|
3,843
|
|
|
$
|
18.88
|
|
Assumed from GigPeak acquisition
|
328
|
|
|
23.62
|
|
Granted
|
2,030
|
|
|
23.83
|
|
Released
|
(1,137
|
)
|
|
16.65
|
|
Forfeited
|
(137
|
)
|
|
21.21
|
|
Ending RSUs outstanding
|
4,927
|
|
|
$
|
21.69
|
|
As of
July 2, 2017
, RSUs expected to vest totaled approximately
4.1 million
with a weighted-average remaining contract life of
1.72
years. The aggregate intrinsic value was approximately
$104.5 million
.
As of
July 2, 2017
, the unrecognized compensation cost related to RSUs granted under the Company’s equity incentive plan was approximately
$58.3 million
, net of estimated forfeitures, and is expected to be recognized over a weighted-average period of
1.84
years.
Performance-Based Stock Units
In fiscal 2013, the Compensation Committee of the Board of Directors of IDT approved the Company's Key Talent Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for the grant of performance-based stock units under the 2004 Plan which vest and convert into one share of the Company's common stock based on the level of achievement of pre-established performance goals during a specified performance period. The initial performance period under the Incentive Plan is the Company's fourth quarter of fiscal 2013 through the fourth quarter of fiscal 2016 for which performance goals relate to cumulative revenue targets for a specific product group. The performance-based stock units that were granted under the Incentive Plan have vested in the first quarter of fiscal 2017 based on actual achievement of the performance goals, and the expense associated with that had been fully recognized as of July 3, 2016.
Market-Based Stock Units
In May 2017, under the 2004 Plan, the Company granted approximately
0.3 million
shares of RSUs with both market-based and performance-based conditions to a group of executive-level employees. These equity awards vest and convert into shares of the Company’s common stock based on the achievement of the Company’s relative total shareholder return, with a revenue growth multiplier, over the performance period of
3
years. The earned stock units will vest in three equal installments, with the first installment of vesting to occur on May 15, 2018, the second to occur on May 15, 2019, and the third to occur on May 15, 2020.
In June 2016, under the 2004 Plan, the Company granted approximately
0.3 million
shares of RSUs with a market-based condition to a group of executive-level employees. These equity awards vest and convert into shares of the Company’s common stock based on the achievement of the Company’s relative total shareholder return over the performance period of
2
years. The earned market-based stock units will vest in
two
equal installments, with the first installment of vesting to occur on June 15, 2018, and the second to occur on June 15, 2019.
In June 2015, under the 2004 Plan, the Company granted approximately
0.2 million
shares of RSUs with a market-based condition to a group of executive-level employees. These equity awards vest and convert into shares of the Company’s common stock based on the achievement of the Company’s relative total shareholder return over the performance period of
2
years. The earned market-based stock units will vest in
two
equal installments, with the first installment of vesting occurred on June 15, 2017, and the second to occur on June 15, 2018.
In June 2014, under the 2004 Plan, the Company granted approximately
0.5 million
shares of RSUs with a market-based condition to a group of executive-level employees. These equity awards vest and convert into shares of the Company’s common stock based on the achievement of the Company’s relative total shareholder return over the performance period of
2
years. The earned market-based stock units will vest in
two
equal installments, with the first installment of vesting occurred on June 15, 2016, and the second occurred on June 15, 2017.
The fair value of each market-based stock unit award was estimated on the date of grant using a Monte Carlo simulation model that uses the assumptions noted in the table below. The Company uses historical data to estimate employee termination within the valuation model. The expected term in years was derived from the output of the valuation model and represents the period of time that restricted stock units granted are expected to be outstanding.
The following weighted average assumptions were used to calculate the fair value of the market-based equity award using a Monte Carlo simulation model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 15, 2017
|
June 15, 2016
|
June 15, 2015
|
June 15, 2014
|
Estimated fair value
|
$
|
27.65
|
|
$
|
28.01
|
|
$
|
33.08
|
|
$
|
21.00
|
|
Expected volatility
|
43.36
|
%
|
46.90
|
%
|
41.22
|
%
|
34.6
|
%
|
Expected term (in years)
|
2.88
|
|
1.80
|
|
1.80
|
|
1.80
|
|
Risk-free interest rate
|
1.47
|
%
|
0.70
|
%
|
0.65
|
%
|
0.38
|
%
|
As of
July 2, 2017
, the total market-based stock units outstanding were approximately
0.7 million
.
As of
July 2, 2017
, market-based stock units vested and expected to vest totaled approximately
0.6 million
with a weighted-average remaining contract life of
1.52
years. The aggregate intrinsic value was approximately
$15.9 million
.
As of
July 2, 2017
, the unrecognized compensation cost related to market-based stock units granted under the Company’s equity incentive plans was approximately
$11.6 million
, net of estimated forfeitures, and is expected to be recognized over a weighted-average period of
1.57
years.
2009 Employee Stock Purchase Plan (2009 ESPP)
On June 18, 2009, the Board approved implementation of the 2009 Employee Stock Purchase Plan (2009 ESPP) and authorized the reservation and issuance of up to
9.0 million
shares of the Company's common stock, subject to stockholder approval. On September 17, 2009, the Company's stockholders approved the plan at the 2009 Annual Meeting of Stockholders. The 2009 ESPP is intended to be implemented in successive quarterly purchase periods commencing on the first day of each fiscal quarter of the Company. In order to maintain its qualified status under Section 423 of the Internal Revenue Code, the 2009 ESPP imposes certain restrictions, including the limitation that no employee is permitted to participate in the 2009 ESPP if the rights of such employee to purchase common stock of the Company under the 2009 ESPP and all similar purchase plans of the Company or its subsidiaries would accrue at a rate which exceeds
$25,000
of the fair market value of such stock (determined at the time the right is granted) for each calendar year. At the 2012 annual meeting of stockholders on September 13, 2012, the Company's stockholders approved an additional
5.0 million
. The number of shares of common stock reserved for issuance thereunder increased from
9.0 million
shares to
14.0 million
shares.
Activity under the Company's ESPP for the
three
months ended
July 2, 2017
is summarized in the following table:
|
|
|
|
|
(in thousands, except per share amounts)
|
|
Number of shares issued
|
140
|
|
Average issuance price
|
$
|
20.12
|
|
Number of shares available as of July 2, 2017
|
3,124
|
|
Note 8. Stockholders' Equity
Stock Repurchase Program.
In the three months ended
July 2, 2017
and
July 3, 2016
, the Company repurchased
1.4 million
shares for
$34.8 million
and
1.5 million
shares for
$30.6 million
, respectively. As of
July 2, 2017
, approximately
$57.3 million
was available for future purchase under the share repurchase program. Shares repurchased were recorded as treasury stock and resulted in a reduction of stockholder's equity. On July 28, 2017, the Company's Board of Directors approved an increase to the share repurchase authorization of
$200 million
.
Note 9. Balance Sheet Detail
|
|
|
|
|
|
|
|
|
(in thousands)
|
July 2,
2017
|
|
April 2,
2017
|
Inventories, net
|
|
|
|
Raw materials
|
$
|
3,142
|
|
|
$
|
2,017
|
|
Work-in-process
|
44,014
|
|
|
35,192
|
|
Finished goods
|
24,215
|
|
|
15,079
|
|
Total inventories, net
|
$
|
71,371
|
|
|
$
|
52,288
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
Accounts receivable, gross
|
$
|
110,331
|
|
|
$
|
94,396
|
|
Allowances
|
(6,898
|
)
|
|
(5,084
|
)
|
Total accounts receivable, net
|
$
|
103,433
|
|
|
$
|
89,312
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
|
|
Land
|
$
|
11,535
|
|
|
$
|
11,535
|
|
Machinery and equipment
|
274,217
|
|
|
268,683
|
|
Building and leasehold improvements
|
49,484
|
|
|
49,022
|
|
Total property, plant and equipment, gross
|
335,236
|
|
|
329,240
|
|
Less: accumulated depreciation (1)
|
(250,540
|
)
|
|
(248,279
|
)
|
Total property, plant and equipment, net
|
$
|
84,696
|
|
|
$
|
80,961
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
|
Accrued restructuring costs (2)
|
$
|
5,358
|
|
|
$
|
4,841
|
|
Other (3)
|
15,485
|
|
|
15,364
|
|
Total other accrued liabilities
|
$
|
20,843
|
|
|
$
|
20,205
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations
|
|
|
|
Deferred compensation related liabilities
|
$
|
16,166
|
|
|
$
|
15,024
|
|
Other (4)
|
6,957
|
|
|
3,870
|
|
Total other long-term liabilities
|
$
|
23,123
|
|
|
$
|
18,894
|
|
(1) Depreciation expense was
$6.1 million
and
$5.2 million
for the three months ended
July 2, 2017
and
July 3, 2016
, respectively.
(2) Includes accrued severance costs related to integration, the disposed HSC business, and other restructuring actions. Refer to Note 13 for additional information.
(3) Other current liabilities consist primarily of accrued royalties and outside commissions, current portion of deferred revenue, current portion of supplier obligations, current portion of capital lease payable, and other accrued unbilled expenses.
(4) Other long-term obligations consist primarily of liability for contingent consideration payment, non-current portion of deferred revenue and other long-term accrued liabilities.
Note 10. Deferred Income on Shipments to Distributors
Included in the caption “Deferred income on shipments to distributors” on the Condensed Consolidated Balance Sheets are amounts related to shipments to certain distributors for which revenue is not recognized until the Company's product has been sold by the distributor to an end customer
.
The components of deferred income on shipments to distributors as of
July 2, 2017
and
April 2, 2017
are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
July 2,
2017
|
|
April 2,
2017
|
Gross deferred revenue
|
$
|
2,837
|
|
|
$
|
2,335
|
|
Gross deferred costs
|
(619
|
)
|
|
(350
|
)
|
Deferred income on shipments to distributors
|
$
|
2,218
|
|
|
$
|
1,985
|
|
The gross deferred revenue represents the gross value of shipments to distributors at the list price billed to the distributor less any price protection credits provided to them in connection with reductions in list price while the products remain in their inventory. The amount ultimately recognized as revenue will be lower than this amount as a result of ship from stock pricing credits which are issued in connection with the sell through of the Company's products to end customers. Based on the last four quarters, this amount has ranged from an average of approximately
25%
to
31%
of the list price billed to the customer. The gross deferred costs represent the standard costs (which approximate actual costs) of products the Company sells to the distributors. Although the Company monitors the levels and quality of inventory in the distribution channel, the Company's experience is that products returned from these distributors may be sold to a different distributor or in a different region of the world. As such, inventory write-downs for products in the distribution channel have not been significant.
Note 11. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component, net of tax, for the
three
months ended
July 2, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cumulative translation adjustments
|
|
Unrealized gain or loss on available-for-sale investments
|
|
Pension adjustments
|
|
Total
|
Balance, April 2, 2017
|
$
|
(6,043
|
)
|
|
$
|
(807
|
)
|
|
$
|
65
|
|
|
$
|
(6,785
|
)
|
Other comprehensive income before reclassifications
|
1,403
|
|
|
120
|
|
|
—
|
|
|
1,523
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
Net current-period other comprehensive income gain
|
1,403
|
|
|
134
|
|
|
—
|
|
|
1,537
|
|
Balance as of July 2, 2017
|
$
|
(4,640
|
)
|
|
$
|
(673
|
)
|
|
$
|
65
|
|
|
$
|
(5,248
|
)
|
Comprehensive income components consisted of:
|
|
|
|
|
|
|
(in thousands)
|
Three Months Ended July 2, 2017
|
|
Location
|
Unrealized holding loss on available-for-sale investments
|
$
|
14
|
|
|
interest and other, net
|
|
|
|
|
Note 12. Goodwill and Intangible Assets, Net
Goodwill balances by reportable segment as of
July 2, 2017
and
April 2, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
(in thousands)
|
Communications
|
|
Computing, Consumer and Industrial
|
|
Total
|
Balance as of April 2, 2017
|
$
|
122,687
|
|
|
$
|
184,238
|
|
|
$
|
306,925
|
|
Additions - GigPeak acquisition (see Note 3)
|
18,613
|
|
|
94,579
|
|
|
113,192
|
|
Balance as of July 2, 2017
|
$
|
141,300
|
|
|
$
|
278,817
|
|
|
$
|
420,117
|
|
Goodwill balances as of
July 2, 2017
and
April 2, 2017
were net of
$920.3 million
in accumulated impairment losses.
Intangible asset balances as of
July 2, 2017
and
April 2, 2017
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2017
|
(in thousands)
|
Gross Assets
|
|
Accumulated
Amortization
|
|
Net Assets
|
Purchased intangible assets:
|
|
|
|
|
|
Developed technology
|
$
|
318,184
|
|
|
$
|
(205,583
|
)
|
|
$
|
112,601
|
|
Trademarks
|
5,391
|
|
|
(5,391
|
)
|
|
—
|
|
Customer relationships
|
201,997
|
|
|
(140,289
|
)
|
|
61,708
|
|
Intellectual property licenses
|
14,886
|
|
|
(4,860
|
)
|
|
10,026
|
|
Software license
|
3,063
|
|
|
(2,307
|
)
|
|
756
|
|
Order backlog
|
200
|
|
|
(50
|
)
|
|
150
|
|
Total amortizable purchased intangible assets
|
543,721
|
|
|
(358,480
|
)
|
|
185,241
|
|
In-process research and development
|
10,200
|
|
|
—
|
|
|
10,200
|
|
Total purchased intangible assets
|
$
|
553,921
|
|
|
$
|
(358,480
|
)
|
|
$
|
195,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2, 2017
|
(in thousands)
|
Gross Assets
|
|
Accumulated
Amortization
|
|
Net Assets
|
Purchased intangible assets:
|
|
|
|
|
|
Developed technology
|
$
|
262,184
|
|
|
$
|
(199,851
|
)
|
|
$
|
62,333
|
|
Trademarks
|
5,391
|
|
|
(5,347
|
)
|
|
44
|
|
Customer relationships
|
173,097
|
|
|
(137,239
|
)
|
|
35,858
|
|
Intellectual property licenses
|
16,196
|
|
|
(5,613
|
)
|
|
10,583
|
|
Total purchased intangible assets
|
$
|
456,868
|
|
|
$
|
(348,050
|
)
|
|
$
|
108,818
|
|
As a result of the acquisition of GigPeak, the Company recognized additional intangible assets with fair value of
$97.9 million
during the three months ended July 2, 2017 (see Note 3). During the first quarter of fiscal 2018, the Company recorded an accelerated amortization charge of
$2.0 million
related to certain software licenses as the estimated future cash flows expected resulting from the use of the assets were less than the carrying amount.
Amortization expense for the three months ended
July 2, 2017
and
July 3, 2016
was
$11.7 million
and
$6.1 million
, respectively.
The intangible assets are being amortized over estimated useful lives of
1
to
7
years.
Based on the intangible assets recorded at
July 2, 2017
, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated amortization expense is expected to be as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
Amount
|
2018 (Remaining 9 months)
|
$
|
28,017
|
|
2019
|
36,943
|
|
2020
|
36,688
|
|
2021
|
36,317
|
|
2022 and thereafter
|
47,276
|
|
Total amortizable purchased intangible assets
|
185,241
|
|
In-process research and development
|
10,200
|
|
Total intangible assets
|
$
|
195,441
|
|
Note 13. Restructuring
The following table shows the provision of the restructuring charges and the liability remaining as of
July 2, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Continuing Operations
|
HSC
(Discontinued Operations)
|
Total
|
Balance as of April 2, 2017
|
$
|
3,414
|
|
$
|
1,427
|
|
$
|
4,841
|
|
Provision
|
653
|
|
—
|
|
653
|
|
Payments and other adjustments
|
(136
|
)
|
—
|
|
(136
|
)
|
Balance as of July 2, 2017
|
$
|
3,931
|
|
$
|
1,427
|
|
$
|
5,358
|
|
As part of an effort to streamline operations with changing market conditions and to create a more efficient organization, the Company has undertaken restructuring actions to reduce its workforce and consolidate facilities. The Company’s restructuring expenses consist primarily of severance and termination benefit costs related to the reduction of its workforce.
Integration-related Restructuring Plan
During fiscal 2017, the Company prepared a workforce-reduction plan with respect to employees of its Automotive and Industrial business (formerly ZMDI) in Germany. The plan which required consultation with the German Works Council, was approved by the German Works Council. Also, the details of the plan were communicated to the affected employees. The plan identified the number of employees to be terminated, their job classification or function, their location and the date that the plan is expected to be completed. The plan also established the terms of the benefit arrangement in sufficient detail to enable the employees to determine the type and amount of benefits that they would receive if terminated. In addition, the actions required to complete the plan indicated that it was unlikely that substantial changes to the plan would be made after communication of the employees. Accordingly, the Company accrued restructuring charges in accordance with ASC 420, Exit and Disposal Cost Obligations. Approximately
$4.9 million
of the
$5.0 million
was paid during fiscal 2017 and the remaining
$0.1 million
will be paid by the second quarter of fiscal 2018.
Radio Frequency Business
During fiscal 2017, the Company prepared a workforce-reduction plan with respect to employees of its Radio Frequency business in France. The plan which sets forth the general parameters, terms and benefits for employee dismissals, was submitted to the French Works Council. The Company initially determined that an ongoing benefit arrangement existed as the affected employees are being protected under the provisions of prior plan and the minimum statutory requirement. Subsequent to this, the Company and the affected employees signed agreements with regards to the timing and payment of severance benefits. As of July 2, 2017, the total accrued balance for employee severance costs related to this action was $
2.9 million
. The Company expects to complete this action by December 31, 2017.
HSC Business
During fiscal 2015, the Company prepared a workforce-reduction plan with respect to employees of its HSC business in France and the Netherlands. The Company has substantially completed payments of these termination benefits and the total accrued balance related to this action was
$1.4 million
as of July 2, 2017. The Company expects to complete this action by December 2017.
Other
During the three months ended July 2, 2017, the Company recorded restructuring charges of
$0.7 million
and reduced headcount by
16
employees. Approximately
$0.1 million
was paid during the current quarter and the remaining balance will be paid by the second quarter of fiscal 2018.
During fiscal 2017, the Company recorded charges of
$4.0 million
and reduced headcount by
59
employees. As of July 2, 2017, the total accrued balance for employee severance costs related to these actions was
$0.3 million
. The Company expects to complete these actions by the second quarter of fiscal 2018.
Note 14. Commitments and Contingencies
Warranty
The Company maintains an accrual for obligations it incurs under its standard product warranty program and customer, part, or process specific matters. The Company’s standard warranty period is one year, however in certain instances the warranty period may be extended to as long as two years. Management estimates the fair value of the Company’s warranty liability based on actual past warranty claims experience, its policies regarding customer warranty returns and other estimates about the timing and disposition of product returned under the standard program. Customer, part, or process specific accruals are estimated using a specific identification method. Historical profit and loss impact related to warranty returns activity has been minimal. The total warranty accrual was
$0.8 million
and
$0.3 million
as of July 2, 2017 and April 2, 2017.
Litigation
On February 13, 2017, the Company and GigPeak announced that they had entered into an Agreement and Plan of Merger, dated as of February 13, 2017. On February 17, 2017, a purported class action was filed in Santa Clara County Superior Court, (Carbajal v. GigPeak, Inc., et al, Case No. 17-cv-306571). On March 8, 2017, a purported class action was filed in the United States District Court of Delaware (Vladimir Gusinsky Rev. Trust v. GigPeak, Case No. 1:17-cv-00241-VAC SRF). On March 13, 2017, a purported class action was filed in the United States District Court for the Northern District of California (Mendoza v. Gigpeak, Inc. et al, Case No. 3;17-cv-01351-WHO). On March 16, a second purported class action was filed in the United States District Court for the Northern District of California (Travis v. GigPeak, Inc. et al, Case No. 5:17-cv-01441-LKH). The Company was named as a defendant in the Carbajal and Gusinsky complaints. The Carbajal complaint asserted claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, including that defendants have failed to secure adequate deal consideration as well as various other breaches of duty. The Gusinsky, Travis and Mendoza complaints asserted claims under Sections 14(d)(4), 14(e) and 20(a) of the Exchange Act. The Gusinsky, Mendoza and Travis complaint alleged that the Schedule 14D-9 filed by GigPeak contained material omissions and misstatements, and sought to enjoin and/or rescind the Offer as well as certain other equitable relief, unspecified damages and attorneys’ fees and costs. The Carbajal complaint was voluntarily dismissed on March 7, 2017. Each of the remaining complaints was voluntarily dismissed by Plaintiffs on or around April 7, 2017, and the actions were closed by the Court on or around May 15, 2017 after Plaintiffs’ fees were agreed to by the parties.
In November 2016, North Star Innovations, Inc. (“NSI”), an IP licensing non-practicing entity and subsidiary of Wi-Lan, Inc., filed a complaint against the Company in the federal courts of the Central District of California, alleging the Company infringed
three
U.S. patents assigned to and owned by NSI. The Company did not file an Answer or other responsive pleading in this litigation. On or about January 13, 2017, RPX Corporation, a membership-based defensive patent aggregator, entered a license agreement with NSI, to which the Company is a beneficiary based on the Company’s membership in RPX. Based on this license, the Company and NSI signed a Release Agreement effective January 31, 2017, releasing the Company from liability under the claims for infringement of the
three
asserted patents. On January 31, 2017, the court ordered the litigation against IDT to be formally dismissed.
In January 2012, Maxim I Properties, a general partnership that had purchased a certain parcel of real property (the Property) in 2003, filed a complaint in the Northern District of California naming approximately
30
defendants, including the Company ("Defendants"), alleging various environmental violations of the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Resource Conservation and Recovery Act (RCRA), the California Hazardous Substance Account Act (HSAA), and other common law claims (the Complaint). The Complaint alleged that Defendants including the Company “…generated, transported, and/or arranged for the transport and/or disposal of hazardous waste to the Property.” On August 15, 2012, Maxim I Properties voluntarily dismissed its Complaint without prejudice. However, another defendant, Moyer Products, Inc., counter-claimed against the plaintiff, Maxim, and cross-claimed against the remaining co-Defendants, including the Company. Thus, the Company remains a cross-defendant in this action.
In a related, but independent action, the California Department of Toxic Substances Control (DTSC) notified the Company in September 2012 that the Company, and more than
50
other entities, were being named as respondents to DTSC's Enforcement Order, as “a generator of hazardous waste.” In April 2013, the Company, along with the other “respondent” parties, entered into a Corrective Action Consent Agreement (CACA) with the DTSC, agreeing to conduct the Property investigation and corrective action selection. The CACA supersedes the DTSC's Enforcement Order. The District Court for the Northern District of California stayed the Maxim/Moyer litigation pending the Property investigation under the CACA and DTSC's corrective action selection.
Property investigation activity took place between April 2013 and June 2015. On June 23, 2015, the DTSC deemed the Property investigation complete. The DTSC continues to evaluate corrective action alternatives. The Company will continue to vigorously defend itself against the allegations in the Complaint and evaluate settlement options with Moyer upon notification from DTSC of its corrective action selection. No specific corrective action has been selected yet, and thus no specific monetary demands have been made. Accordingly, an estimate of contingent loss, if any, related to this action cannot be made.
The Company may also be a party to various other legal proceedings and claims arising in the normal course of business from time to time. With regard to these or future litigation matters that may arise, potential liability and probable losses or ranges of possible losses due to an unfavorable litigation outcome cannot be reasonably estimated at this time. Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in the Maxim lawsuit or any other particular lawsuit or claim. Pending lawsuits, claims as well as potential future litigation, could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Note 15. Employee Benefit Plans
401(k) Plan
The Company sponsors a 401(k) retirement matching plan for qualified domestic employees. The Company recorded expenses of approximately $
0.8 million
and $
1.1 million
in matching contributions under the plan during the three months ended
July 2, 2017
and
July 3, 2016
, respectively.
Deferred Compensation Plans
Effective November 1, 2000, the Company established an unfunded deferred compensation plan to provide benefits to executive officers and other key employees. Under the plan, participants can defer any portion of their salary and bonus compensation into the plan and may choose from a portfolio of funds from which earnings are measured. Participant balances are always
100%
vested. As of
July 2, 2017
and
April 2, 2017
, obligations under the plan totaled approximately
$16.2 million
and
$15.0 million
. Additionally, the Company has set aside assets in a separate trust that is invested in corporate owned life insurance intended to substantially fund the liability under the plan. As of
July 2, 2017
and
April 2, 2017
, the deferred compensation plan assets were approximately
$16.3 million
and
$16.0 million
respectively.
International Employee Benefit Plans
The Company sponsors defined-benefit pension plans, defined-contribution plans, multi-employer plans and other post-employment benefit plans covering employees in certain of the Company's international locations. As of
July 2, 2017
and
April 2, 2017
, the net liability for all of these international benefit plans totaled $
0.9 million
and
$0.7 million
, respectively.
Note 16. Convertible Senior Notes, Warrants and Hedges
Convertible Notes Offering
On October 29, 2015, the Company priced its private offering of
$325 million
in aggregate principal amount of
0.875%
Convertible Senior Notes due 2022 ("Initial Convertible Notes"). On November 3, 2015, the initial purchasers in such offering exercised in full the over-allotment option to purchase an additional
$48.8 million
in aggregate principal amount of Convertible Notes (“Additional Convertible Notes”, and together “Convertible Notes”). The aggregate principal amount of Convertible Notes is
$373.8 million
. The net proceeds from this offering were approximately
$363.4 million
, after deducting the initial purchasers’ discounts and commissions and the offering expenses.
The Convertible Notes are governed by the terms of an indenture, dated November 4, 2015 (“Indenture”), between the Company and a trustee. The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of
0.875%
per annum, payable semi-annually in arrears on May 15 and November 15 of each year, commencing May 15, 2016. The Convertible Notes will mature on November 15, 2022, unless earlier repurchased or converted. At any time prior to the close of business on the business day immediately preceding August 15, 2022, holders may convert their Convertible Notes at their option only under the certain circumstances as defined in the Indenture. On or after August 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of such circumstances.
The conversion rate for the Convertible Notes will initially be 29.8920 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to an initial conversion price of approximately
$33.45
per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers.
As of July 2, 2017, none of the conditions allowing holders of the Convertible Notes to convert had been met.
At the debt issuance date, the Convertible Notes, net of issuance costs, consist of the following (in thousands):
|
|
|
|
|
|
November 3, 2015
|
|
Liability component
|
|
Principal
|
$
|
274,435
|
|
Less: Issuance cost
|
(7,568
|
)
|
Net carrying amount
|
266,867
|
|
Equity component *
|
|
|
Allocated amount
|
99,316
|
|
Less: Issuance cost
|
(2,738
|
)
|
Net carrying amount
|
96,578
|
|
Convertible Notes, net
|
$
|
363,445
|
|
* Recorded in the consolidated balance sheet within additional paid-in capital.
The following table includes total interest expense recognized related to the Convertible Notes during the three month period ended
July 2, 2017
and
July 3, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
July 2, 2017
|
Three Months Ended
July 3, 2016
|
Contractual interest expense
|
$
|
827
|
|
$
|
818
|
|
Amortization of debt issuance costs
|
270
|
|
270
|
|
Amortization of debt discount
|
3,166
|
|
2,998
|
|
|
$
|
4,263
|
|
$
|
4,086
|
|
The net liability component of Convertible Notes is comprised of the following as of
July 2, 2017
(in thousands):
|
|
|
|
|
Net carrying amount as of April 2, 2017
|
$
|
285,541
|
|
Amortization of debt issuance costs during the period
|
270
|
|
Amortization of debt discount during the period
|
3,166
|
|
Net carrying amount as of July 2, 2017
|
$
|
288,977
|
|
During the three months ended
July 2, 2017
and
July 3, 2016
, the Company paid contractual interest on the Convertible Note of approximately
$1.6 million
and
$1.7 million
, respectively.
See Note 5 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's Convertible Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, on October 29, 2015, the Company entered into convertible note hedge transaction (the "Initial Bond Hedge"), with JPMorgan Chase Bank, National Association (the “Option Counterparty”) and paid
$81.9 million
.
On October 29, 2015, the Company also entered into separate warrant transaction (the "Initial Warrant Transaction") with the Option Counterparty and received
$49.4 million
.
In connection with the exercise of the Over-Allotment Option, on November 3, 2015, the Company entered into a convertible note hedge transaction (the “Additional Bond Hedge”, and together with the Initial Bond Hedges, the “Bond Hedge”) with the Option Counterparty and paid
$12.3 million
. On November 3, 2015, the Company also entered into separate additional warrant transaction (the “Additional Warrant Transaction”, and together with the Initial Warrant Transaction, the “Warrant Transactions”) with the Option Counterparty and received
$7.4 million
. Total amount paid for the purchase of bond hedge and total amount received for the sale of warrants were
$94.2 million
and
$56.8 million
, respectively.
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price
$33.45
of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is
$48.66
per share. The Bond Hedges and Warrants are not marked to market. The value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified as stockholders' equity in accordance with ASC 815-40,
Derivatives and Hedging - Contracts in Entity's Own Equity
. As of
July 2, 2017
and
April 2, 2017
, no warrants have been exercised.
Note 17. Term B Loan
On April 4, 2017, the Company, JP Morgan Chase bank, N.A.("JP Morgan") as administrative agent and a group of lenders entered into a credit agreement that provides for variable rate term loans in aggregate principal amount of
$200 million
, with an original term of
7
years (the "Initial Term B Loan"). After payment of transaction costs associated with the Credit Agreement, the Company received net proceeds from the Initial Term B Loan of approximately
$194.3 million
, which was used to partially finance the acquisition of GigPeak and other payments related to such transaction. Debt issuance costs and debt discount were recorded as a reduction of the carrying value of the loan and are being amortized as a component of interest expense over the term of the Credit Agreement.
The Company will repay the principal amount of the Initial Term B Loan on the last day of each March 31, June 30, September 30 and December 31, commencing on June 30, 2017, in an amount equal to
0.25%
of the original principal amount of the Initial Term B Loan; and on the maturity date, as described below, in an amount equal to the remainder of the outstanding principal amount of the Initial Term B Loan.
The maturity date of the Initial Term B Loan is April 4, 2024; provided that if any of the Company's Convertible Notes are outstanding on August 16, 2022, the maturity date of which had not otherwise been extended to a date that is no earlier than 91 days after April 4, 2024, the Initial Term B Loan maturity date shall instead be August 16, 2022, unless the Company and its guarantors shall have cash, permitted investments and/or unwithdrawn revolving credit commitments in an aggregate amount not less than the aggregate principal amount of then outstanding Convertible Notes. The Company may prepay the Initial Term B Loan, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may not be reborrowed. The interest rate of the Initial Term B Loan is based on adjusted LIBO rate which is equal to the LIBO rate for such interest period multiplied by statutory reserve rate, plus an applicable margin of
3%
. For the initial three-month period through June 30, 2017, the interest rate on the Initial Term B Loan is approximately
4.15%
.
The following table summarizes the outstanding borrowings from the Initial Term B Loan as of July 2, 2017:
|
|
|
|
|
(in thousands)
|
July 2, 2017
|
Outstanding principal balance
|
$
|
199,500
|
|
Unamortized debt issuance costs and debt discount
|
(5,543
|
)
|
Outstanding principal, net of unamortized debt issuance costs and debt discount
|
$
|
193,957
|
|
Classified as follows:
|
|
Current portion of long-term debt
|
$
|
2,000
|
|
Long-term debt
|
$
|
191,957
|
|
As of July 2, 2017, the Company made payment totaling
$0.5 million
towards the outstanding principal balance of the Initial Term B Loan. The following table includes the total interest expense related to the Term B Loan recognized during the three months ended July 2, 2017:
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
July 2, 2017
|
Contractual interest expense
|
$
|
2,106
|
|
Amortization of debt issuance costs and debt discount
|
205
|
|
Total
|
$
|
2,311
|
|
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Credit Agreement includes customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with covenants. Under certain circumstances, a default interest rate will apply on all overdue obligations under the Credit Agreement at a per annum rate equal to
2.00%
above the applicable interest rate for any overdue principal and
2.00%
above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations under the Credit Agreement. As of July 2, 2017, the Company is in compliance with the covenants specified in the Credit Agreement.
See Note 5 to the Company's condensed consolidated financial statements for fair value determination related to the Company's Initial Term B Loan.
Note 18. Income Taxes
During the three months ended July 2, 2017 and July 3, 2016, the Company recorded an income tax benefit of
$1.0 million
and
$3.6 million
, respectively. The income tax benefit recorded in the three months ended July 2, 2017 was primarily due to the benefit from research and development tax credits and excess tax benefits from stock based compensation. The income tax benefit recorded in the three months ended July 3, 2016 was primarily due to the tax benefit on severance costs.
As of July 2, 2017, the Company continues to maintain a valuation allowance against the Company's net deferred tax assets in certain foreign and state jurisdictions, as the Company is not able to conclude that it is more likely than not that these deferred tax assets will be realized. The Company reached this decision based on judgment, which included consideration of historical operating results and projections of future profits. The Company will continue to monitor the need for the valuation allowance on a quarterly basis.
In fiscal year 2016, after examination of the Company’s projected offshore cash flows, and global cash requirements, the Company determined that it would no longer require
100%
of its future foreign generated cash to support its foreign operations. The Company plans to continue to repatriate a portion of its offshore earnings generated after March 29, 2015 to the U.S. for domestic operations, and has accrued for the related tax impacts accordingly. For earnings accumulated as of March 29, 2015, the Company continues to indefinitely reinvest such amounts in its foreign jurisdictions, except to the extent there is any previously taxed income which is expected to be repatriated. If circumstances change and it becomes apparent that some or all of those undistributed earnings of the Company's offshore subsidiary will be remitted in the foreseeable future but income taxes have not been recognized, the Company will accrue income taxes attributable to that remittance.
The Company benefits from tax incentives granted by local tax authorities in certain foreign jurisdictions. In the fourth quarter of fiscal 2011, the Company agreed with the Malaysia Industrial Development Board to enter into a new tax incentive agreement which is a full tax exemption on statutory income for a period of 10 years commencing April 4, 2011. This tax incentive agreement is subject to the Company meeting certain financial targets, investments, headcounts and activities in Malaysia.
As of July 2, 2017, the Company is under examination in Malaysia for fiscal years 2012 through 2015, in India for fiscal year 2015, and in the state of New York for fiscal years 2013 through 2016. Although the final outcome of each examination is uncertain, based on currently available information, the Company believes that the ultimate outcome will not have a material adverse effect on its financial position, cash flows or results of operations.
The Company's open years in the U.S. federal jurisdiction are fiscal 2014 and later years. In addition, the Company is effectively subject to federal tax examination adjustments for tax years ended on or after fiscal year 1999, in that the Company has tax attribute carryforwards from these years that could be subject to adjustments, if and when utilized. The Company's open years in various state and foreign jurisdictions are fiscal years 2010 and later.
The Company does not expect a material change in unrecognized tax benefits within the next twelve months.
Note 19. Segment Information
The Chief Operating Decision Maker is the Company’s President and Chief Executive Officer.
The Company's reportable segments include the following:
|
|
•
|
Communications segment: includes clock and timing solutions, flow-control management devices including Serial RapidIO
®
switching solutions, multi-port products, telecommunications products, high-speed static random access memory, first in and first out memory (FIFO), digital logic, radio frequency, and frequency control solutions.
|
|
|
•
|
Computing, Consumer and Industrial segment: includes clock generation and distribution products, high-performance server memory interfaces, PCI Express switching solutions, power management solutions, signal integrity products, video distribution and contribution solutions and sensing products for mobile, automotive and industrial solutions.
|
The tables below provide information about these segments:
|
|
|
|
|
|
|
|
|
Revenues by segment
|
Three Months Ended
|
(in thousands)
|
July 2,
2017
|
|
July 3,
2016
|
Communications
|
$
|
57,826
|
|
|
$
|
79,097
|
|
Computing, Consumer and Industrial
|
138,887
|
|
|
113,031
|
|
Total revenues
|
$
|
196,713
|
|
|
$
|
192,128
|
|
|
|
|
|
|
|
|
|
|
Income by segment
|
Three Months Ended
|
(in thousands)
|
July 2,
2017
|
|
July 3,
2016
|
Communications
|
19,272
|
|
|
28,738
|
|
Computing, Consumer and Industrial
|
30,411
|
|
|
23,042
|
|
Unallocated expenses:
|
|
|
|
Amortization of intangible assets
|
(10,841
|
)
|
|
(5,775
|
)
|
Inventory fair market value adjustment
|
(4,081
|
)
|
|
(2,395
|
)
|
Assets impairment and other
|
—
|
|
|
(870
|
)
|
Stock-based compensation expense
|
(11,820
|
)
|
|
(10,515
|
)
|
Severance, retention and facility closure costs
|
(653
|
)
|
|
(11,937
|
)
|
Acquisition-related costs and other
|
(2,225
|
)
|
|
—
|
|
Deferred compensation plan expense, net
|
(52
|
)
|
|
(11
|
)
|
Interest expense and other, net
|
(4,279
|
)
|
|
(2,888
|
)
|
Income before income taxes
|
$
|
15,732
|
|
|
$
|
17,389
|
|
The Company does not allocate goodwill and intangible assets impairment charge, IPR&D, severance and retention costs, acquisition-related costs, stock-based compensation, interest income and other, and interest expense to its segments. In addition, the Company does not allocate assets to its segments. The Company excludes these items consistent with the manner in which it internally evaluates its results of operations.
Revenues from unaffiliated customers by geographic area, based on the customers' shipment locations, were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
July 2,
2017
|
|
July 3,
2016
|
Hong Kong
|
$
|
63,888
|
|
|
$
|
73,928
|
|
Rest of Asia Pacific
|
82,698
|
|
|
74,763
|
|
Americas (1)
|
25,795
|
|
|
20,453
|
|
Europe
|
24,332
|
|
|
22,984
|
|
Total revenues
|
$
|
196,713
|
|
|
$
|
192,128
|
|
|
|
(1)
|
The revenues from the customers in the U.S. were
$22.1 million
and
$18.7 million
in the three months ended
July 2, 2017
and
July 3, 2016
, respectively.
|
The Company utilizes global and regional distributors around the world, that buy products directly from the Company on behalf of their customers.
One
distributor, Avnet and its affiliates accounted for
11%
of the Company's revenues in the three months ended
July 2, 2017
. One direct original equipment manufacturer (OEM) customer, Samsung Electronics accounted for
11%
of the Company's revenues in the three months ended
July 2, 2017
.
Two
distributors, Uniquest and Avnet and its affiliates accounted for
13%
and
11%
, respectively, of the Company's revenues in the three months ended
July 3, 2016
.
As of
July 2, 2017
,
two
distributors represented approximately
13%
and
10%
of the Company’s gross accounts receivable. As of
April 2, 2017
,
two
distributors represented approximately
11%
and
10%
, respectively, of the Company’s gross accounts receivable.
The Company’s significant operations outside of the United States include a test facility in each of Malaysia and Germany, design centers in the U.S., Canada and China, and sales subsidiaries in APAC and Europe. The Company's net property, plant and equipment are summarized below by geographic area:
|
|
|
|
|
|
|
|
|
(in thousands)
|
July 2,
2017
|
|
April 2,
2017
|
United States
|
$
|
40,863
|
|
|
$
|
37,996
|
|
Malaysia
|
25,760
|
|
|
24,386
|
|
Germany
|
11,654
|
|
|
12,477
|
|
Canada
|
3,604
|
|
|
3,512
|
|
All other countries
|
2,815
|
|
|
2,590
|
|
Total property, plant and equipment, net
|
$
|
84,696
|
|
|
$
|
80,961
|
|
Note 20. Interest Income and Other, Net
The components of interest income and other, net are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
July 2, 2017
|
|
July 3, 2016
|
Interest income
|
$
|
757
|
|
|
$
|
600
|
|
Other income, net
|
2,225
|
|
|
1,052
|
|
Interest income and other, net
|
$
|
2,982
|
|
|
$
|
1,652
|
|
Interest income is derived from earnings on cash and short term investments. Other income, net primarily consists of gains or losses in the value of deferred compensation plan assets, foreign currency gains or losses and other non-operating gains or losses.
Note 21. Subsequent Event
On July 28, 2017, the Company's Board of Directors approved an increase to the share repurchase authorization of
$200 million
.