|
|
Item 1.
|
Financial Statements
|
Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net sales
|
|
$
|
84,834
|
|
|
$
|
77,788
|
|
|
$
|
244,825
|
|
|
$
|
229,178
|
|
Cost of sales
|
|
55,538
|
|
|
51,741
|
|
|
162,250
|
|
|
153,651
|
|
Gross profit
|
|
29,296
|
|
|
26,047
|
|
|
82,575
|
|
|
75,527
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
10,978
|
|
|
10,583
|
|
|
32,363
|
|
|
30,914
|
|
Selling, general and administrative
|
|
11,942
|
|
|
10,829
|
|
|
34,845
|
|
|
32,648
|
|
Total operating expenses
|
|
22,920
|
|
|
21,412
|
|
|
67,208
|
|
|
63,562
|
|
Operating income
|
|
6,376
|
|
|
4,635
|
|
|
15,367
|
|
|
11,965
|
|
Interest and other income (expense), net
|
|
99
|
|
|
546
|
|
|
905
|
|
|
1,329
|
|
Gain on sale of investments
|
|
2,140
|
|
|
7,280
|
|
|
11,300
|
|
|
9,339
|
|
Income before income taxes
|
|
8,615
|
|
|
12,461
|
|
|
27,572
|
|
|
22,633
|
|
Provision for income taxes
|
|
2,388
|
|
|
5,215
|
|
|
6,941
|
|
|
9,619
|
|
Consolidated net income
|
|
6,227
|
|
|
7,246
|
|
|
20,631
|
|
|
13,014
|
|
Net income attributable to noncontrolling interests
|
|
(41
|
)
|
|
(182
|
)
|
|
(198
|
)
|
|
(164
|
)
|
Net income attributable to ISSI
|
|
$
|
6,186
|
|
|
$
|
7,064
|
|
|
$
|
20,433
|
|
|
$
|
12,850
|
|
Basic net income per share
|
|
$
|
0.20
|
|
|
$
|
0.25
|
|
|
$
|
0.69
|
|
|
$
|
0.46
|
|
Shares used in basic per share calculation
|
|
30,312
|
|
|
28,293
|
|
|
29,816
|
|
|
27,988
|
|
Diluted net income per share
|
|
$
|
0.19
|
|
|
$
|
0.24
|
|
|
$
|
0.65
|
|
|
$
|
0.44
|
|
Shares used in diluted per share calculation
|
|
31,963
|
|
|
29,755
|
|
|
31,337
|
|
|
29,427
|
|
See accompanying notes to condensed consolidated financial statements.
Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Consolidated net income
|
|
$
|
6,227
|
|
|
$
|
7,246
|
|
|
$
|
20,631
|
|
|
$
|
13,014
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on investments:
|
|
|
|
|
|
|
|
|
Changes arising during current period, net of tax benefit (expense) of $0, ($2,750), $251 and ($9,774), respectively
|
|
—
|
|
|
7,231
|
|
|
(349
|
)
|
|
17,166
|
|
Reclassification for gain included in net income, net of tax expense of $592, $2,057, $3,589 and $2,193, respectively
|
|
(1,024
|
)
|
|
(2,371
|
)
|
|
(6,029
|
)
|
|
(3,039
|
)
|
|
|
(1,024
|
)
|
|
4,860
|
|
|
(6,378
|
)
|
|
14,127
|
|
Change in cumulative translation adjustment:
|
|
|
|
|
|
|
|
|
Changes arising during current period
|
|
2,989
|
|
|
(1,018
|
)
|
|
(1,020
|
)
|
|
(3,357
|
)
|
Change in retirement plan actuarial losses:
|
|
|
|
|
|
|
|
|
Reclassification for gain included in net income, net of tax expense (benefit) of $0 for the three and nine months ended June 30, 2014 and 2013
|
|
27
|
|
|
168
|
|
|
82
|
|
|
218
|
|
Change in retirement plan transition obligation:
|
|
|
|
|
|
|
|
|
Reclassification for gain included in net income, net of tax expense (benefit) of $0 for the three and nine months ended June 30, 2014 and 2013
|
|
(15
|
)
|
|
(67
|
)
|
|
(45
|
)
|
|
(97
|
)
|
Other comprehensive income (loss)
|
|
1,977
|
|
|
3,943
|
|
|
(7,361
|
)
|
|
10,891
|
|
Comprehensive income
|
|
8,204
|
|
|
11,189
|
|
|
13,270
|
|
|
23,905
|
|
Comprehensive income attributable to noncontrolling interest
|
|
(41
|
)
|
|
(182
|
)
|
|
(198
|
)
|
|
(164
|
)
|
Comprehensive income attributable to ISSI
|
|
$
|
8,163
|
|
|
$
|
11,007
|
|
|
$
|
13,072
|
|
|
$
|
23,741
|
|
See accompanying notes to condensed consolidated financial statements.
Integrated Silicon Solution, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
September 30,
2013
|
|
|
(unaudited)
|
|
(1)
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
139,469
|
|
|
$
|
119,997
|
|
Restricted cash
|
|
1,000
|
|
|
—
|
|
Short-term investments
|
|
1,746
|
|
|
21,558
|
|
Accounts receivable, net
|
|
50,329
|
|
|
46,088
|
|
Inventories
|
|
80,097
|
|
|
68,469
|
|
Deferred tax assets
|
|
2,840
|
|
|
2,326
|
|
Other current assets
|
|
15,745
|
|
|
14,602
|
|
Total current assets
|
|
291,226
|
|
|
273,040
|
|
Property, equipment and leasehold improvements, net
|
|
50,221
|
|
|
46,504
|
|
Purchased intangible assets, net
|
|
5,440
|
|
|
6,626
|
|
Goodwill
|
|
9,178
|
|
|
9,178
|
|
Deferred tax assets
|
|
10,338
|
|
|
9,942
|
|
Other assets
|
|
23,446
|
|
|
16,579
|
|
Total assets
|
|
$
|
389,849
|
|
|
$
|
361,869
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
46,982
|
|
|
$
|
50,229
|
|
Accrued compensation and benefits
|
|
10,155
|
|
|
8,072
|
|
Accrued expenses
|
|
10,834
|
|
|
7,357
|
|
Current portion of long-term debt
|
|
195
|
|
|
195
|
|
Total current liabilities
|
|
68,166
|
|
|
65,853
|
|
Long-term debt
|
|
4,388
|
|
|
4,534
|
|
Other long-term liabilities
|
|
5,083
|
|
|
8,712
|
|
Total liabilities
|
|
77,637
|
|
|
79,099
|
|
Commitments and contingencies
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Common stock
|
|
3
|
|
|
3
|
|
Additional paid-in capital
|
|
360,293
|
|
|
343,947
|
|
Accumulated deficit
|
|
(52,065
|
)
|
|
(72,498
|
)
|
Accumulated other comprehensive income
|
|
1,760
|
|
|
9,121
|
|
Total ISSI stockholders’ equity
|
|
309,991
|
|
|
280,573
|
|
Noncontrolling interest
|
|
2,221
|
|
|
2,197
|
|
Total stockholders’ equity
|
|
312,212
|
|
|
282,770
|
|
Total liabilities and stockholders’ equity
|
|
$
|
389,849
|
|
|
$
|
361,869
|
|
|
|
(1)
|
Derived from audited financial statements.
|
See accompanying notes to condensed consolidated financial statements.
Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
June 30,
|
|
|
2014
|
|
2013
|
Cash flows from operating activities
|
|
|
|
|
Consolidated net income
|
|
$
|
20,631
|
|
|
$
|
13,014
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
5,885
|
|
|
4,152
|
|
Stock-based compensation
|
|
4,585
|
|
|
4,373
|
|
Excess tax benefits from share-based compensation
|
|
(2,567
|
)
|
|
—
|
|
Amortization of intangibles
|
|
1,186
|
|
|
1,191
|
|
Gain on sale of investments
|
|
(11,300
|
)
|
|
(9,339
|
)
|
Equity in net loss of affiliate
|
|
215
|
|
|
222
|
|
Net foreign currency transaction gains
|
|
(405
|
)
|
|
(538
|
)
|
Deferred tax assets
|
|
1,736
|
|
|
7,197
|
|
Other non-cash items
|
|
(35
|
)
|
|
56
|
|
Net effect of changes in current and other assets and current liabilities
|
|
(14,231
|
)
|
|
1,582
|
|
Net cash provided by operating activities
|
|
5,700
|
|
|
21,910
|
|
Cash flows from investing activities
|
|
|
|
|
Acquisition of property and equipment
|
|
(9,928
|
)
|
|
(17,883
|
)
|
Acquisition of noncontrolling interest in consolidated subsidiary
|
|
(199
|
)
|
|
(1,614
|
)
|
Payment of license fees
|
|
(7,098
|
)
|
|
—
|
|
Payment of holdback related to Si En acquisition
|
|
—
|
|
|
(4,200
|
)
|
Proceeds from sale of investments
|
|
—
|
|
|
4,256
|
|
Increase in restricted cash
|
|
(1,000
|
)
|
|
—
|
|
Purchases of available-for-sale securities
|
|
(1,316
|
)
|
|
(4,330
|
)
|
Sales of available-for-sale securities
|
|
22,143
|
|
|
22,637
|
|
Cash provided by (used in) investing activities
|
|
2,602
|
|
|
(1,134
|
)
|
Cash flows from financing activities
|
|
|
|
|
Repurchases and retirement of common stock
|
|
(350
|
)
|
|
(547
|
)
|
Proceeds from issuance of stock through compensation plans
|
|
9,569
|
|
|
5,338
|
|
Excess tax benefit from share-based compensation
|
|
2,567
|
|
|
—
|
|
Proceeds from borrowings
|
|
—
|
|
|
4,875
|
|
Principal payments of long-term obligations
|
|
(146
|
)
|
|
(97
|
)
|
Proceeds from borrowings under short-term lines of credit
|
|
—
|
|
|
4,069
|
|
Principal payments of short-term lines of credit
|
|
—
|
|
|
(4,069
|
)
|
Cash provided by financing activities
|
|
11,640
|
|
|
9,569
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(470
|
)
|
|
(616
|
)
|
Net increase in cash and cash equivalents
|
|
19,472
|
|
|
29,729
|
|
Cash and cash equivalents at beginning of period
|
|
119,997
|
|
|
75,497
|
|
Cash and cash equivalents at end of period
|
|
$
|
139,469
|
|
|
$
|
105,226
|
|
See accompanying notes to condensed consolidated financial statements.
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited condensed consolidated financial statements include the accounts of Integrated Silicon Solution, Inc. (the Company or ISSI) and its consolidated majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (which are of a normal, recurring nature) considered necessary for fair presentation have been included.
On September 14, 2012, the Company acquired approximately
94.1%
of the outstanding shares of Chingis Technology Corporation (Chingis) and the Company’s financial results reflect accounting for Chingis on a consolidated basis from the date of acquisition. In May 2013, the Company acquired an additional
4.8%
of Chingis for approximately
$1.6 million
. In October 2013, the Company acquired an additional
0.5%
of Chingis for approximately
$0.2 million
. At June 30, 2014, the Company owned approximately
99.4%
of the outstanding shares of Chingis.
The Company’s operating results for the
nine
months ended
June 30, 2014
are not necessarily indicative of the results that may be expected for the fiscal year ending
September 30, 2014
or for any other period. The financial statements included herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2013
.
Certain reclassifications have been made to prior year balances in order to conform to the current year's presentation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Such estimates include the useful lives of fixed assets, allowances for doubtful accounts and customer returns, valuation allowances for deferred tax assets, inventory write-downs, potential reserves relating to litigation matters, accrued liabilities, and other reserves. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs of what could occur in the future, given available information. Actual results may differ from those estimates, and such differences may be material to the financial statements.
|
|
3.
|
Impact of Recently Issued Accounting Pronouncements and Standards
|
The following issued accounting pronouncements are not yet effective for the Company as of June 30, 2014.
Liabilities
In February 2013, the Financial Accounting Standards Board (FASB) issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples of obligations include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The guidance requires an entity to measure such obligations as the sum of the amount that the reporting entity agreed to pay on the basis of its arrangement among its co-obligors in addition to amounts the reporting entity expects to pay on behalf of its co-obligors. The guidance becomes effective for the Company beginning in the first quarter of fiscal 2015 and is not expected to have a material impact on the Company's consolidated financial statements.
Foreign Currency Matters
In March 2013, FASB issued guidance on when foreign currency translation adjustments should be released to net income. When a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance becomes effective for the Company beginning in the first quarter of fiscal 2015 and is not expected to have a material impact on the Company's consolidated financial statements.
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Revenue from Contracts with Customers
In May 2014, FASB amended the existing accounting standards for revenue recognition. The new guidance establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The guidance becomes effective for the Company beginning in the first quarter of fiscal 2018. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company has not yet selected a transition method nor has the Company determined the impact of adopting the new revenue standard on its consolidated financial statements.
|
|
4.
|
Fair Value Measurements
|
Under FASB guidance, fair value is defined as the price expected to be received from the sale of an asset or paid to transfer a liability in a transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The FASB guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that the market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available at that time. The fair value hierarchy is broken down into the following three levels based on the reliability of inputs:
|
|
•
|
Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices which are readily and regularly available in an active market, valuation of these products can be done without a significant degree of judgment.
|
|
|
•
|
Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments and model-derived valuations in which all significant inputs and significant value drives are observable in active markets.
|
|
|
•
|
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
|
As of
June 30, 2014
and
September 30, 2013
, all of the Company’s financial assets utilize Level 1 inputs. The Company did not have any financial assets utilizing Level 2 or Level 3 inputs at
June 30, 2014
or
September 30, 2013
.
The following table represents the Company’s fair value hierarchy for financial assets measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
September 30,
2013
|
|
|
(Level 1)
|
|
(Level 1)
|
|
|
(In thousands)
|
Money market instruments (1)
|
|
$
|
19,321
|
|
|
$
|
19,318
|
|
Semiconductor Manufacturing International Corp.
|
|
|
|
|
(SMIC) common stock (2)
|
|
—
|
|
|
1,793
|
|
Nanya Technology Corporation (Nanya) common stock (2)
|
|
—
|
|
|
16,624
|
|
|
|
$
|
19,321
|
|
|
$
|
37,735
|
|
|
|
(1)
|
Included in cash and cash equivalents
|
|
|
(2)
|
Included in short-term investments
|
There were no transfers in or out of Level 1 assets during the three months ended
June 30, 2014
.
As of
June 30, 2014
, the Company did not have any liabilities or non-financial assets that are measured at fair value on a recurring basis.
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Available-for-sale marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
Amortized
Cost
|
|
Gross
Unrealized
Holding
Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Fair
Value
|
|
|
|
|
(In thousands)
|
|
|
Money market instruments
|
|
$
|
19,321
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,321
|
|
Certificates of deposit
|
|
21,266
|
|
|
—
|
|
|
—
|
|
|
21,266
|
|
Nanya common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
40,587
|
|
|
—
|
|
|
—
|
|
|
40,587
|
|
Less: Amounts included in cash, cash
|
|
|
|
|
|
|
|
|
equivalents and restricted cash
|
|
(38,841
|
)
|
|
—
|
|
|
—
|
|
|
(38,841
|
)
|
|
|
$
|
1,746
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,746
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
Amortized
Cost
|
|
Gross
Unrealized
Holding
Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Fair
Value
|
|
|
|
|
(In thousands)
|
|
|
Money market instruments
|
|
$
|
19,318
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,318
|
|
Certificates of deposit
|
|
15,595
|
|
|
—
|
|
|
—
|
|
|
15,595
|
|
SMIC common stock
|
|
1,099
|
|
|
694
|
|
|
—
|
|
|
1,793
|
|
Nanya common stock
|
|
7,100
|
|
|
9,524
|
|
|
—
|
|
|
16,624
|
|
Total
|
|
43,112
|
|
|
10,218
|
|
|
—
|
|
|
53,330
|
|
Less: Amounts included in cash and cash
|
|
|
|
|
|
|
|
|
equivalents
|
|
(31,772
|
)
|
|
—
|
|
|
—
|
|
|
(31,772
|
)
|
|
|
$
|
11,340
|
|
|
$
|
10,218
|
|
|
$
|
—
|
|
|
$
|
21,558
|
|
During the three months ended
June 30, 2014
, the Company sold its approximately
23.2 million
remaining shares of freely- tradeable Nanya common stock for approximately
$3.6 million
which resulted in a pre-tax gain of approximately
$2.1 million
. During the
nine
months ended
June 30, 2014
, the Company sold approximately
109.6 million
shares of Nanya common stock for approximately
$16.2 million
which resulted in a pre-tax gain of approximately
$9.2 million
. See Note 8 for further information regarding our Nanya share ownership.
During the
nine
months ended
June 30, 2014
, the Company sold all of its approximately
29.9 million
remaining shares of SMIC common stock for approximately
$3.2 million
which resulted in a pre-tax gain of approximately
$2.1 million
.
As of
June 30, 2014
and
September 30, 2013
, the Company had cash, cash equivalents, restricted cash and short-term investments in foreign financial institutions of
$70.2 million
(
$2.0 million
of which was in China and subject to exchange control regulations) and
$71.2 million
, respectively.
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
|
5.
|
Stock-based Compensation
|
Stock-Based Benefit Plans
The Company grants stock-based compensation awards under its 2007 Incentive Compensation Plan (the 2007 Plan) which permits the grant of stock options, stock appreciation rights (SARs), restricted stock awards, restricted stock units (RSUs), performance shares and performance units. The Company has outstanding grants under its 2012 Inducement Option Plan (the Inducement Plan) and under prior plans, though no further grants can be made under these plans. At
June 30, 2014
,
1,811,000
shares were available for future grant under the 2007 Plan. Options generally vest ratably over a
four
-year period with a
6
-month or
1
-year cliff vest and then vesting ratably over the remaining period. Options granted prior to October 1, 2005 expire
ten
years after the date of grant; options granted after October 1, 2005 expire
seven
years after the date of the grant. RSUs generally vest annually over periods ranging from
two
years to
four
years based upon continued employment with the Company.
The Company began granting cash-settled SARs in the first quarter of fiscal 2014. The SARs vest ratably over a
four
-year period with a
6
-month or
1
-year cliff vest and then vest ratably each month over the remaining period based upon continued employment with the Company. The SARs expire
seven
years after the date of grant. These SARs allow the holder to receive in cash the difference between the SARs' exercise price (which is the closing market price of the Company's common stock on the grant date) and the closing market price of the Company's common stock on the date the holder exercises the SAR. The SARs are recorded as a liability in accrued compensation and benefits in the Company's balance sheet.
The Company has an Employee Stock Purchase Plan (ESPP) which permits eligible employees to purchase shares of the Company’s common stock through payroll deductions. As approved by the Board of Directors, effective August 1, 2010, shares under the ESPP are purchased at a price equal to
85%
of the lesser of the fair market value of the Company’s common stock as of the first day or the last day of each
six
-month offering period. The offering periods under the ESPP commence on approximately February 1 and August 1 of each year. At
June 30, 2014
,
453,000
shares were available for future issuance under the ESPP.
Stock-Based Compensation
The following table outlines the effects of total stock-based compensation including expense related to SARs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
(In thousands)
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
50
|
|
|
$
|
46
|
|
|
$
|
154
|
|
|
$
|
133
|
|
Research and development
|
|
694
|
|
|
566
|
|
|
2,119
|
|
|
1,665
|
|
Selling, general and administrative
|
|
1,017
|
|
|
852
|
|
|
3,156
|
|
|
2,575
|
|
Total stock-based compensation
|
|
1,761
|
|
|
1,464
|
|
|
5,429
|
|
|
4,373
|
|
Tax effect on stock-based compensation
|
|
(330
|
)
|
|
—
|
|
|
(1,018
|
)
|
|
—
|
|
Net effect on net income
|
|
$
|
1,431
|
|
|
$
|
1,464
|
|
|
$
|
4,411
|
|
|
$
|
4,373
|
|
|
|
|
|
|
|
|
|
|
Compensation related to SARs included in total stock-based compensation
|
|
$
|
222
|
|
|
$
|
—
|
|
|
$
|
844
|
|
|
$
|
—
|
|
As of
June 30, 2014
, there was approximately
$9.4 million
of total unrecognized stock-based compensation expense related to options and awards under the Company’s stock-based benefit plans that will be recognized over a weighted-average period of approximately
2.23
years. Future stock option and award grants will add to this total whereas quarterly amortization and the vesting of the existing stock option and award grants will reduce this total. In addition, as of
June 30, 2014
, there was approximately
$54,000
of total unrecognized stock-based compensation expense under the Company’s ESPP that will be recognized over a weighted-average period of approximately
one
month. As of
June 30, 2014
, there was approximately
$4.4 million
of total unrecognized stock-based compensation expense related to SARs that will be recognized over a weighted-average period of approximately
3.36
years. Future SAR grants will add to this total whereas quarterly amortization and the vesting of the SARs will reduce this total. In addition, because the SARs are settled with cash, the fair value of the SARs must be revalued on a quarterly basis which will likely impact the amount of expense in future periods.
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company uses the Black-Scholes option pricing model to estimate the fair value of the options and SARS granted and rights to acquire stock granted under the ESPP. The weighted average estimated fair values of stock option grants and rights granted under the ESPP, as well as the weighted average assumptions used in calculating these values during the
three and nine
month periods ended
June 30, 2014
and
2013
were based on estimates at the date of grant as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Options
|
|
|
|
|
|
|
|
|
Weighted-average fair value of grants
|
|
$
|
6.13
|
|
|
$
|
4.31
|
|
|
$
|
4.70
|
|
|
$
|
4.31
|
|
Expected term in years
|
|
4.42
|
|
|
4.45
|
|
|
4.42
|
|
|
4.45
|
|
Estimated volatility
|
|
51
|
%
|
|
55
|
%
|
|
51
|
%
|
|
59
|
%
|
Risk-free interest rate
|
|
1.21
|
%
|
|
0.62
|
%
|
|
1.04
|
%
|
|
0.53
|
%
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
ESPP
|
|
|
|
|
|
|
|
|
Weighted-average fair value of grants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.66
|
|
|
$
|
2.30
|
|
Expected term in years
|
|
—
|
|
|
—
|
|
|
0.49
|
|
|
0.49
|
|
Estimated volatility
|
|
—
|
%
|
|
—
|
%
|
|
27
|
%
|
|
32
|
%
|
Risk-free interest rate
|
|
—
|
%
|
|
—
|
%
|
|
0.41
|
%
|
|
0.11
|
%
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The Company issues RSUs from time to time. The estimated fair value of RSU awards is calculated based on the market price of the Company’s common stock on the date of grant. The weighted average grant date fair value of RSUs granted in the
three
month period ended
June 30, 2014
was
$14.45
per share. The weighted average grant date fair value of RSUs granted in the
nine
month periods ended
June 30, 2014
and
June 30, 2013
, was
$11.62
per share and
$9.14
per share, respectively.
A summary of the Company’s stock option activity and related information for the
nine
months ended
June 30, 2014
follows (number of shares and aggregate intrinsic value are presented in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term in Years
|
|
Aggregate
Intrinsic Value
|
Outstanding at September 30, 2013
|
|
5,351
|
|
|
$
|
7.51
|
|
|
|
|
|
Granted
|
|
468
|
|
|
$
|
11.22
|
|
|
|
|
|
Exercised
|
|
(1,239
|
)
|
|
$
|
6.77
|
|
|
|
|
$
|
7,632
|
|
Cancelled/Expired
|
|
(121
|
)
|
|
$
|
10.18
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
4,459
|
|
|
$
|
8.03
|
|
|
3.94
|
|
$
|
30,036
|
|
Exercisable at June 30, 2014
|
|
2,759
|
|
|
$
|
6.87
|
|
|
3.13
|
|
$
|
21,800
|
|
Vested and expected to vest after June 30, 2014
|
|
4,384
|
|
|
$
|
8.00
|
|
|
3.91
|
|
$
|
29,689
|
|
A summary of the Company’s RSU activity and related information for the
nine
months ended
June 30, 2014
under the 2007 Plan follows (number of shares and aggregate intrinsic value are presented in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Aggregate
Intrinsic Value
|
Outstanding at September 30, 2013
|
|
269
|
|
|
$
|
9.02
|
|
|
|
Granted
|
|
88
|
|
|
$
|
11.62
|
|
|
|
Vested
|
|
(92
|
)
|
|
$
|
8.91
|
|
|
$
|
1,062
|
|
Forfeited
|
|
(1
|
)
|
|
$
|
10.64
|
|
|
|
Outstanding at June 30, 2014
|
|
264
|
|
|
$
|
9.92
|
|
|
$
|
3,899
|
|
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
A summary of the Company’s SAR activity and related information for the
nine
months ended
June 30, 2014
under the 2007 Plan follows (number of shares and aggregate intrinsic value are presented in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term in Years
|
|
Aggregate
Intrinsic Value
|
Outstanding at September 30, 2013
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Granted
|
|
779
|
|
|
$
|
10.96
|
|
|
|
|
|
Exercised
|
|
(3
|
)
|
|
$
|
10.96
|
|
|
|
|
|
Cancelled/Expired
|
|
(18
|
)
|
|
$
|
10.96
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
758
|
|
|
$
|
10.96
|
|
|
6.32
|
|
$
|
2,889
|
|
Exercisable at June 30, 2014
|
|
62
|
|
|
$
|
10.96
|
|
|
6.28
|
|
$
|
237
|
|
In the
three and nine
months ended
June 30, 2014
, revenue from the Company's largest distributor accounted for approximately
20%
and
18%
, respectively, of the Company's total net sales. In the
three and nine
months ended
June 30, 2014
, revenue from the Company's second largest distributor accounted for approximately
12%
and
13%
, respectively, of the Company's total net sales. In the
three and nine
months ended
June 30, 2013
, revenue from the Company's largest distributor accounted for approximately
13%
and
14%
, respectively, of the Company's total net sales. In the
three and nine
months ended
June 30, 2013
, revenue from the Company's second largest distributor accounted for approximately
10%
and
11%
, respectively, of the Company's total net sales.
The following is a summary of inventories by major category:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
September 30,
2013
|
|
|
(In thousands)
|
Purchased components
|
|
$
|
18,193
|
|
|
$
|
14,039
|
|
Work-in-process
|
|
27,570
|
|
|
20,960
|
|
Finished goods
|
|
34,334
|
|
|
33,470
|
|
|
|
$
|
80,097
|
|
|
$
|
68,469
|
|
During the
three and nine
months ended
June 30, 2014
, the Company recorded inventory write-downs of
$2.1 million
and
$4.3 million
, respectively. During the
three and nine
months ended
June 30, 2013
, the Company recorded inventory write-downs of
$1.2 million
and
$3.5 million
, respectively. The inventory write-downs were predominantly for excess and obsolescence and lower of cost or market issues on certain of the Company's products.
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
September 30,
2013
|
|
|
(In thousands)
|
Restricted assets
|
|
$
|
508
|
|
|
$
|
811
|
|
Other investment
|
|
1,469
|
|
|
1,684
|
|
Nanya private placement shares
|
|
10,831
|
|
|
10,920
|
|
Technology licenses, net
|
|
9,456
|
|
|
2,002
|
|
Other
|
|
1,182
|
|
|
1,162
|
|
|
|
$
|
23,446
|
|
|
$
|
16,579
|
|
The Company has various deposits including deposits with suppliers for purchase guarantees and for customs clearance. These deposits are included in restricted assets.
In September 2012, the Company invested approximately
$27.1 million
in Nanya, which was comprised of common shares which are classified as available-for-sale securities and private placement shares which are accounted for on the cost-basis. The Company accounts for the private placement shares it acquired in Nanya on the cost-basis as these securities are restricted and the restrictions do not terminate within
one
year of the reporting date. In addition, as of June 30, 2014, the Company had pledged
$5.3 million
of its Nanya private placement shares as collateral for the Company's accounts payable.
From time-to-time, the Company licenses patents or other intellectual property rights from third parties. The technology licenses are being amortized over their estimated useful lives ranging from
three
to
ten
years.
In March 2012, the Company made an equity investment of
$2.0 million
in a private technology company headquartered in Hong Kong. At June 30, 2014, the Company's ownership interest in such company was approximately
31%
. This investment is accounted for under the equity method and the Company's results include its percentage share of such company's results of operations in interest and other income, net.
|
|
9.
|
Purchased Intangible Assets
|
The following tables present details of the Company’s total purchased intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
|
(In thousands)
|
June 30, 2014
|
|
|
|
|
|
|
Developed technology
|
|
$
|
5,330
|
|
|
$
|
2,414
|
|
|
$
|
2,916
|
|
Customer relationships
|
|
3,340
|
|
|
997
|
|
|
2,343
|
|
Other
|
|
450
|
|
|
269
|
|
|
181
|
|
Total
|
|
$
|
9,120
|
|
|
$
|
3,680
|
|
|
$
|
5,440
|
|
September 30, 2013
|
|
|
|
|
|
|
Developed technology
|
|
$
|
5,330
|
|
|
$
|
1,758
|
|
|
$
|
3,572
|
|
Customer relationships
|
|
3,340
|
|
|
580
|
|
|
2,760
|
|
Other
|
|
450
|
|
|
156
|
|
|
294
|
|
Total
|
|
$
|
9,120
|
|
|
$
|
2,494
|
|
|
$
|
6,626
|
|
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table presents details of the amortization expense of purchased intangible assets as reported in the consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
(In thousands)
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
191
|
|
|
$
|
222
|
|
|
$
|
656
|
|
|
$
|
647
|
|
Operating expenses
|
|
177
|
|
|
176
|
|
|
530
|
|
|
544
|
|
Total
|
|
$
|
368
|
|
|
$
|
398
|
|
|
$
|
1,186
|
|
|
$
|
1,191
|
|
The following table presents the estimated future amortization expense of the Company’s purchased intangible assets at
June 30, 2014
(in thousands). The weighted-average remaining amortization period for developed technology, customer relationships and other intangibles is
4.29
years,
4.21
years and
1.21
years, respectively. If the Company acquires additional purchased intangible assets in the future, its future amortization may be increased by those assets.
|
|
|
|
|
Fiscal year
|
|
Remainder of 2014
|
$
|
347
|
|
2015
|
1,382
|
|
2016
|
1,238
|
|
2017
|
1,239
|
|
2018
|
1,195
|
|
Thereafter
|
39
|
|
Total
|
$
|
5,440
|
|
In December 2012, the Company obtained a bank loan in the amount of
$4.9 million
(the Loan), to partially finance the
$6.5 million
purchase price of approximately
2.85
acres of land and a
55,612
square foot building located at 1623 Buckeye Drive, Milpitas, California for its corporate headquarters. The Loan has a maturity date of November 30, 2017 and is secured by the property and an assignment of all leases and rents relating to the property. The Loan is subject to customary events of default, including defaults in the payment of principal and interest. The Loan bears an interest rate of
one
percent above
LIBOR
adjusted on a monthly basis. Principal payments due under the Loan are as follows (in thousands):
|
|
|
|
|
Fiscal year
|
|
Remainder of 2014
|
$
|
49
|
|
2015
|
195
|
|
2016
|
195
|
|
2017
|
195
|
|
2018
|
195
|
|
Thereafter
|
3,754
|
|
Total
|
$
|
4,583
|
|
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
|
11.
|
Accumulated Other Comprehensive Income
|
The components of accumulated other comprehensive income, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
September 30,
2013
|
|
|
(In thousands)
|
Accumulated foreign currency translation adjustments
|
|
$
|
3,767
|
|
|
$
|
4,787
|
|
Accumulated net unrealized gain on SMIC (net of tax of $0 and $275, respectively)
|
|
—
|
|
|
419
|
|
Accumulated net unrealized gain on Nanya (net of tax of $0 and $3,565, respectively)
|
|
—
|
|
|
5,959
|
|
Accumulated net retirement plan transition asset (net of tax of $148 and $148, respectively)
|
|
2
|
|
|
47
|
|
Accumulated net retirement plan actuarial losses (net of tax of $470 and $470, respectively)
|
|
(2,009
|
)
|
|
(2,091
|
)
|
Total accumulated other comprehensive income
|
|
$
|
1,760
|
|
|
$
|
9,121
|
|
The significant amounts reclassified out of accumulated other comprehensive income into the consolidated condensed statements of income, with presentation location, during the
three
and
nine
months ended
June 30, 2014
and
June 30, 2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
(In thousands)
|
|
|
Comprehensive Income Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Income
|
|
Amount Reclassified from Accumulated Other Comprehensive Income
|
|
Location
|
Unrealized holding gains (losses) on available-for -sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,616
|
|
|
$
|
4,428
|
|
|
$
|
9,618
|
|
|
$
|
5,232
|
|
|
Gain on the sale of investments
|
|
|
(592
|
)
|
|
(2,057
|
)
|
|
(3,589
|
)
|
|
(2,193
|
)
|
|
Provision for income taxes
|
|
|
$
|
1,024
|
|
|
$
|
2,371
|
|
|
$
|
6,029
|
|
|
$
|
3,039
|
|
|
|
The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the current quarter's year-to-date pre-tax income for fiscal
2014
. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company's annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the Company's ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than being included in the estimated annual effective income tax rate.
For the
three
and
nine
months ended
June 30, 2014
, the Company recorded income tax expense of
$2.4 million
and
$6.9 million
, respectively, that represents an effective tax rate of approximately
28%
and
25%
, respectively. The differences between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of
35%
, were primarily attributable to the differential in foreign tax rates, non-deductible stock-based compensation expense and certain foreign losses not benefited.
For the
three
months and
nine
months ended
June 30, 2013
, the Company recorded income tax expense of
$5.2 million
and
$9.6 million
, respectively, that represents an effective tax rate of approximately
42%
and
42%
, respectively. Discrete items were recorded in the
three
months and
nine
months ended
June 30, 2013
related to a decrease in the valuation allowance of approximately
$1.3 million
for foreign tax credit carryforwards based on the Company's estimated ability to use these carryforwards in the future as a result of a change in its legal structure and an increase in the valuation allowance for research and development credits of
$0.5 million
in certain foreign jurisdictions based on the Company's estimated inability to use these credits in the future. The
nine
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
months ended
June 30, 2013
includes an additional discrete item related to an increase in the valuation allowance of approximately
$1.5 million
for California net operating loss carryforwards based on the Company's estimated inability to use these carryforwards in the future as a result of a change in the Company's legal structure. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of
35%
, was primarily attributable to the impact of these discrete items, the differential in foreign tax rates, significant foreign inclusions and non-deductible stock-based compensation expense.
As of
June 30, 2014
, the Company had unrecognized tax positions that would impact its effective tax rate, if realized.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Numerator for basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
Net income attributable to ISSI
|
|
$
|
6,186
|
|
|
$
|
7,064
|
|
|
$
|
20,433
|
|
|
$
|
12,850
|
|
Denominator for basic net income per share:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
30,312
|
|
|
28,293
|
|
|
29,816
|
|
|
27,988
|
|
Dilutive stock options and awards
|
|
1,651
|
|
|
1,462
|
|
|
1,521
|
|
|
1,439
|
|
Denominator for diluted net income per share
|
|
31,963
|
|
|
29,755
|
|
|
31,337
|
|
|
29,427
|
|
Basic net income per share
|
|
$
|
0.20
|
|
|
$
|
0.25
|
|
|
$
|
0.69
|
|
|
$
|
0.46
|
|
Diluted net income per share
|
|
$
|
0.19
|
|
|
$
|
0.24
|
|
|
$
|
0.65
|
|
|
$
|
0.44
|
|
For the three months and
nine
months ended
June 30, 2014
, stock options and awards for
686,000
shares and
1,070,000
shares, respectively, were excluded from diluted earnings per share by the application of the treasury stock method. For the three months and
nine
months ended
June 30, 2013
, stock options and awards for
2,864,000
shares and
2,849,000
shares, respectively, were excluded from diluted earnings per share by the application of the treasury stock method.
|
|
14.
|
Common Stock Repurchase Program
|
In the
nine
month period ended
June 30, 2014
, the Company did not repurchase any shares of its common stock in the open market. As of
June 30, 2014
, the Company had repurchased and retired an aggregate of
14,179,711
shares of common stock at a cost of approximately
$88.5 million
since September 2007. As of
June 30, 2014
,
$19.8 million
remained available under the Company's existing share repurchase authorization.
The Company issues RSUs as part of its equity incentive plan. For a portion of the RSUs granted, the number of shares issued on the date the RSUs vest is net of the statutory withholding requirements that the Company pays on behalf of its employees. During the
nine
months ended
June 30, 2014
, the Company withheld
30,323
shares to satisfy approximately
$0.4 million
of employee tax obligations. Although the shares withheld are not issued, they are treated as common stock repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting.
|
|
15.
|
Commitments and Contingencies
|
Legal Matters
In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights of others. The Company has been, and from time-to-time expects to be, notified of claims that it may be infringing patents, maskwork rights or copyrights owned by third parties. If it appears necessary or desirable, the Company may seek licenses under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, licenses may not be offered and the terms of any offered licenses may not be acceptable to the Company. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by the Company could cause it to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, any of which could materially and adversely affect the Company’s business and operating results. Furthermore, there can be no assurance that the Company will not become involved in protracted litigation regarding its alleged infringement of third
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
party intellectual property rights or litigation to assert and protect its patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property matters could result in substantial cost and diversion of the Company’s resources.
GSI Technology Inc. v. Integrated Silicon Solution, Inc., et al.
On October 2, 2013, GSI Technology Inc. (GSI) filed a Second Amended Complaint in a lawsuit filed earlier in 2013 solely against defendant United Memories, Inc. in the United States District Court for the Northern District of California. GSI named the Company as a new, second defendant in the Second Amended Complaint. On April 18, 2014, the Court granted the Company's motion to dismiss that complaint in part, leaving claims against the Company for Unfair Competition under California Business & Professions Code 17200, misappropriation of trade secrets, and intentional interference with prospective economic advantage. In the remaining portion of the complaint, GSI alleges that the Company acted together with United Memories, Inc. to harm GSI in connection with a bid from Cisco Systems, Inc. and misappropriated alleged GSI trade secrets. GSI seeks damages and injunctive relief. The Company filed an answer on June 2, 2014 and asserted a declaratory relief counterclaim against GSI. Before the Company was named as a defendant, the Court denied motions by GSI against United Memories, Inc. for temporary and preliminary injunctive relief. The Court issued a case management order on June 13, 2014 with a scheduled trial date of July 13, 2015. The Company believes it has meritorious defenses to the claims alleged by GSI and intends to defend this suit vigorously. However, there can be no assurance as to the outcome of this matter or any future litigation.
Other Legal Proceedings
In the ordinary course of its business, the Company has been involved in a limited number of other legal actions, both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not presently determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations. However, no assurances can be given with respect to the extent or outcome of any such litigation in the future.
Commitments to Wafer Fabrication Facilities and Contract Manufacturers
The Company issues purchase orders for wafers to various wafer foundries. These purchase orders are generally considered to be cancelable. However, to the degree that the wafers have entered into work-in-process at the foundry, as a matter of practice, it becomes increasingly difficult to cancel the purchase order. As of
June 30, 2014
, the Company had approximately
$26.6 million
of purchase orders for which the related wafers had been entered into wafer work-in-process (i.e., manufacturing had begun).
|
|
16.
|
Geographic and Segment Information
|
The Company has one operating segment, which is to design, develop, and market high-performance SRAM, DRAM, and other semiconductor products. The following table summarizes the Company’s operations in different geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,571
|
|
|
$
|
9,517
|
|
|
$
|
28,449
|
|
|
$
|
27,731
|
|
China
|
|
9,838
|
|
|
10,477
|
|
|
32,689
|
|
|
20,579
|
|
Hong Kong
|
|
16,456
|
|
|
13,638
|
|
|
45,499
|
|
|
50,532
|
|
Japan
|
|
5,916
|
|
|
8,194
|
|
|
16,569
|
|
|
23,241
|
|
Korea
|
|
4,000
|
|
|
3,311
|
|
|
10,544
|
|
|
10,064
|
|
Taiwan
|
|
12,344
|
|
|
11,230
|
|
|
35,099
|
|
|
30,447
|
|
Other Asia Pacific countries
|
|
6,435
|
|
|
5,880
|
|
|
18,390
|
|
|
18,374
|
|
Europe
|
|
19,587
|
|
|
14,797
|
|
|
56,207
|
|
|
46,681
|
|
Other
|
|
687
|
|
|
744
|
|
|
1,379
|
|
|
1,529
|
|
Total net sales
|
|
$
|
84,834
|
|
|
$
|
77,788
|
|
|
$
|
244,825
|
|
|
$
|
229,178
|
|
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
September 30,
2013
|
|
|
(In thousands)
|
Long-lived assets
|
|
|
|
|
United States
|
|
$
|
10,943
|
|
|
$
|
9,696
|
|
Hong Kong
|
|
16
|
|
|
7
|
|
China
|
|
3,955
|
|
|
3,424
|
|
Taiwan
|
|
35,307
|
|
|
33,377
|
|
|
|
$
|
50,221
|
|
|
$
|
46,504
|
|
Revenues are attributed to countries based on the customers' ship-to location.
Long-lived assets by geographic area are those assets used in the Company’s operations in each area.
|
|
17.
|
Related Party Transactions
|
The Company sells semiconductor products to Chrontel International Ltd. (Chrontel). Jimmy S.M. Lee, the Company’s Executive Chairman, has been a director of Chrontel since July 1995. Sales to Chrontel were
$80,000
and
$162,000
during the
three
months and
nine
months ending
June 30, 2014
, respectively. Sales to Chrontel were
$104,000
and
$294,000
during the
three
months and
nine
months ending
June 30, 2013
, respectively. Accounts receivable from Chrontel was approximately
$26,000
and
$65,000
at
June 30, 2014
and
September 30, 2013
, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this report that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of our operations. Also, when we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. You should note that an investment in our securities involves certain risks and uncertainties that could affect our future financial results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in “Risk Factors” and elsewhere in this report.
We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risks described in “Risk Factors” included in this report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in “Risk Factors” and elsewhere in this report could harm our business and adversely affect our results.
All forward-looking statements made by us or persons acting on our behalf are expressly qualified in their entirety by the "Risk Factors" and other cautionary statements set forth in this report. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.
Overview
We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) automotive, (ii) communications, (iii) industrial, medical and military (IMM), and (iv) digital consumer. Our primary products are low and medium density DRAM, high speed and low power SRAM, serial and parallel NOR flash products and a variety of mixed signal and analog products. In the first nine months of fiscal 2014 and in fiscal 2013, approximately 89% and 88%, respectively, of our revenue was derived from our DRAM and SRAM products. Sales of our DRAM products have represented a majority of our revenue in each year since fiscal 2003.
On September 14, 2012, we acquired approximately 94.1% of the outstanding shares of Chingis Technology Corporation (Chingis) for approximately $32 million, or $13 million net of the approximately $19 million in cash and cash equivalents on Chingis' balance sheet at closing. In May 2013 and October 2013, we acquired additional shares of Chingis. At June 30, 2014, we owned approximately 99.4% of the outstanding shares of Chingis. Founded in 1995, Chingis provides a variety of NOR flash memory technologies used in standalone and embedded applications. Chingis is headquartered in HsinChu, Taiwan and has offices in Taiwan, Korea, China and the U.S. Our financial results reflect accounting for Chingis on a consolidated basis beginning on September 14, 2012.
On January 31, 2011, we acquired Si En Integration Holdings Limited (Si En), a privately held fabless provider of high performance analog and mixed signal integrated circuits headquartered in Xiamen, China. Si En targets the mobile communications, digital consumer, networking, and automotive markets. Si En’s current products include audio power amplifiers, LED drivers, power management and temperature sensors.
In order to control our operating expenses, for the past several years we have limited our headcount in the U.S. and maintained much of our operations in Taiwan and China. We believe this strategy has enabled us to limit our operating expenses while simultaneously locating these operations closer to our manufacturing partners and our customers. As a result of these efforts, we currently have significantly more employees in Asia than we do in the U.S. We intend to continue these strategies going forward.
As a fabless semiconductor company, our business model is less capital intensive because we rely on third parties to manufacture, assemble and test our products. Because of our dependence on third-party wafer foundries, our ability to increase our unit sales volumes depends on our ability to increase our wafer capacity allocation from current foundries, add additional foundries and improve yields of good die per wafer. In recent years, it has become more difficult for us to secure long-term foundry capacity (particularly for our DRAM products) due to industry consolidation affecting foundries and adverse financial conditions at foundries. In this regard, in September 2012, we invested approximately $27.1 million in Nanya and entered into an agreement with Nanya to provide us with access to leading edge process technologies and certain wafer volume guarantees. In addition, certain of our foundries have decided from time to time not to produce the type of wafers that we need (especially certain types of DRAM wafers) so we have been forced to rely on alternative sources of supply and to place large last time buy orders which expose us to the risk of inventory obsolescence. Once a product is in production at a particular foundry, it is time consuming and costly to have such product manufactured at a different foundry. Although such matters have not had a material adverse impact
on our business or financial results in recent periods, there can be no assurance as to the future impact that such matters will have on our business, customer relationships or results of operations.
The average selling prices of our DRAM and SRAM products are sensitive to supply and demand conditions in our target markets and have generally declined over time. We experienced declines in the average selling prices for certain of our products in the first nine months of fiscal 2014 and in fiscal 2013. We expect average selling prices for our products to decline in the future, principally due to market demand, market competition and the supply of competitive products in the market. Any future decreases in our average selling prices could have an adverse impact on our revenue, gross margins and operating margins. Our ability to maintain or increase revenues will be highly dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling prices will adversely affect our gross margins unless we are able to offset such declines with commensurate reductions in per unit costs or changes in product mix in favor of higher margin products.
Revenue from product sales to our direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. A portion of our sales is made to distributors under agreements that provide for the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with credits that will be issued to these distributors, we defer recognition of such sales until our products are sold by the distributors to their end customers. Revenue from sales to distributors who do not have sales price rebates or product return privileges is recognized at the time our products are sold by us to the distributors.
We market and sell our products in Asia, the U.S., Europe and other locations through our direct sales force, distributors and sales representatives. The percentage of our sales shipped outside the U.S. was approximately 89% in the three months ended June 30, 2014, approximately 88% in the three months ended June 30, 2013, and approximately 88% in each of the nine months ended June 30, 2014 and June 30, 2013. We measure sales location by the shipping destination. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales. The percentages of our net sales by region are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Nine Months Ended
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Asia
|
|
65
|
%
|
|
68
|
%
|
|
65
|
%
|
|
67
|
%
|
Europe
|
|
23
|
|
|
19
|
|
|
23
|
|
|
20
|
|
U.S.
|
|
11
|
|
|
12
|
|
|
12
|
|
|
12
|
|
Other
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Our sales are generally made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog may not be a good indicator of our future sales. Cancellations of customer orders or changes in product specifications could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses.
Due to the complex nature of the markets we serve and the broad fluctuations in economic conditions in the U.S. and other countries, it is difficult for us to assess the impact of seasonal factors on our business.
We are subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China, changes in trade policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. Most of our foundries and all of our assembly and test subcontractors are located in Asia. Although our international sales are largely denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, we have foreign operations where expenses are generally denominated in the local currency. Such transactions expose us to the risk of exchange rate fluctuations. We monitor our exposure to foreign currency fluctuations, but have not adopted any hedging strategies to date. There can be no assurance that exchange rate fluctuations will not harm our business and operating results in the future.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make difficult and subjective estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The estimates and judgments that we use in applying our accounting policies have a significant impact on the results we report in our financial statements. We base our estimates and judgments on our historical experience combined with knowledge of current conditions and our beliefs of what could occur in the future, considering the information available at the time. Actual results could differ from those estimates and such differences may be material to our financial statements. We reevaluate our estimates and judgments on an ongoing basis.
Our critical accounting policies which are impacted by our estimates are: (i) the valuation of our inventory, which impacts cost of goods sold and gross profit; (ii) the valuation of our allowance for sales returns and allowances, which impacts net sales; (iii) the valuation of our allowance for doubtful accounts, which impacts general and administrative expense; (iv) accounting for acquisitions and goodwill, which impacts cost of goods sold and operating expense when we record impairments; (v) accounting for stock-based compensation which impacts costs of goods sold, research and development expense and selling, general and administrative expense and (vi) accounting for income taxes. Each of these policies is described in more detail below. We also have other key accounting policies that may not require us to make estimates and judgments that are as subjective or difficult. For instance, our policies with regard to revenue recognition, including the deferral of revenues on sales to distributors with sales price rebates and product return privileges. These policies are described in the notes to our financial statements contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013.
Valuation of inventory
. Our inventories are stated at the lower of cost or market value. Determining the market value of inventories on hand and at distributors as of the balance sheet date involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories. When market values are below our costs, we record a charge to cost of goods sold to write down our inventories to their estimated market value in advance of when the inventories are actually sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when the written down products are sold. In addition to lower of cost or market write-downs, we also analyze inventory to determine whether any of it is excess, obsolete or defective. We write down to zero dollars (which is a charge to cost of goods sold) the carrying value of inventory on hand that has aged over one year (two years for wafer and die bank) to cover estimated excess and obsolete exposures, unless adjustments are made based on management’s judgments for newer products, end of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, we take into account the product life cycles which can range from six to 30 months, the stage in the life cycle of the product, and the impact of competitors’ announcements and product introductions on our products. Once established, these write-downs are considered permanent.
Valuation of allowance for sales returns and allowances
. Net sales consist principally of total product sales less estimated sales returns and allowances. To estimate sales returns and allowances, we analyze potential customer specific product application issues, potential quality and reliability issues and historical returns. We evaluate quarterly the adequacy of the allowance for sales returns and allowances. This allowance is reflected as a reduction to accounts receivable in our consolidated balance sheets. Increases to the allowance are recorded as a reduction to net sales. Because the allowance for sales returns and allowances is based on our judgments and estimates, particularly as to product application, quality and reliability issues, our allowances may not be adequate to cover actual sales returns and other allowances. If our allowances are not adequate, our net sales could be adversely affected.
Valuation of allowance for doubtful accounts
. We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers’ inability to make required payments for goods and services purchased from us. We make our estimates of the uncollectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. Once an account is deemed unlikely to be fully collected, we write down the carrying value of the receivable to the estimated recoverable value, which results in a charge to general and administrative expense, which decreases our profitability.
Accounting for acquisitions and goodwill.
We account for acquisitions using the purchase accounting method. Under this method, the total consideration paid is allocated over the fair value of the net assets acquired, including in-process research and development, with any excess allocated to goodwill. Goodwill is defined as the excess of the purchase price over the fair value allocated to the net assets. Our judgments as to the fair value of the assets will, therefore, affect the amount of goodwill that we record. Management is responsible for the valuation of tangible and intangible assets. For tangible assets acquired in any acquisition, such as plant and equipment, the useful lives are estimated by considering comparable lives of similar assets, past history, the intended use of the assets and their condition. In estimating the useful life of the acquired intangible assets with definite lives, we
consider the industry environment and unique factors relating to each product relative to our business strategy and the likelihood of technological obsolescence. Acquired intangible assets primarily include developed and in-process technology (IPR&D), customer relationships, trade names and non-compete agreements. The amounts allocated to IPR&D projects are not expensed until technological feasibility is reached for each project. Upon completion of development for each project, the acquired IPR&D will be amortized over its useful life. We are currently amortizing our acquired intangible assets with definite lives over periods generally ranging from three to six years.
We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances where indicators of impairment may exist. For instance, in response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of tangible and intangible assets, including goodwill. In this regard, in fiscal 2012, we recorded impairment charges of $13.1 million for intangible assets and goodwill from our acquisition of Si En and $1.2 million for the impairment of certain tangible assets.
Accounting for stock-based compensation.
Stock option fair value is calculated on the date of grant using the Black-Scholes valuation model. The compensation cost is then recognized on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. The Black-Scholes valuation model requires us to estimate key assumptions such as expected term, volatility, dividend yield and risk-free interest rates that determine the stock option fair value. In addition, we estimate forfeitures at the time of grant. In subsequent periods, if actual forfeitures differ from the estimate, the forfeiture rate may be revised. We estimate our expected forfeitures rate based on our historical activity and judgment regarding trends. We estimate the expected term for option grants based upon historical exercise data. If we determined that another method used to estimate expected life was more reasonable than our current method, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value calculated could change materially. We also use the Black-Scholes method to estimate the value of cash-settled stock appreciation rights (SARs). The fair value of the SARs must be revalued on a quarterly basis which will likely impact the amount of our expense in future periods. Upon the exercise of a SAR, the expense recognized is adjusted to reflect the difference between the exercise price of the SAR and the closing market price of our common stock on the date of exercise.
Accounting for income taxes.
We account for income taxes under the asset and liability approach. We record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, projections of future income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and practical tax planning strategies. To the extent we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we would increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent primarily upon future U.S. and foreign taxable income. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.
We are subject to income taxes in the U.S. and foreign countries, and we are subject to routine corporate income tax audits in certain of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities may challenge certain positions, which may not be fully sustained. Our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgment and estimates. We evaluate our uncertain tax positions and believe that our provision for uncertain tax positions, including related interest and penalties, is adequate based on information currently available to us. However, the amount ultimately paid upon resolution of audits could be materially different from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. Our overall tax provision requirement could change due to the issuance of new regulations or new case law, management's judgments on undistributed foreign earnings including judgments about and intentions concerning our future operations, negotiations with tax authorities, resolution with respect to individual audit issues, or the entire audit, or the expiration of statutes of limitations.
Accounting Changes and Recent Accounting Pronouncements
For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated condensed financial statements, see “Note 3: Impact of Recently Issued Accounting Pronouncements and Standards” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.
Results of Operations
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
Net Sales
. Net sales consist principally of total product sales less estimated sales returns. Net sales increased to $84.8 million in the three months ended June 30, 2014 from $77.8 million in the three months ended June 30, 2013. The increase of $7.0 million was primarily the result of a $8.3 million increase in our DRAM and SRAM revenue in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in our DRAM revenue can be attributed to an increase in unit shipments along with an increase in average selling prices due to a change in product mix to higher density products. The increase in our SRAM revenue can be attributed to an increase in unit shipments. However, our flash revenue decreased by $1.4 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 as a result of a decrease in unit shipments. Our analog revenue increased by $0.1 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. We anticipate that the average selling prices of our existing products will generally decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that any future price declines will be offset by higher volumes or by higher prices on newer products.
In the three months ended June 30, 2014, revenue from our largest and second largest distributor accounted for approximately 20% and 12%, respectively, of our total net sales. In the three months ended June 30, 2013, revenue from our largest and second largest distributor accounted for approximately 13% and 10%, respectively, of our total net sales.
Gross profit
. Cost of sales includes die cost from wafers acquired from foundries, subcontracted package, assembly and test costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit increased by $3.3 million to $29.3 million in the three months ended June 30, 2014 from $26.0 million in the three months ended June 30, 2013 primarily as a result of an increase in DRAM and SRAM shipments. Our gross margin was 34.5% in the three months ended June 30, 2014 compared to 33.5% in the three months ended June 30, 2013. The increase in gross margin in the three months ended June 30, 2014 compared to the three months ended June 30, 2013 can be attributed to a change in product mix for our DRAM and SRAM products. In addition, we achieved cost reductions for assembly and test charges for certain products which benefited our gross margin. We believe that the average selling prices of our products will decline over time and, unless we are able to reduce our cost per unit to the extent necessary to offset such declines, the decline in average selling prices could result in a material decline in our gross margin. In addition, our product costs could increase if our suppliers raise prices, which could result in a material decline in our gross margin. Although we have product cost reduction programs in place that involve efforts to reduce internal costs and supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset the expected declines in average selling prices. We do not believe that such cost reduction efforts are likely to have a material adverse impact on the quality of our products or the level of service provided by us.
Research and Development
. Research and development expenses increased by 4% to $11.0 million in the three months ended June 30, 2014 from $10.6 million in the three months ended June 30, 2013. As a percentage of net sales, research and development expenses decreased to 12.9% in the three months ended June 30, 2014 from 13.6% in the three months ended June 30, 2013. The increase in research and development expenses of $0.4 million was primarily the result of an increase in headcount related expenses partially offset by a decrease in product development costs. We expect the dollar amount of our research and development expenses to increase in the September 2014 quarter and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales
.
Selling, General and Administrative
. Selling, general and administrative expenses increased by 10% to $11.9 million in the three months ended June 30, 2014 from $10.8 million in the three months ended June 30, 2013. As a percentage of net sales, selling, general and administrative expenses increased to 14.1% in the three months ended June 30, 2014 from 13.9% in the three months ended June 30, 2013. The increase in selling, general and administrative expenses of $1.1 million was primarily the result of an increase in headcount related expenses, expenses related to our world-wide sales conference, sales commissions and legal fees related to ongoing litigation. We expect the dollar amount of our selling, general and administrative expenses to increase in the September 2014 quarter and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.
Interest and other income, net.
Interest and other income, net was $0.1 million in the three months ended June 30, 2014 compared to $0.5 million in the three months ended June 30, 2013. The $0.1 million of interest and other income in the three months ended June 30, 2014 is comprised primarily of $0.2 million in rental income from the lease of excess space in our Taiwan facility and an exchange loss of $0.1 million as a result of the depreciation of the U.S. dollar compared to the New Taiwan dollar. The $0.5 million of interest and other income in the three months ended June 30, 2013 is comprised primarily of $0.3 million in rental income from the lease of excess space in our Taiwan facility and an exchange gain of $0.3 million as a result of the appreciation of the U.S. dollar compared to the New Taiwan dollar partially offset by other items.
Gain on the sale of investments.
Gain on the sale of investments was $2.1 million in the three months ended June 30, 2014 compared to $7.2 million in the three months ended June 30, 2013. In the three months ended June 30, 2014, we sold our approximately 23.2 million remaining salable shares of Nanya common stock for approximately $3.6 million which resulted in a pre-tax gain of approximately $2.1 million. In the three months ended June 30, 2013, we sold approximately 69.0 million shares of Nanya common stock for approximately $11.5 million which resulted in a pre-tax gain of approximately $7.0 million, and we sold our investment in Giantec for approximately $4.3 million which resulted in a pre-tax gain of approximately $0.2 million.
Provision for income taxes.
For the three months ended June 30, 2014, we recorded income tax expense of $2.4 million that represents an effective tax rate of approximately 28%. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the differential in foreign tax rates, non-deductible stock-based compensation expense and certain foreign losses not benefited. For the three months ended June 30, 2013, we recorded income tax expense of $5.2 million that represents an effective tax rate of approximately 42%. In the three months June 30, 2013, we recorded a decrease in the valuation allowance of approximately $1.3 million for foreign tax credit carryforwards based on our estimated ability to use these carryforwards in the future as a result of a change in our legal structure and an increase in the valuation allowance for research and development credits of $0.5 million in certain foreign jurisdictions based on our estimated inability to use these credits in the future. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the impact of such items, the differential in foreign tax rates, significant foreign inclusions and non-deductible stock-based compensation expense.
Net (income) loss attributable to noncontrolling interests.
The net income attributable to noncontrolling interests was $41,000 in the three months ended June 30, 2014 compared to $182,000 in the three months ended June 30, 2013.
Nine Months Ended June 30, 2014 Compared to Nine Months Ended June 30, 2013
Net Sales
. Net sales increased to $244.8 million in the nine months ended June 30, 2014 from $229.2 million in the nine months ended June 30, 2013. The increase of $15.6 million was primarily the result of a $18.6 million increase in our DRAM and SRAM revenue in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013. The increase in our DRAM revenue can be attributed to an increase in unit shipments along with and increase in average selling prices due to a change in product mix to higher density products. The increase in our SRAM revenue can be attributed to an increase in unit shipments. However, our flash revenue decreased by $3.3 million in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013 as a result of a decrease in unit shipments. Our analog revenue increased by $0.3 million in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013.
In the nine months ended June 30, 2014, revenue from our largest and second largest distributor accounted for approximately 18% and 13%, respectively, of our total net sales. In the nine months ended June 30, 2013, revenue from our largest and second largest distributor accounted for approximately 14% and 11%, respectively, of our total net sales.
Gross profit
. Gross profit increased by $7.1 million to $82.6 million in the nine months ended June 30, 2014 from $75.5 million in the nine months ended June 30, 2013 primarily as a result of an increase in DRAM and SRAM shipments. Our gross margin was 33.7% in the nine months ended June 30, 2014 compared to 33.0% in the nine months ended June 30, 2013. The increase in gross margin in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013 can be attributed to a change in product mix for our DRAM and SRAM products. In addition, we achieved cost reductions for assembly and test charges for certain products which benefited our gross margin.
Research and development
. Research and development expenses increased by 5% to $32.4 million in the nine months ended June 30, 2014 from $30.9 million in the nine months ended June 30, 2013. As a percentage of net sales, research and development expenses decreased to 13.2% in the nine months ended June 30, 2014 from 13.5% in the nine months ended June 30, 2013. The increase in research and development expenses of $1.5 million was primarily the result of an increase in headcount related expenses partially offset by a decrease in product development costs.
Selling, general and administrative
. Selling, general and administrative expenses increased by 7% to $34.8 million in the nine months ended June 30, 2014 from $32.6 million in the nine months ended June 30, 2013. As a percentage of net sales, selling, general and administrative expenses were 14.2% in each of the nine months ended June 30, 2014 and the nine months ended June 30, 2013. The increase in selling, general and administrative expenses of $2.2 million was primarily the result of an increase in headcount related expenses, sales commissions, expenses related to our world-wide sales conference and legal fees related to ongoing litigation.
Interest and other income, net.
Interest and other income, net was $0.9 million in the nine months ended June 30, 2014 compared to $1.3 million in the nine months ended June 30, 2013. The $0.9 million of interest and other income in the nine months ended June 30, 2014 is comprised primarily of $0.7 million in rental income from the lease of excess space in our Taiwan facility and an exchange gain of $0.4 million as a result of the appreciation of the U.S. dollar compared to the New Taiwan dollar partially
offset by $0.2 million of other items. The $1.3 million of interest and other income in the nine months ended June 30, 2013 is comprised primarily of $0.9 million in rental income from the lease of excess space in our Taiwan facility and an exchange gain of $0.5 million as a result of the appreciation of the U.S. dollar compared to the New Taiwan dollar partially offset by other items.
Gain on the sale of investments.
Gain on the sale of investments was $11.3 million in the nine months ended June 30, 2014 compared to $9.3 million in the nine months ended June 30, 2013. In the nine months ended June 30, 2014, we sold approximately 109.6 million shares of Nanya common stock for approximately $16.2 million which resulted in a pre-tax gain of approximately $9.2 million. In addition, we sold our remaining shares of SMIC for approximately $3.2 million which resulted in a pre-tax gain of approximately $2.1 million. In the nine months ended June 30, 2013, we sold approximately 109.5 million shares of Nanya common stock for approximately $16.1 million which resulted in a pre-tax gain of approximately $9.1 million. In addition, we sold our investment in Giantec for approximately $4.3 million which resulted in a pre-tax gain of approximately $0.2 million.
Provision for income taxes.
For the nine months ended June 30, 2014, we recorded income tax expense of $6.9 million that represents an effective tax rate of approximately 25%. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the differential in foreign tax rates and non-deductible stock-based compensation expense. For the nine months ended June 30, 2013, we recorded income tax expense of $9.6 million that represents an effective tax rate of approximately 42%. In the nine months ended June 30, 2013, we recorded an increase in the valuation allowance of approximately $1.5 million for California net operating loss carryforwards and a decrease in the valuation allowance of approximately $1.3 million for foreign tax credit carryforwards based on our estimated ability to use these carryforwards in the future as a result of a change in our legal structure. In addition, we recorded an increase in the valuation allowance for research and development credits of $0.5 million in certain foreign jurisdictions based on our estimated inability to use these credits in the future. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the impact of such items, the differential in foreign tax rates, significant foreign inclusions and non-deductible stock-based compensation expense.
Net income attributable to noncontrolling interests.
The net income attributable to noncontrolling interests was $198,000 in the nine months ended June 30, 2014 compared to $164,000 in the nine months ended June 30, 2013.
Liquidity and Capital Resources
As of June 30, 2014, our principal sources of liquidity included cash, cash equivalents, restricted cash and short-term investments of approximately $142.2 million. During the nine months ended June 30, 2014, we generated $5.7 million from operating activities compared to $21.9 million generated in the nine months ended June 30, 2013. The cash provided by operations in the nine months ended June 30, 2014 was primarily due to our net income of $20.6 million adjusted for non-cash items of $0.7 million and increases in accrued liabilities of $5.8 million. This was partially offset by increases in accounts receivable of $4.3 million, increases in inventories of $11.5 million, increases in other assets of $1.3 million and decreases in accounts payable of $2.9 million. The cash provided by operations in the nine months ended June 30, 2013 was primarily due to our net income of $13.0 million adjusted for non-cash items of $7.3 million, increases in accounts payable of $2.2 million, decreases in inventories of $0.9 million and decreases in other assets of $0.7 million. This was partially offset by decreases in accrued liabilities of $1.5 million and increases in accounts receivable of $0.7 million.
In the nine months ended June 30, 2014, we generated $2.6 million from investing activities compared to $1.1 million used in the nine months ended June 30, 2013. The cash generated in the nine months ended June 30, 2014 included $16.2 million from the sale of our remaining approximately 109.6 million freely-tradeable shares of Nanya common stock, $3.2 million from the sale of our remaining shares of SMIC common stock and $1.4 million from net sales of other available-for-sale securities. In the nine months ended June 30, 2014, we used $9.9 million for the acquisition of property and equipment, $7.1 million for the payment of license fees, $1.0 million to collateralize accounts payable to a supplier and $0.2 million to acquire additional shares of our Chingis subsidiary. The cash used in the nine months ended June 30, 2013 included $17.9 million for the acquisition of property, equipment and building improvements including $9.1 million for our new corporate headquarters and $2.4 million for office space in Suzhou, China, $4.2 million for the payment of a holdback related to our acquisition of Si En and $1.6 million to acquire an additional 4.8% of the noncontrolling interest in our Chingis subsidiary. In the nine months ended June 30, 2013, we generated $16.1 million from the sale of approximately 109.5 million shares of Nanya common stock, $4.3 million from the sale of our investment in Giantec and $2.2 million from net sales of available-for-sale securities.
In the nine months ended June 30, 2014, we made capital expenditures of approximately $9.9 million for test equipment, engineering tools, computer hardware and software. On June 25, 2014, we entered into an agreement to purchase an approximately 30,908 square foot building located in Zhangjiang Hi-tech Park, Shanghai, China. We will relocate our Shanghai operations to this location upon completion of the building improvements which is expected in mid-2015. The purchase price is approximately $8.4 million which will be paid from our existing cash and cash equivalent balances. We expect to spend approximately $22.0
million to $27.0 million to purchase property, building improvements and capital equipment during the next twelve months, including approximately $10 million for the purchase of the Shanghai building and related improvements and the remaining balance for additional test equipment, design and engineering tools, and computer hardware and software. We expect to fund our capital expenditures from our existing cash and cash equivalent balances.
We generated $11.6 million from financing activities during the nine months ended June 30, 2014 compared to $9.6 million during the nine months ended June 30, 2013. Our sources of financing for the nine months ended June 30, 2014 were proceeds from the issuance of common stock of $9.6 million from stock option exercises and sales under our employee stock purchase plan and $2.6 million excess tax benefits from share-based compensation. In the nine months ended June 30, 2014, we used $0.4 million to settle shares withheld for statutory withholding requirements upon the vesting of RSUs and $0.2 million for the repayment of long-term borrowings. Our sources of financing for the nine months ended June 30, 2013 were borrowings of $4.9 million to purchase our new corporate headquarters in Milpitas, California, borrowing of $4.1 million under short-term lines of credit and proceeds from the issuance of common stock of $5.3 million from stock option exercises and sales under our employee stock purchase plan. In the nine months ended June 30, 2013, we used $4.2 million for the repayment of short-term and long-term borrowings and $0.5 million to settle shares withheld for statutory withholding requirements upon the vesting of RSUs.
At June 30, 2014, we had $17.4 million in borrowings available through a number of short-term lines of credit with various financial institutions in Taiwan. These lines of credit expire at various times through March 2015. As of June 30, 2014, we had no outstanding borrowings under these short-term lines of credit.
On December 4, 2012, we purchased a building in Milpitas, California consisting of 55,612 square feet on approximately 2.85 acres for $6.5 million. We relocated our headquarters to this location in June 2013. We financed a portion of the purchase price for our new headquarters with a loan for approximately $4.9 million. In Taiwan, we own and occupy our building and the land upon which our building is situated is leased under an operating lease that expires in March 2016. We have operations in leased sites in the U.S., China and Hong Kong. In addition to these sites, we lease sales offices in the U.S., Europe and Asia. These leases expire at various dates through 2019. Our outstanding commitments under these leases were approximately $2.3 million at June 30, 2014.
We generally warrant our products against defects in materials and workmanship for a period of 12 months. Liability for a stated warranty period is usually limited to the replacement of defective items or return of amounts paid. Warranty expense has historically been immaterial to our financial statements.
Our contractual cash obligations at June 30, 2014 are outlined in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual Obligations
|
Total
|
|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More than
5 years
|
|
(In thousands)
|
Operating leases
|
$
|
2,296
|
|
|
$
|
308
|
|
|
$
|
1,711
|
|
|
$
|
227
|
|
|
$
|
50
|
|
Borrowings
|
4,583
|
|
|
49
|
|
|
390
|
|
|
4,144
|
|
|
—
|
|
Purchase of Shanghai building
|
8,407
|
|
|
8,407
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchase obligations with wafer foundries
|
26,607
|
|
|
26,607
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total contractual cash obligations
|
$
|
41,893
|
|
|
$
|
35,371
|
|
|
$
|
2,101
|
|
|
$
|
4,371
|
|
|
$
|
50
|
|
At June 30, 2014, we had outstanding authorization from our Board to purchase up to $19.8 million of our common stock from time to time.
We believe our existing funds will satisfy our anticipated working capital and other cash requirements through at least the next 12 months. We may from time to time take actions to further increase our cash position through equity or debt financings, sales of shares of investments, additional bank borrowings, or the disposition of certain assets. From time to time, we may also commit to acquisitions or equity investments, including strategic investments in or prepayments to wafer fabrication foundries or assembly and test subcontractors. To the extent we enter into such transactions, any such transaction could require us to seek additional equity or debt financing to fund such activities. There can be no assurance that any such additional financing could be obtained on terms acceptable to us, if at all.
Off-Balance Sheet Arrangements
We may be obligated to indemnify certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. In certain cases, there are limits on and exceptions to our
potential liability for indemnification relating to intellectual property infringement claims. In addition, we have entered into indemnification agreements with our officers and directors, and the Company’s bylaws provide that indemnification may be provided to our agents. We have directors’ and officers’ insurance pursuant to which we may be reimbursed for certain indemnity expenses, subject to the terms of the insurance policy. We cannot estimate the amount of potential future indemnity expenses that we may be required to make. The amount of available directors’ and officers’ insurance may not be sufficient to cover our indemnity obligations, which may have a material adverse effect on our results of operations in future periods.
Other than as set forth above, we are not currently party to any off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.