SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended September 26, 2015 |
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☐ |
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the Transition Period from _______ to _______
Commission
File Number 0-27026 |
Pericom Semiconductor
Corporation
(Exact Name of
Registrant as Specified in Its Charter)
California |
77-0254621 |
(State or Other Jurisdiction of |
(I.R.S. Employer |
Incorporation or Organization) |
Identification
No.) |
1545 Barber
Lane
Milpitas, California 95035
(408) 232-9100
(Address of Principal
Executive Offices and
Issuers Telephone Number, Including Area Code)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒ No ☐
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒ No ☐
Indicate by check mark
whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.
Large
Accelerated Filer ☐ |
|
Accelerated Filer ☒ |
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Non-accelerated Filer ☐ |
|
Smaller Reporting Company
☐ |
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 126-2 of the
Exchange Act) Yes
☐ No ☒
As of October 26, 2015 the
Registrant had outstanding 21,891,000 shares of Common Stock.
Pericom Semiconductor Corporation
Form 10-Q for the Quarter Ended
September 26, 2015
INDEX
PART I. FINANCIAL
INFORMATION |
|
Page |
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Item
1: |
Condensed Consolidated Financial Statements
(Unaudited) |
|
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|
|
|
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Condensed Consolidated Balance
Sheets as of |
|
|
|
|
September 26, 2015 and June 27,
2015 |
|
3 |
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations for the three
months |
|
|
|
|
ended September 26, 2015 and September 27, 2014 |
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4 |
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|
|
|
|
|
|
Condensed Consolidated Statements
of Comprehensive Income (Loss) |
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|
|
|
for the three months ended
September 26, 2015 and |
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|
|
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September 27, 2014 |
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5 |
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|
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|
|
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Condensed Consolidated Statements of Cash Flows for the three
months |
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ended September 26, 2015 and September 27, 2014 |
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6 |
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|
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Notes to Condensed Consolidated
Financial Statements |
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7 |
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Item
2: |
Managements Discussion and Analysis of |
|
|
|
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Financial Condition and Results of Operations |
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20 |
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|
|
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Item 3: |
Quantitative and Qualitative
Disclosures about |
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Market Risk |
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27 |
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Item
4: |
Controls and Procedures |
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28 |
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PART II. OTHER
INFORMATION |
|
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|
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Item
1A: |
Risk Factors |
|
29 |
|
|
|
|
|
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Item 2: |
Unregistered Sales of Equity
Securities and Use of Proceeds |
|
43 |
|
|
|
|
|
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Item
6: |
Exhibits |
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44 |
|
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Signatures |
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45 |
2
PART I. FINANCIAL
INFORMATION
Item 1: Condensed Consolidated Financial Statements
Pericom Semiconductor
Corporation
Condensed Consolidated Balance Sheets
(In thousands, except
share data)
(Unaudited)
|
|
September 26, |
|
June
27, |
|
|
2015 |
|
2015 |
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash
equivalents |
|
$ |
41,544 |
|
$ |
38,773 |
Investments in
marketable securities |
|
|
78,958 |
|
|
90,304 |
Accounts
receivable |
|
|
|
|
|
|
Trade
(net of reserves and allowances of $1,631 and $1,830) |
|
|
26,756 |
|
|
23,962 |
Other
receivables |
|
|
2,727 |
|
|
2,377 |
Inventories |
|
|
15,183 |
|
|
13,613 |
Prepaid expenses
and other current assets |
|
|
3,387 |
|
|
3,510 |
Deferred income
taxes |
|
|
311 |
|
|
438 |
Total
current assets |
|
|
168,866 |
|
|
172,977 |
|
Property, plant and equipment net |
|
|
55,947 |
|
|
57,746 |
Investments in unconsolidated affiliates |
|
|
2,289 |
|
|
2,311 |
Deferred income taxes non-current |
|
|
2,594 |
|
|
2,601 |
Intangible assets (net of accumulated amortization of $15,804
and $15,588) |
|
|
3,234 |
|
|
4,057 |
Other assets |
|
|
7,739 |
|
|
8,031 |
Total
assets |
|
$ |
240,669 |
|
$ |
247,723 |
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts
payable |
|
$ |
10,763 |
|
$ |
8,960 |
Accrued
liabilities |
|
|
10,142 |
|
|
11,425 |
Total
current liabilities |
|
|
20,905 |
|
|
20,385 |
|
Industrial development subsidy |
|
|
5,010 |
|
|
5,377 |
Deferred income taxes |
|
|
4,756 |
|
|
4,705 |
Noncurrent tax liabilities |
|
|
1,424 |
|
|
1,411 |
Other long-term liabilities |
|
|
426 |
|
|
236 |
Total
liabilities |
|
|
32,521 |
|
|
32,114 |
|
|
|
|
|
|
|
Commitments and contingencies (Note 6) |
|
|
|
|
|
|
|
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Shareholders equity: |
|
|
|
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Common stock and
paid in capital - no par value, 60,000,000 shares |
|
|
|
|
|
|
authorized;
shares issued and outstanding: September 26, 2015, |
|
|
|
|
|
|
21,891,000;
June 27, 2015, 22,177,000 |
|
|
109,455 |
|
|
114,248 |
Retained
earnings |
|
|
94,574 |
|
|
92,346 |
Accumulated other
comprehensive income, net of tax |
|
|
4,119 |
|
|
9,015 |
Total
shareholders' equity |
|
|
208,148 |
|
|
215,609 |
Total
liabilities and shareholders' equity |
|
$ |
240,669 |
|
$ |
247,723 |
See notes to condensed
consolidated financial statements.
3
Pericom Semiconductor Corporation
Condensed Consolidated Statements of Operations
(In thousands, except
per share amounts)
(Unaudited)
|
|
Three Months Ended |
|
|
September 26, |
|
September 27, |
|
|
2015 |
|
2014 |
Net
revenues |
|
$ |
31,570 |
|
$ |
33,259 |
Cost of revenues |
|
|
17,229 |
|
|
19,179 |
Gross profit |
|
|
14,341 |
|
|
14,080 |
Operating expenses: |
|
|
|
|
|
|
Research
and development |
|
|
4,452 |
|
|
4,588 |
Selling,
general and administrative |
|
|
9,066 |
|
|
7,300 |
Total
operating expenses |
|
|
13,518 |
|
|
11,888 |
Income from operations |
|
|
823 |
|
|
2,192 |
Interest and other income, net |
|
|
3,245 |
|
|
1,274 |
Income before income tax
expense |
|
|
4,068 |
|
|
3,466 |
Income tax expense |
|
|
535 |
|
|
1,010 |
Net income from consolidated
companies |
|
|
3,533 |
|
|
2,456 |
Equity in net income of unconsolidated
affiliate |
|
|
26 |
|
|
39 |
Net income |
|
$ |
3,559 |
|
$ |
2,495 |
Basic income per share |
|
$ |
0.16 |
|
$ |
0.11 |
Diluted income per share |
|
$ |
0.16 |
|
$ |
0.11 |
Shares used in computing basic income per
share |
|
|
21,955 |
|
|
21,936 |
Shares used in computing diluted
income per share |
|
|
22,523 |
|
|
22,262 |
See notes to condensed
consolidated financial statements.
4
Pericom Semiconductor
Corporation
Condensed Consolidated
Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
|
|
Three Months Ended |
|
|
September 26, |
|
September 27, |
|
|
2015 |
|
2014 |
Net
income |
|
$ |
3,559 |
|
|
$ |
2,495 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Change
in unrealized gain or loss on securities available for sale, net |
|
|
(148 |
) |
|
|
(174 |
) |
Foreign
currency translation adjustment |
|
|
(4,749 |
) |
|
|
(458 |
) |
Tax
benefit related to other comprehensive income (loss) |
|
|
1 |
|
|
|
115 |
|
Other
comprehensive income (loss), net of tax |
|
|
(4,896 |
) |
|
|
(517 |
) |
Comprehensive income (loss) |
|
$ |
(1,337 |
) |
|
$ |
1,978 |
|
See notes to condensed
consolidated financial statements.
5
Pericom Semiconductor
Corporation
Condensed Consolidated Statements of Cash Flows
(In
thousands)
(Unaudited)
|
|
Three Months
Ended |
|
|
September 26, |
|
September 27, |
|
|
2015 |
|
2014 |
CASH
FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
3,559 |
|
|
$ |
2,495 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
2,297 |
|
|
|
2,260 |
|
Share-based
compensation |
|
|
960 |
|
|
|
709 |
|
Tax benefit
resulting from share-based transactions |
|
|
797 |
|
|
|
293 |
|
Excess tax benefit
resulting from share-based transactions |
|
|
(220 |
) |
|
|
(29 |
) |
Write off of
assets |
|
|
66 |
|
|
|
301 |
|
Loss on sale of
investments |
|
|
37 |
|
|
|
6 |
|
Equity in net
income of unconsolidated affiliate |
|
|
(26 |
) |
|
|
(39 |
) |
Deferred
taxes |
|
|
441 |
|
|
|
50 |
|
Changes in assets
and liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(3,962 |
) |
|
|
(1,033 |
) |
Inventories |
|
|
(2,103 |
) |
|
|
370 |
|
Prepaid
expenses and other current assets |
|
|
77 |
|
|
|
1,400 |
|
Other
assets |
|
|
13 |
|
|
|
11 |
|
Accounts
payable |
|
|
2,651 |
|
|
|
371 |
|
Accrued
liabilities |
|
|
(1,701 |
) |
|
|
(41 |
) |
Other
long-term liabilities |
|
|
(3 |
) |
|
|
- |
|
Net
cash provided by operating activities |
|
|
2,883 |
|
|
|
7,124 |
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of
property, plant and equipment |
|
|
(2,032 |
) |
|
|
(1,136 |
) |
Purchase of
available-for-sale investments |
|
|
(10,214 |
) |
|
|
(25,719 |
) |
Maturities and
sales of available-for-sale investments |
|
|
20,826 |
|
|
|
15,292 |
|
Net
cash provided by (used in) investing activities |
|
|
8,580 |
|
|
|
(11,563 |
) |
|
CASH
FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from
common stock issuance under stock plans, net |
|
|
6 |
|
|
|
1,498 |
|
Cash dividends
paid |
|
|
(1,331 |
) |
|
|
- |
|
Excess tax benefit
resulting from stock option transactions |
|
|
220 |
|
|
|
29 |
|
Repurchase of
common stock |
|
|
(5,763 |
) |
|
|
(2,302 |
) |
Net
cash used in financing activities |
|
|
(6,868 |
) |
|
|
(775 |
) |
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS |
|
|
(1,824 |
) |
|
|
(219 |
) |
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
2,771 |
|
|
|
(5,433 |
) |
CASH
AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
Beginning of
period |
|
|
38,773 |
|
|
|
33,020 |
|
End of
period |
|
$ |
41,544 |
|
|
$ |
27,587 |
|
See notes to condensed
consolidated financial statements.
6
Pericom Semiconductor
Corporation
Notes To Condensed
Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated
financial statements have been prepared by Pericom Semiconductor Corporation
(Pericom or the Company) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). In the opinion of management, these
unaudited condensed consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments and accruals, necessary for a
fair presentation of the Companys financial position as of September 26, 2015,
the results of operations for the three months ended September 26, 2015 and
September 27, 2014 and cash flows for the three months ended September 26, 2015
and September 27, 2014. This unaudited quarterly information should be read in
conjunction with the audited consolidated financial statements of Pericom and
the notes thereto included in the Companys Annual Report on Form 10-K as filed
with the SEC on September 1, 2015.
The preparation of the
interim condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the interim condensed consolidated financial
statements and the reported amounts of revenue and expenses during the period.
Actual amounts could differ from these estimates. The results of operations for
the three months ended September 26, 2015 are not necessarily indicative of the
results to be expected for the entire year. The three month periods ended
September 26, 2015 and September 27, 2014 each had 13 weeks.
The Company participates in
a dynamic high technology industry and believes that changes in any of the
following areas could have a material adverse effect on the Companys future
financial position or results of operations: advances and trends in new
technologies; competitive pressures in the form of new products or price
reductions on current products; changes in the overall demand for products
offered by the Company; changes in customer relationships; acquisitions and the
subsequent integration of the acquired entity with the Company; litigation or
claims against the Company based on intellectual property, patent, product,
regulatory or other factors; risks associated with changes in domestic and
international economic and/or political conditions or regulations and
environmental laws; availability of necessary components; interruptions at wafer
suppliers and subcontractors; fluctuations in currencies given the Companys
sales and operations being heavily weighted and paid in foreign currencies; and
the Companys ability to attract and retain employees necessary to support its
growth.
These interim condensed
consolidated financial statements include the accounts of Pericom Semiconductor
Corporation and its wholly owned subsidiaries, Pericom Global Limited (PGL),
PSE Technology Corporation (PSE-TW), and Pericom Asia Limited (PAL). PGL has
two wholly-owned subsidiaries, Pericom International Limited (PIL) and Pericom
Semiconductor (HK) Limited (PHK). In addition, PAL has three subsidiaries, PSE
Technology (Shandong) Corporation ("PSE-SD") and Pericom Technology Yangzhou
Corporation (PSC-YZ) for the Jinan, China and Yangzhou, China operations,
respectively, and Pericom Technology Inc. (PTI). The Company eliminates all
intercompany balances and transactions in consolidation.
PENDING
TRANSACTION On September 2,
2015, the Company entered into an Agreement and Plan of Merger (Merger
Agreement) with Diodes Incorporated, a Delaware Corporation
(Diodes) and PSI Merger Sub, Inc., a California corporation and a wholly-owned
subsidiary of Diodes (Merger Sub), pursuant to which, subject to satisfaction
or waiver of the conditions therein, Merger Sub will merge with and into the
Company (the Merger), with the Company surviving as a wholly-owned subsidiary
of Diodes. Pursuant to the terms of the Merger Agreement, at the effective time
of the Merger (the Effective Time), each share of the Companys common stock
issued and outstanding immediately prior to the Effective Time, excluding shares
owned by shareholders who have exercised dissenters rights under California law
and shares owned by the Company, Diodes, Merger Sub or any of their respective
subsidiaries, will be converted into the right to receive $17.00 in cash,
without interest. The transaction is subject to approval by the Companys
shareholders, as well as other customary closing conditions and regulatory
approvals.
7
Concurrently with the
Companys execution of the Merger Agreement, certain directors and executive
officers of the Company, in their capacities as holders of shares or other
equity interests of the Company, entered into Voting Agreements with Diodes
pursuant to which they agreed, among other things, to vote or cause to be voted
all of the Company shares beneficially owned by such shareholders for the
approval of the merger and the Merger Agreement and against any alternative
proposal. Notwithstanding the foregoing, however, the Voting Agreements
terminate upon the termination of the Merger Agreement in accordance with their
terms, including the termination of the Merger Agreement by the Companys Board
of Directors in favor of a superior proposal.
The Company has agreed to
customary restrictions on its ability to solicit and respond to any other
proposals from third parties to acquire it and to provide information to, and
enter into discussions or negotiations with, third parties regarding alternative
acquisition proposals. However, prior to receiving shareholder approval, the
solicitation restrictions are subject to a customary fiduciary-out provision
that allows the Company to provide information to, and engage in negotiations or
discussions with, third parties with respect to a written acquisition proposal
if the board of directors of the Company determines in good faith after
consultation with its outside legal counsel that the failure to take such action
would reasonably be expected to be inconsistent with the Board of Directors
fiduciary duties under applicable law.
The Merger Agreement
contains certain termination rights for both the Company and Diodes, including
the Company's ability to terminate the Merger Agreement in order to accept a
superior proposal. In the event that the Merger Agreement is terminated, the
Company may, under specified circumstances, be required to pay a termination fee
of $15 million.
The foregoing description
of the Merger Agreement and the transactions contemplated thereby does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, a copy of which is attached as Exhibit 2.1 to the Current
Report on Form 8-K filed by the Company on September 3, 2015. Additional
information relating to the Merger Agreement is also included in that Current
Report on Form 8-K, the Schedule 14A filed on September 17, 2015 and revised on
October 13, 2015, the Current Report on Form 8-K filed on October 16, 2015 and
in other filings the Company has made and will make with the SEC relating to the
Merger Agreement.
FISCAL
PERIOD For purposes of
reporting the financial results, the Companys fiscal years end on the Saturday
closest to the end of June. The year ended June 27, 2015 is referred to as
fiscal year 2015 or fiscal 2015, whereas the current fiscal year 2016 or fiscal
2016 will end on July 2, 2016. Fiscal 2015 contains 52 weeks or 364 days,
whereas fiscal 2016 will include a 53rd week to end the year on the
Saturday closest to the end of June.
RECENTLY ISSUED
ACCOUNTING STANDARDS
In July 2015, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2015-11, Simplifying the
Measurement of Inventory. Under
this ASU, inventory will be measured at the lower of cost and net realizable
value, and options that currently exist for market value will be eliminated.
The ASU defines net realizable value as estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. No other changes were made to the current
guidance on inventory measurement. ASU 2015-11 is effective for interim and
annual periods beginning after December 15, 2016. Early application is permitted
and should be applied prospectively. Management is evaluating the provisions of
this statement, including which period to adopt, and has not determined what
impact the adoption of ASU 2015-11 will have on the Company's financial position
or results of operations.
In May 2014, the FASB
issued ASU 2014-09, Revenue from
Contracts with Customers. ASU
2014-09 outlines a single comprehensive model for accounting for revenue arising
from contracts with customers and supersedes most current revenue recognition
guidance. ASU 2014-09 requires an entity to recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for
those goods or services. ASU 2014-09 will be effective for annual and interim
reporting periods beginning after December 15, 2017, although public companies
may early adopt for annual and interim reporting periods beginning after
December 15, 2016. The impact on the Companys financial condition, results of
operations and cash flows as a result of the adoption of ASU 2014-09 has not yet
been determined.
8
2. INTANGIBLE ASSETS
The following table
summarizes the components of intangible assets and related accumulated
amortization balances for each of the period-ending dates shown, which were
recorded as a result of business combinations:
|
|
September 26,
2015 |
|
June 27,
2015 |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Accumulated |
|
|
|
(in thousands) |
|
Gross |
|
Amortization |
|
Net |
|
Gross |
|
Amortization |
|
Net |
Customer relationships |
|
$ |
5,845 |
|
$ |
(4,968 |
) |
|
$ |
877 |
|
$ |
6,008 |
|
$ |
(4,862 |
) |
|
$ |
1,146 |
Core
developed technology |
|
|
12,831 |
|
|
(10,836 |
) |
|
|
1,995 |
|
|
13,251 |
|
|
(10,726 |
) |
|
|
2,525 |
Total amortizable purchased intangible assets |
|
|
18,676 |
|
|
(15,804 |
) |
|
|
2,872 |
|
|
19,259 |
|
|
(15,588 |
) |
|
|
3,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SaRonix trade name |
|
|
362 |
|
|
- |
|
|
|
362 |
|
|
386 |
|
|
- |
|
|
|
386 |
Total purchased intangible assets |
|
$ |
19,038 |
|
$ |
(15,804 |
) |
|
$ |
3,234 |
|
$ |
19,645 |
|
$ |
(15,588 |
) |
|
$ |
4,057 |
Amortization expense
related to finite-lived purchased intangible assets was approximately $721,000
and $725,000 for the three month periods ended September 26, 2015 and September
27, 2014, respectively.
The Company performs an
impairment review of its intangible assets at least annually. Based on the
results of its most recent impairment review, the Company determined that no
impairment of its intangible assets existed as of September 26, 2015. However,
future impairment reviews could result in a charge to earnings.
The finite-lived purchased
intangible assets consist of customer relationships and existing and core
technology, which have remaining useful lives from one to two years. The Company
expects future amortization expense associated with its intangible assets to
be:
|
|
Months from September
26, 2015 |
(in thousands) |
|
Next 12 |
|
13-24 |
|
Over 24 |
|
|
|
|
|
Months |
|
Months |
|
Months |
|
Total |
Customer relationships |
|
$ |
877 |
|
$ |
- |
|
$ |
- |
|
$ |
877 |
Core
developed technology |
|
|
1,744 |
|
|
251 |
|
|
- |
|
|
1,995 |
Total |
|
$ |
2,621 |
|
$ |
251 |
|
$ |
- |
|
$ |
2,872 |
3. INCOME PER SHARE
Basic income per share is
based upon the weighted average number of common shares outstanding. Diluted
income per share reflects the additional potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
9
Basic and diluted income
per share for the three month periods ended September 26, 2015 and September 27,
2014 are computed as follows:
|
Three Months
Ended |
|
September 26, |
|
September 27, |
(in thousands, except per share data) |
2015 |
|
2014 |
Net income |
$ |
3,559 |
|
$ |
2,495 |
Computation of common shares outstanding basic earnings per
share: |
|
|
|
|
|
Weighted average shares
of common stock |
|
21,955 |
|
|
21,936 |
Basic earnings per share |
$ |
0.16 |
|
$ |
0.11 |
Computation of common shares outstanding
diluted earnings per share: |
|
|
|
|
|
Weighted average shares
of common stock |
|
21,955 |
|
|
21,936 |
Dilutive shares using the
treasury stock method |
|
568 |
|
|
326 |
Shares used in computing diluted earnings per share |
|
22,523 |
|
|
22,262 |
Diluted earnings per share |
$ |
0.16 |
|
$ |
0.11 |
Options to purchase 340,000
and 1,256,000 shares of common stock, and restricted stock units of 29,000 and
zero were outstanding during the three month periods ended September 26, 2015
and September 27, 2014 respectively, but are not included in the computation of
diluted earnings per share because the options and units would be anti-dilutive
under the treasury stock method.
4.
INVENTORIES
Inventories consist of:
|
September 26, |
|
June 27, |
(in thousands) |
2015 |
|
2015 |
Raw materials |
$ |
7,448 |
|
$ |
6,249 |
Work
in process |
|
3,150 |
|
|
2,812 |
Finished goods |
|
4,585 |
|
|
4,552 |
Total inventories |
$ |
15,183 |
|
$ |
13,613 |
The Company considers raw
material inventory obsolete and reserves for it if the raw material has not been
placed into production within 365 days. The Company reviews its assembled
devices for excess and records a reserve if the quantity of assembled devices in
inventory is in excess of the greater of the quantity shipped in the previous
twelve months, the quantity in backlog or the quantity forecasted to be shipped
in the following twelve months. In certain circumstances, management will
determine, based on expected usage or other factors, that inventory considered
excess by these guidelines should not be reserved. The Company does occasionally
determine that the last twelve months sales levels will not continue and
reserves inventory in line with the quantity forecasted. As of September 26,
2015 and June 27, 2015, the Company had reserved for $2.4 million and $2.8
million of inventory, respectively.
5. ACCRUED
LIABILITIES
Accrued liabilities consist
of:
|
September 26, |
|
June 27, |
(in thousands) |
2015 |
|
2015 |
Accrued compensation |
$ |
6,192 |
|
$ |
6,489 |
Income taxes payable |
|
2,207 |
|
|
2,280 |
Sales commissions |
|
396 |
|
|
347 |
Other accrued expenses |
|
1,347 |
|
|
2,309 |
Total accrued liabilities |
$ |
10,142 |
|
$ |
11,425 |
10
6. COMMITMENTS AND
CONTINGENCIES
The Companys future
minimum commitments as of September 26, 2015 are as follows:
|
|
Months from September 26, 2015 |
|
|
|
|
|
|
(in thousands) |
|
Less than |
|
12-24 |
|
24-36 |
|
Over 36 |
|
48-60 |
|
Over 60 |
|
|
|
|
12 Months |
|
Months |
|
Months |
|
Months |
|
Months |
|
Months |
|
Total |
Operating lease payments |
|
$ |
427 |
|
$ |
315 |
|
$ |
185 |
|
$ |
8 |
|
$ |
8 |
|
$ |
2 |
|
$ |
945 |
Capital equipment purchase commitments |
|
|
11 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
11 |
Facility modification commitments |
|
|
330 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
330 |
Total |
|
$ |
768 |
|
$ |
315 |
|
$ |
185 |
|
$ |
8 |
|
$ |
8 |
|
$ |
2 |
|
$ |
1,286 |
The operating lease
commitments are primarily facility leases at certain of the Companys Asian
subsidiaries.
The facility modification
commitments have been made at the Companys Shandong, China manufacturing
operation for a general contractor and architecture firm to develop feasibility
studies, plans and cost estimates for potential additional development of the
plant site. Building permits have been applied for, and site preparation has
begun. The Company has no other purchase obligations beyond routine purchase
orders and the facility modifications shown in the table as of September 26,
2015.
7. INDUSTRY AND SEGMENT
INFORMATION
The Company has two
operating segments which aggregate into one reportable segment, the
interconnectivity device supply market. The Company designs, develops,
manufactures and markets high performance integrated circuits and frequency
control products.
The following table
indicates the percentage of the Companys net revenues and accounts receivable
in excess of 10 percent with any single customer:
|
|
Net
Revenues |
|
|
Three Months
Ended |
|
|
September 26, |
|
September 27, |
|
|
2015 |
|
2014 |
Customer A |
|
19 |
% |
|
12 |
% |
Customer B |
|
16 |
% |
|
29 |
% |
All others |
|
65 |
% |
|
59 |
% |
|
|
100 |
% |
|
100 |
% |
|
|
|
Accounts
Receivable |
|
|
September 26, |
|
June 27, |
|
|
2015 |
|
2015 |
Customer A |
|
27 |
% |
|
23 |
% |
Customer B |
|
14 |
% |
|
16 |
% |
All others |
|
59 |
% |
|
61 |
% |
|
|
100 |
% |
|
100 |
% |
11
For geographical reporting,
the Company attributes net revenues to the country where customers are located
(the bill to location). The Company neither conducts business in nor sells to
persons in Iran, Syria or Sudan, countries located in referenced regions
identified as state sponsors of terrorism by the U.S. Department of State and
subject to U.S. economic sanctions and export controls. The following table sets
forth net revenues by country for the three month periods ended September 26,
2015 and September 27, 2014:
|
|
Net
Revenues |
|
|
Three Months
Ended |
|
|
September 26, |
|
September 27, |
|
|
2015 |
|
2014 |
China (including Hong Kong) |
|
$ |
14,847 |
|
$ |
16,178 |
Taiwan |
|
|
11,297 |
|
|
10,805 |
United States |
|
|
1,078 |
|
|
1,462 |
Other (less than 10% each) |
|
|
4,348 |
|
|
4,814 |
Total net revenues |
|
$ |
31,570 |
|
$ |
33,259 |
Long-lived assets consist
of all non-monetary assets, excluding financial assets, deferred taxes and
intangible assets. The Company attributes long-lived assets to the country where
they are located. The following table sets forth the Companys long-lived assets
by country of location as of September 26, 2015 and June 27, 2015:
|
|
September 26, |
|
June 27, |
|
|
2015 |
|
2015 |
China (including Hong Kong) |
|
$ |
29,866 |
|
$ |
31,211 |
United States |
|
|
14,178 |
|
|
14,392 |
Taiwan |
|
|
10,349 |
|
|
10,974 |
Korea |
|
|
1,349 |
|
|
1,024 |
Others (less than 10% each) |
|
|
205 |
|
|
145 |
Total long-lived assets |
|
$ |
55,947 |
|
$ |
57,746 |
8. STOCK REPURCHASE
PROGRAM
On April 24, 2014, the
Board of Directors authorized a share repurchase program for $20 million of
common stock. The Company may repurchase the shares from time to time in open
market or private transactions, at the discretion of the Companys
management.
During the three month
period ended September 26, 2015, the Company repurchased 464,957 shares for an
aggregate cost of approximately $5.8 million. During the three month period
ended September 27, 2014, the Company repurchased 250,547 shares for an
aggregate cost of approximately $2.3 million. Current cash balances and the
proceeds from stock option exercises and purchases in the employee stock
purchase plan have funded stock repurchases in the past. As of September 26,
2015, the Company had approximately $10.0 million of repurchase authority
remaining under the 2014 share repurchase program. Due to the pending
acquisition of the Company, no future share repurchases are
scheduled.
9. SHAREHOLDERS EQUITY
AND SHARE-BASED COMPENSATION
PREFERRED
STOCK
The Companys shareholders
have authorized the Board of Directors to issue 5,000,000 shares of currently
undesignated preferred stock from time to time in one or more series and to fix
the rights, privileges and restrictions of each series. As of September 26,
2015, the Company has issued no shares of preferred stock.
STOCK OPTION
PLANS
As of September 26, 2015
the Company had three stock incentive plans and one employee stock purchase
plan, including the 2001 Stock Option Plan, 2004 Stock Incentive Plan, 2014
Stock Award and Incentive Compensation Plan (collectively, the Plans) and the
2010 Employee Stock Purchase Plan (ESPP).
Under the Plans, the Company has
reserved an aggregate of 6.2 million shares of common stock as of September 26,
2015 for issuance to employees, officers, directors, independent contractors and
consultants of the Company in the form of incentive or nonqualified stock
options, or grants of restricted or performance stock units.
12
The Company may grant stock
options at the fair value on the grant date for incentive stock options and
nonqualified stock options. Options vest over periods of generally 48 months as
determined by the Board of Directors. Options granted under the Plans expire 10
years from the grant date.
The Company estimates the
fair value of each employee stock option on the date of grant using the
Black-Scholes option valuation model and expenses that value as compensation
using a straight-line method over the options vesting period, which corresponds
to the requisite employee service period. The Company estimates expected stock
price volatility based on actual historical volatility for periods that the
Company believes represent predictors of future volatility. The Company uses
historical data to estimate option exercises, expected option holding periods
and option forfeitures. The Company bases the risk-free interest rate for
periods within the contractual life of the option on the U.S. Treasury yield
corresponding to the expected life of the underlying option.
The Companys did not grant
any stock options under its Plans during the three month periods ended September
26, 2015 or September 27, 2014.
The following table
summarizes the Companys stock option activity for the three months ended
September 26, 2015:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Aggregate |
|
|
|
|
Average |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Exercise |
|
Term |
|
Value |
|
|
(in
thousands) |
|
Price |
|
(years) |
|
(in thousand) |
Options outstanding as of June 27,
2015 |
|
1,249 |
|
|
$ |
10.92 |
|
4.67 |
|
$ |
4,501 |
|
Granted |
|
- |
|
|
|
- |
|
|
|
|
|
Exercised |
|
(14 |
) |
|
|
11.19 |
|
|
|
|
|
Cancelled or expired |
|
- |
|
|
|
- |
|
|
|
|
|
Options outstanding as of September 26,
2015 |
|
1,235 |
|
|
$ |
10.92 |
|
4.44 |
|
$ |
7,872 |
|
Options vested and expected to vest as of September 26,
2015 |
|
1,222 |
|
|
$ |
10.95 |
|
4.40 |
|
$ |
7,759 |
Options exercisable as of September 26,
2015 |
|
1,050 |
|
|
$ |
11.29 |
|
3.76 |
|
$ |
6,302 |
As of September 26, 2015,
2.9 million shares were available for future grants under the incentive plans.
The aggregate intrinsic value of options exercised during the three months ended
September 26, 2015 was $78,000.
As of September 26, 2015,
expected future compensation expense relating to options outstanding is
$626,000, which will be amortized to expense over a weighted average period of
2.0 years.
13
Additional information
regarding options outstanding and exercisable as of September 26, 2015 is as
follows:
|
|
|
|
|
|
Options
Outstanding |
|
Exercisable
Options |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Number |
|
Average |
|
Weighted |
|
Number |
|
Weighted |
|
|
Outstanding as |
|
Remaining |
|
Average |
|
Exercisable as |
|
Average |
Range of Exercise |
|
of September |
|
Contractual |
|
Exercise |
|
of September |
|
Exercise |
Prices |
|
26, 2015 |
|
Term |
|
Price |
|
26, 2015 |
|
Price |
$ |
5.48 |
|
$ |
8.10 |
|
249,000 |
|
6.77 |
|
$ |
7.65 |
|
158,000 |
|
$ |
7.62 |
|
8.11 |
|
|
8.85 |
|
261,000 |
|
4.50 |
|
|
8.56 |
|
231,000 |
|
|
8.54 |
|
8.86 |
|
|
10.25 |
|
254,000 |
|
4.84 |
|
|
9.83 |
|
211,000 |
|
|
9.96 |
|
10.26 |
|
|
15.45 |
|
305,000 |
|
3.39 |
|
|
13.56 |
|
284,000 |
|
|
13.61 |
|
15.46 |
|
|
18.10 |
|
166,000 |
|
2.14 |
|
|
16.36 |
|
166,000 |
|
|
16.36 |
$ |
5.48 |
|
$ |
18.10 |
|
1,235,000 |
|
4.44 |
|
$ |
10.92 |
|
1,050,000 |
|
$ |
11.29 |
Restricted Stock Units
and Performance Stock Units
Restricted stock units
(RSUs) and performance stock units (PSUs) are converted into shares of the
Companys common stock upon vesting on a one-for-one basis. Typically, vesting
of RSUs and PSUs is subject to the employees continuing service to the Company.
RSUs generally vest over a period of 4 years and are expensed ratably on a
straight-line basis over their respective vesting period net of estimated
forfeitures. PSUs are granted to executives of the Company and will vest in
approximately 12 months subject to the achievement of certain financial metrics
of the Company as well as each participants performance goals established at
the beginning of the fiscal year. The fair value of RSUs and PSUs granted
pursuant to the Companys 2014 Stock Incentive Plan is the product of the number
of shares granted and the grant date fair value of the common stock. A summary
of activity of RSUs and PSUs for the three months ended September 26, 2015 is
presented below:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
Average |
|
Aggregate |
|
|
|
|
Average |
|
Remaining |
|
Intrinsic |
|
|
|
|
Award |
|
Contractual |
|
Value |
|
|
Shares |
|
Date Fair |
|
Term |
|
(in |
|
|
(in thousands) |
|
Value |
|
(years) |
|
thousands) |
RSUs and PSUs outstanding as of June 27,
2015 |
|
769 |
|
|
$ |
9.76 |
|
1.33 |
|
$ |
10,792 |
|
Awarded |
|
334 |
|
|
|
14.64 |
|
|
|
|
|
Released |
|
(174 |
) |
|
|
9.17 |
|
|
|
|
|
Forfeited |
|
(3 |
) |
|
|
10.66 |
|
|
|
|
|
RSUs and PSUs outstanding as of September
26, 2015 |
|
926 |
|
|
$ |
11.63 |
|
1.54 |
|
$ |
15,990 |
|
RSUs
and PSUs expected to vest after September 26, 2015 |
|
790 |
|
|
$ |
11.41 |
|
1.40 |
|
$ |
13,653 |
|
|
|
|
|
|
|
|
|
|
|
|
Of the 334,000 shares
awarded during the three months ended September 26, 2015, 235,000 shares were
RSUs while the remaining shares awarded were PSUs. As of September 26, 2015,
expected future compensation expense relating to RSUs and PSUs is $7.2 million,
which will be amortized to expense over a weighted average remaining recognition
period of 2.6 years.
2010 EMPLOYEE
STOCK PURCHASE PLAN
The Companys ESPP allows
eligible employees of the Company to purchase shares of common stock through
payroll deductions. The Company reserved 2.0 million shares of the Companys
common stock for issuance under this Plan, of which 1.5 million remain available
at September 26, 2015. The ESPP permits eligible employees to purchase common
stock at a discount through payroll deductions during six-month purchase
periods. The six-month periods come to an end on or about May 1 and November 1
and the purchases are then made. Thus there were no purchases under the ESPP for
the three month periods ended September 26, 2015 and September 27, 2014.
Participants in the ESPP may purchase stock at 85% of the lower of the stocks
fair market value on the first day and last day of the offering period. The
maximum number of shares of Common Stock that any employee may purchase during
any offering period under the plan is 1,500 shares, and an employee may not
accrue more than $15,000 for share purchases in any offering period.
14
The Company estimates the
fair value of stock purchase rights granted under the Companys ESPP on the date
of grant using the Black-Scholes option valuation model. Accounting Standards
Codification (ASC) Topic 718, Compensation Stock Compensation, states that a
lookback pricing provision with a share limit should be considered a
combination of stock and a call option. The valuation results for these elements
have been combined to value the specific features of the stock purchase rights.
The Company bases volatility on the expected volatility of the Companys stock
during the offering period. The expected term is determined by the time from
enrollment until purchase, and the Company uses the U.S. Treasury yield for the
risk-free interest rate for the offering period.
At September 26, 2015, the
Company had $19,000 in unamortized share-based compensation related to its ESPP
which will be amortized and recognized in the consolidated statement of
operations over the next month.
SHARE-BASED
COMPENSATION
The following table shows
total share-based compensation expense classified by Consolidated Statements of
Operations reporting caption for the three month periods ended September 26,
2015 and September 27, 2014 generated from the plans described above:
|
|
Three Months
Ended |
|
|
September 26, |
|
September 27, |
(in thousands) |
|
2015 |
|
2014 |
Cost of goods sold |
|
$ |
63 |
|
$ |
33 |
Research and development |
|
|
287 |
|
|
218 |
Selling, general and
administrative |
|
|
610 |
|
|
458 |
Pre-tax share-based compensation expense |
|
|
960 |
|
|
709 |
Income tax impact |
|
|
321 |
|
|
230 |
Net
share-based compensation expense |
|
$ |
639 |
|
$ |
479 |
The amount of share-based
compensation expense capitalized in inventory as of September 26, 2015 and June
27, 2015 is immaterial.
10. INCOME
TAXES
Income Tax Expense
Income tax expense for the
three month periods ended September 26, 2015 and September 27, 2014 was $535,000
and $1.0 million, respectively, and was comprised of domestic federal and state
income tax and foreign income tax. The effective tax rate for the three months
ended September 26, 2015 was 13%, which resulted from the allocation of earnings
between different tax jurisdictions and the inability to utilize losses in
certain non-includable entities. The effective tax rate for the three months
ended September 27, 2014 was 29%. As of September 26, 2015 and June 27, 2015,
the Company has recorded a valuation allowance of $4.4 million against its
deferred tax assets.
The Companys effective tax
rate may differ from the federal statutory rate primarily due to the permanent
differences related to the benefit of foreign rate differentials, income
inclusions under Subpart F tax rules, and non-deductible share-based
compensation from equity grants.
Accounting for
Uncertainty in Income Taxes
The Companys total amount
of unrecognized tax benefits as of September 26, 2015 was $2.3 million. Of this
amount, $1.1 million would affect the Companys effective tax rate if
recognized. In addition, as of September 26, 2015 the Company had accrued
$240,000 for any interest and penalties related to unrecognized tax benefits.
15
The Company is subject to
examination by federal, foreign, and various state jurisdictions for the years
2009 through 2015.
11. INVESTMENT IN
UNCONSOLIDATED AFFILIATE
The Companys investment in
an unconsolidated affiliate is as follows:
|
|
September 26, |
|
June 27, |
(in
thousands) |
|
2015 |
|
2015 |
Jiyuan Crystal Photoelectric Frequency
Technology Ltd. |
|
$ |
2,289 |
|
$ |
2,311 |
PSE-TW has a 49% equity
interest in Jiyuan Crystal Photoelectric Frequency Technology Ltd. (JCP), an
FCP manufacturing company located in Science Park of Jiyuan City, Henan
Province, China. JCP is a key manufacturing partner of PSE-TW and supplies
PSE-TW with blanks for its surface mount device (SMD) production lines. For
the first three months of fiscal 2016 and 2015, the Companys allocated portion
of JCPs results was income of $26,000 and $39,000, respectively.
12. EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss)
consists of net income, changes in net unrealized gains or losses on
available-for-sale investments and changes in cumulative currency translation
adjustments at consolidated subsidiaries.
As of September 26, 2015,
accumulated other comprehensive income of $4.1 million consists of $4.2 million
of accumulated currency translation gains and $127,000 of net unrealized losses
on available-for-sale investments, which was recorded net of a $2,000 tax
benefit. As of June 27, 2015, accumulated other comprehensive income of $9.0
million was made up of $9.0 million of accumulated currency translation gains
and $21,000 of net unrealized gains on available-for-sale investments, which was
recorded net of a $2,000 tax benefit.
13. DIVIDENDS
On July 28, 2015, the
Companys Board of Directors declared a cash dividend of $0.06 per share of
common stock. The aggregate payment of approximately $1.3 million was made on
September 3, 2015 to shareholders of record as of August 20, 2015.
14. SHORT-TERM DEBT
As of September 26, 2015
and June 27, 2015, the Company has no outstanding debt. However, the Companys
subsidiary PSE-TW has three loan and credit facilities in place for equipment
purchases or inventory financing via short term loans, letters of credit, and
trade financing. The first is an unsecured facility for $100 million New Taiwan
Dollars (NTD), or approximately U.S. $3.0 million. Loans under this facility
are limited to $70 million NTD (U.S. $2.1 million), are for up to 180 days, and
are based on the Taiwan Interbank Offered Rate (TAIBOR) plus 1.25% and may be
in NTD, USD, Japanese yen (JPY) or other currencies. The second is an
unsecured facility for $80 million NTD (U.S. $2.4 million). Loans under this
facility are limited to $60 million NTD (U.S. $1.8 million), are for up to 180
days, with the interest rate determined on a case by case basis, and may be in
NTD, USD, or JPY. The third is a secured facility for up to either $200 million
NTD or $6.0 million USD. The loans are for up to 180 days, and may be in NTD,
USD, JPY or other currencies, with the interest rate based on a spread over
various benchmark rates depending upon the currency. PSE-TW has pledged $4.0
million in land and buildings as collateral for the secured loan and credit
facility.
15. INDUSTRIAL
DEVELOPMENT SUBSIDY
As of September 26, 2015,
industrial development subsidies in the amount of $11.6 million have been earned
and applied for by PSE-SD from the Jinan Hi-Tech Industries Development Zone
Commission based on meeting certain pre-defined criteria. The subsidies may be
used for the acquisition of assets or to cover business expenses. When a subsidy
is used to acquire assets, the subsidy will be amortized over the useful life of
the asset. When a subsidy is used for expenses incurred, the subsidy is regarded
as earned upon the incurrence of the expenditure. The remaining balance of the
subsidies as of September 26, 2015 was $5.0 million, which is expected to be
recognized over the next five to seven years.
16
The Company recognized
$186,000 and $188,000 of industrial development subsidy as a reduction of cost
of goods sold and $42,000 and $47,000 of industrial development subsidy as a
reduction of operating expenses in the consolidated statements of operations for
the three month periods ended September 26, 2015 and September 27, 2014,
respectively.
16. INVESTMENTS IN
MARKETABLE SECURITIES
The Companys policy is to
invest in instruments with investment grade credit ratings. The Company
classifies its short-term investments as available-for-sale securities and the
Company bases the cost of securities sold using the specific identification
method. The Company accounts for unrealized gains and losses on its
available-for-sale securities as a separate component of shareholders equity in
the consolidated balance sheets in the period in which the unrealized gain or
loss occurs. As of September 26, 2015, a summary of investments by major
security type is as follows:
|
|
As of September 26,
2015 |
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Gains |
|
|
(in thousands) |
|
Cost |
|
Gains |
|
Losses |
|
(Losses) |
|
Fair
Value |
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
19,264 |
|
$ |
- |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
19,264 |
Repurchase
agreements |
|
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
National government and
agency securities |
|
|
3,180 |
|
|
61 |
|
|
- |
|
|
|
61 |
|
|
|
3,241 |
State and municipal bond
obligations |
|
|
5,201 |
|
|
50 |
|
|
(9 |
) |
|
|
41 |
|
|
|
5,242 |
Corporate bonds and
notes |
|
|
39,386 |
|
|
76 |
|
|
(274 |
) |
|
|
(198 |
) |
|
|
39,188 |
Asset backed
securities |
|
|
7,634 |
|
|
12 |
|
|
(27 |
) |
|
|
(15 |
) |
|
|
7,619 |
Mortgage backed
securities |
|
|
4,419 |
|
|
2 |
|
|
(17 |
) |
|
|
(15 |
) |
|
|
4,404 |
Total |
|
$ |
79,084 |
|
$ |
201 |
|
$ |
(327 |
) |
|
$ |
(126 |
) |
|
$ |
78,958 |
|
As of June 27, 2015 a summary of investments by major security type
is as follows: |
|
|
|
|
|
|
|
|
As of June 27,
2015 |
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Gains |
|
|
(in thousands) |
|
Cost |
|
Gains |
|
Losses |
|
(Losses) |
|
Fair
Value |
Available-for-Sale Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
22,157 |
|
$ |
- |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
22,157 |
National government and
agency securities |
|
|
4,612 |
|
|
64 |
|
|
(3 |
) |
|
|
61 |
|
|
|
4,673 |
State and municipal bond
obligations |
|
|
4,488 |
|
|
13 |
|
|
(11 |
) |
|
|
2 |
|
|
|
4,490 |
Corporate bonds and
notes |
|
|
46,889 |
|
|
168 |
|
|
(200 |
) |
|
|
(32 |
) |
|
|
46,857 |
Asset backed
securities |
|
|
6,994 |
|
|
12 |
|
|
(20 |
) |
|
|
(8 |
) |
|
|
6,986 |
Mortgage backed
securities |
|
|
5,143 |
|
|
11 |
|
|
(13 |
) |
|
|
(2 |
) |
|
|
5,141 |
Total |
|
$ |
90,283 |
|
$ |
268 |
|
$ |
(247 |
) |
|
$ |
21 |
|
|
$ |
90,304 |
The above investments are
included in short-term investments in marketable securities on the Companys
condensed consolidated balance sheets.
17
The following tables show
the unrealized losses and fair market values of the Companys investments that
have unrealized losses, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position,
as of September 26, 2015 and June 27, 2015:
|
|
Continuous Unrealized
Losses at September 26, 2015 |
|
|
Less Than 12
Months |
|
12 Months or
Longer |
|
Total |
|
|
|
|
Unrealized |
|
|
|
Unrealized |
|
|
|
Unrealized |
(in thousands) |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
National government and agency
securities |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
State and municipal bond obligations |
|
|
593 |
|
|
6 |
|
|
607 |
|
|
3 |
|
|
1,200 |
|
|
9 |
Corporate bonds and notes |
|
|
18,266 |
|
|
239 |
|
|
1,758 |
|
|
35 |
|
|
20,024 |
|
|
274 |
Asset backed securities |
|
|
2,404 |
|
|
12 |
|
|
424 |
|
|
15 |
|
|
2,828 |
|
|
27 |
Mortgage backed securities |
|
|
3,200 |
|
|
17 |
|
|
- |
|
|
- |
|
|
3,200 |
|
|
17 |
Total |
|
$ |
24,463 |
|
$ |
274 |
|
$ |
2,789 |
|
$ |
53 |
|
$ |
27,252 |
|
$ |
327 |
|
|
|
Continuous Unrealized
Losses at June 27, 2015 |
|
|
Less Than 12
Months |
|
12 Months or
Longer |
|
Total |
|
|
|
|
Unrealized |
|
|
|
Unrealized |
|
|
|
Unrealized |
(in thousands) |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
National government and agency
securities |
|
$ |
1,411 |
|
$ |
3 |
|
$ |
190 |
|
$ |
- |
|
$ |
1,601 |
|
$ |
3 |
State and municipal bond obligations |
|
|
928 |
|
|
4 |
|
|
1,077 |
|
|
7 |
|
|
2,005 |
|
|
11 |
Corporate bonds and notes |
|
|
20,621 |
|
|
188 |
|
|
2,893 |
|
|
12 |
|
|
23,514 |
|
|
200 |
Asset backed securities |
|
|
1,961 |
|
|
16 |
|
|
1,061 |
|
|
4 |
|
|
3,022 |
|
|
20 |
Mortgage backed securities |
|
|
2,023 |
|
|
12 |
|
|
336 |
|
|
1 |
|
|
2,359 |
|
|
13 |
|
|
$ |
26,944 |
|
$ |
223 |
|
$ |
5,557 |
|
$ |
24 |
|
$ |
32,501 |
|
$ |
247 |
The unrealized losses are
of a temporary nature due to the Companys intent and ability to hold the
investments until maturity or until the cost is recoverable. The unrealized
losses are primarily due to fluctuations in market interest rates. The Company
reports unrealized gains and losses on its available-for-sale securities in
accumulated other comprehensive income in shareholders equity.
The Company records gains
or losses realized on sales of available-for-sale securities in interest and
other income, net on its condensed consolidated statements of operations. The
cost of securities sold is based on the specific identification of the security
and its amortized cost. For the three month periods ended September 26, 2015 and
September 27, 2014, proceeds from sales and maturities of available-for-sale
securities were $20.8 million and $15.3 million, respectively, and realized
losses were $37,000 and $6,000, respectively.
The following table lists
the fair market value of the Companys short-term investments by length of time
to maturity as of September 26, 2015. Securities with maturities over multiple
dates are mortgage-backed (MBS) or asset-backed securities (ABS) featuring
periodic principle paydowns through 2042.
|
September 26, |
(in thousands) |
2015 |
Contractual Maturities |
|
|
Less
than 12 months |
$ |
21,985 |
One to three years |
|
35,128 |
Over
three years |
|
16,699 |
Multiple dates |
|
5,146 |
Total |
$ |
78,958 |
17. FAIR VALUE
MEASUREMENTS
The Company defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair
value must maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes a fair value hierarchy based on
three levels of inputs that may be used to measure fair value, of which the
first two are considered observable and the last is considered
unobservable:
● |
Level 1 - Quoted
prices in active markets for identical assets or
liabilities. |
● |
Level 2 - Inputs
other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other
inputs that are observable
or can be corroborated by observable market data for substantially the
full term of the assets or liabilities. |
18
● |
Level 3 -
Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities. |
The following table
represents the Companys fair value hierarchy for financial assets measured at
fair value on a recurring basis. All of the investments are classified as Level
2 as of September 26, 2015. Level 2 pricing is provided by third party sources
of market information obtained through the Companys investment advisors. The
Company does not adjust for or apply any additional assumptions or estimates to
the pricing information it receives from advisors. The Companys investment
advisors obtain pricing data from independent sources, such as Standard &
Poors, Bloomberg and Interactive Data Corporation, and rely on comparable
pricing of other securities because the Level 2 securities it holds are not
actively traded and have fewer observable transactions. The Company considers
this the most reliable information available for the valuation of the
securities.
The Companys Level 2
securities include time deposits, government securities, corporate debt
securities and mortgage-backed and asset-backed securities. The securities must
meet a required rating level by at least one of the rating agencies (Moodys,
Standard & Poors, Fitch). Government securities include US federal agency
securities, foreign government and agency securities, and US state and municipal
bond obligations. Many of the municipal bonds are insured; those that are not
are nearly all AAA/Aaa rated. The corporate debt securities are all investment
grade and most are single A-rated or better. The asset-backed securities are
AAA/Aaa rated and are backed by auto loans, student loans, credit card balances
and residential or commercial mortgages.
|
|
As of September 26,
2015 |
(in thousands) |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
40,062 |
|
$ |
- |
|
$ |
40,062 |
|
$ |
- |
Repurchase
Agreements |
|
|
754 |
|
|
- |
|
|
754 |
|
|
- |
National government and
agency securities |
|
|
3,241 |
|
|
- |
|
|
3,241 |
|
|
- |
State and municipal bond
obligations |
|
|
5,242 |
|
|
- |
|
|
5,242 |
|
|
- |
Corporate bonds and
notes |
|
|
39,188 |
|
|
- |
|
|
39,188 |
|
|
- |
Asset backed
securities |
|
|
7,619 |
|
|
- |
|
|
7,619 |
|
|
- |
Mortgage backed
securities |
|
|
4,404 |
|
|
- |
|
|
4,404 |
|
|
- |
Total |
|
$ |
100,510 |
|
$ |
- |
|
$ |
100,510 |
|
$ |
- |
|
(1) |
$20,798,000 of the
time deposits and $754,000 of the repurchase agreements are included in
cash and cash equivalents; the balance of the investments are included in
short-term investments in marketable securities on our consolidated
balance sheet. |
The Company had no
transfers into or out of Level 2 during the three months ended September 26,
2015.
When assessing marketable
securities for other-than-temporary declines in value, a number of factors are
considered. Analyses of the severity and duration of price declines, remaining
years to maturity, portfolio manager reports, economic forecasts, and the
specific circumstances of issuers indicate that it is reasonable to expect
marketable securities with unrealized losses as of September 26, 2015 to recover
in fair value up to the Companys cost bases within a reasonable period of time.
The Company does not intend to sell investments with unrealized losses before
maturity, when the obligors are required to redeem them at full face value or
par. The Company believes the obligors have the financial resources to redeem
the debt securities. Accordingly, the Company does not consider the investments
to be other-than-temporarily impaired as of September 26, 2015.
The Company has determined
that the amounts reported for cash and cash equivalents, accounts receivable,
deposits, accounts payable and accrued liabilities approximate fair value
because of their short maturities and/or variable interest rates.
19
Item 2: Managements Discussion and
Analysis
of Financial Condition and Results of Operations
Pericom Semiconductor
Corporation
The following information
should be read in conjunction with the unaudited condensed consolidated
financial statements and notes thereto included in Part 1 - Item 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Managements Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K for the year
ended June 27, 2015 (the Form 10-K).
Factors That May
Affect Operating Results
This Quarterly Report on
Form 10-Q includes forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements
other than statements of historical fact are forward-looking statements for
purposes of these provisions, including any statements regarding our sales to
Taiwan and China, the continuation of a high level of turns orders, higher or
lower levels of inventory, future gross profit and gross margin; the plans and
objectives of management for future operations; our tax rate; currency
fluctuations; the adequacy of allowances for returns, price protection and other
concessions; the sufficiency of cash generated from operations and cash
balances; our exposure to interest rate risk; expectations regarding our
research and development and selling, general and administrative expenses; and
our possible future acquisitions and assumptions underlying any of the
foregoing. In some cases, forward-looking statements can be identified by the
use of terminology such as may, will, expects, plans, anticipates,
estimates, potential, or continue, or the negative thereof or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements contained herein are reasonable, there can be no
assurance that such expectations or any of the forward-looking statements will
prove to be correct, and actual results could differ materially from those
projected or assumed in the forward-looking statements. Our future financial
condition and results of operations, as well as any forward-looking statements,
are subject to risks and uncertainties, including but not limited to the factors
set forth (i) in Item 1A, Risk Factors, of Part II of this Form 10-Q, and (ii)
in Note 1 to the Notes to Condensed Consolidated Financial Statements. All
forward-looking statements and reasons why results may differ included in this
Quarterly Report are made as of the date hereof, and we assume no obligation to
update any such forward-looking statement or reason why actual results may
differ.
Executive Overview
Pericom Semiconductor
Corporation (the Company or Pericom or we, us or our) was incorporated
in June 1990 in the state of California. We design, develop and market
high-performance integrated circuits (ICs) and frequency control products
(FCPs) used in many of today's advanced electronic systems. Our analog,
digital and mixed-signal ICs, together with our FCP products enable higher
system bandwidth and signal quality, resulting in better operating reliability,
signal integrity, and lower overall system cost in applications such as notebook
computers, servers, network switches and routers, storage area networks, digital
TVs, cell phones, GPS and digital media players.
A few years ago, we
embarked on a strategy to transform our business, as sales of our products used
in personal computers and laptops declined with the transition to mobile devices
such as tablets and smart phones where we had lower market shares. Our strategy
was to increase sales from those market segments offering higher gross margins
and growth potential, such as the ultramobility and embedded markets, including
automotive.
On September 3, 2015, we
announced that we had entered into an Agreement and Plan of Merger with Diodes
Incorporated summarized in Note 1 of Notes to Condensed Consolidated Financial
Statements.
During the three months
ended September 26, 2015, net revenues decreased 5.1% as compared with the three
months ended September 27, 2014, with reduced sales in the embedded, digital
media, storage and networking end market segments, partially offset by sales
gains in the PC/notebook market segment, where our new products have higher
gross margins than in years past. We increased gross profit for the three months
ended September 26, 2015 to $14.3 million for an increase of $261,000 from $14.1
million for the three months ended September 27, 2014, primarily due to improved
gross margins in both IC and FCP products. The overall gross margin for the
three months ended September 26, 2015 was 45.4%, a 310 basis point improvement,
as compared to 42.3% for the three months ended September 27, 2014.
20
Operating income was
$823,000 for the three months ended September 26, 2015, as compared with
operating income of $2.2 million for the three months ended September 27, 2014,
with the decrease attributable to $1.7 million of merger-related expenses
incurred in the current period. Interest and other income was $3.2 million for
the three months ended September 26, 2015, as compared with interest and other
income of $1.3 million for the three months ended September 27, 2014, with the
increase attributable primarily to a $1.2 million increase in unrealized
exchange gains and $805,000 of other income from a release of reserves related
to a foreign subsidy. Net income for the three months ended September 26, 2015
was $3.6 million, or $0.16 per diluted share as compared to a net income of $2.5
million or $0.11 per share for the three months ended September 27, 2014.
Results of Operations
The following table sets
forth certain statement of operations data as a percentage of net revenues for
the periods indicated.
|
Three Months
Ended |
|
September
26, |
|
September
27, |
|
2015 |
|
2014 |
Net
revenues |
100.0 |
% |
|
100.0 |
% |
Cost
of revenues |
54.6 |
% |
|
57.7 |
% |
Gross
profit |
45.4 |
% |
|
42.3 |
% |
Operating
expenses: |
|
|
|
|
|
Research
and development |
14.1 |
% |
|
13.8 |
% |
Selling,
general and administrative |
28.7 |
% |
|
21.9 |
% |
Total |
42.8 |
% |
|
35.7 |
% |
Income
from operations |
2.6 |
% |
|
6.6 |
% |
Interest
and other income, net |
10.3 |
% |
|
3.8 |
% |
Income
before income taxes |
12.9 |
% |
|
10.4 |
% |
Income
tax expense |
1.7 |
% |
|
3.1 |
% |
Net
income from consolidated companies |
11.2 |
% |
|
7.3 |
% |
Equity
in net income of unconsolidated affiliates |
0.1 |
% |
|
0.1 |
% |
Net
income |
11.3 |
% |
|
7.4 |
% |
21
Net Revenues
The following table sets
forth our revenues and the customer concentrations with respect to such revenues
for the periods indicated.
|
|
Three Months
Ended |
|
|
September 26, |
|
September 27, |
|
% |
(in thousands) |
|
2015 |
|
2014 |
|
Change |
Net
revenues |
|
$ |
31,570 |
|
|
$ |
33,259 |
|
|
-5.1 |
% |
% of
net revenues accounted for by top 5 direct |
|
|
|
|
|
|
|
|
|
|
|
customers (1) |
|
|
52.0 |
% |
|
|
52.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of direct customers that each account for |
|
|
|
|
|
|
|
|
|
|
|
more
than 10% of net revenues |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
% of
net revenues accounted for by top 5 end |
|
|
|
|
|
|
|
|
|
|
|
customers (2) |
|
|
38.5 |
% |
|
|
29.9 |
% |
|
|
|
|
Number of end customers that each account for |
|
|
|
|
|
|
|
|
|
|
|
more
than 10% of net revenues |
|
|
2 |
|
|
|
- |
|
|
|
|
(1) |
Direct customers
purchase products directly from us and include distributors, contract
manufacturers and original equipment manufacturers (OEMs). |
|
(2) |
End customers are
OEMs and their products are manufactured using our products. End customers
may purchase directly from us or from distributors or contract
manufacturers. For end customer data, we rely on information provided by
our direct distribution and contract manufacturing
customers. |
Net revenues consist of
product sales, which we generally recognize upon shipment, less an estimate for
returns and allowances.
Net revenues decreased $1.7
million or 5.1% in the first three months of fiscal 2016 versus the first three
months of fiscal 2015. Net revenue for IC and FCP products in the first three
months of fiscal 2016 versus the first three months of fiscal 2015 reflected:
● | an
increase of $298,000 or 1.5% in sales of IC products to $20.4 million,
and |
● | a
decrease of $2.0 million or 15.1% in sales of our FCP products to $11.1
million. |
The increase in sales of IC
products was primarily driven by increased sales in the PC/notebook end market
segment. The decrease in sales of FCP products occurred primarily in the digital
media, embedded and storage end market segments.
The following table sets
forth net revenues by country as a percentage of total net revenues for the
three months ended September 26, 2015 and September 27, 2014:
|
Three Months
Ended |
|
September 26, |
|
September 27, |
|
2015 |
|
2014 |
China (including Hong Kong) |
47 |
% |
|
49 |
% |
Taiwan |
36 |
% |
|
32 |
% |
United States |
3 |
% |
|
4 |
% |
Other (less than 10% each) |
14 |
% |
|
15 |
% |
Total |
100 |
% |
|
100 |
% |
Over the past several
years, sales to China and Taiwan have constituted the majority of our sales. We
expect this trend will continue in the future.
Our net revenue levels have
been highly dependent on the number of new orders that are received for products
to be delivered to the customer within the same quarter, also called turns
orders. Because of our lack of visibility into demand when turns orders are
high, it is difficult to predict which products to build to match future demand.
We believe the current high level of turns orders will continue indefinitely.
The sustainability of customer demand is uncertain and our markets are highly
dependent on worldwide economic conditions. The high level of turns orders
together with the uncertainty of product mix and pricing makes it difficult to
predict future levels of sales and may require us to carry higher levels of
inventory.
22
Gross Profit
The following table sets
forth our gross profit for the periods indicated:
|
|
Three Months
Ended |
|
|
September
26, |
|
September
27, |
|
% |
(in
thousands) |
|
2015 |
|
2014 |
|
Change |
Net
revenues |
|
$ |
31,570 |
|
|
$ |
33,259 |
|
|
-5.1 |
% |
Gross
profit |
|
|
14,341 |
|
|
|
14,080 |
|
|
1.9 |
% |
Gross
profit as a percentage of net |
|
|
|
|
|
|
|
|
|
|
|
revenues
(gross margin) |
|
|
45.4 |
% |
|
|
42.3 |
% |
|
|
|
The increase in gross
profit in the first three months of fiscal 2016 as compared to the first three
months of fiscal 2015 of $261,000 is the result of:
● |
a gross margin increase from 42.3% to 45.4%,
resulting in a $1.0 million improvement in gross profit, and |
● |
a 5.1% decrease in sales, which led to $767,000
of reduced gross profit. |
The sales decrease was
discussed above. The gross margin increase resulted primarily from our
initiatives to focus on higher-margin opportunities in server, storage,
networking, telecom and embedded market segments, as well as increased sales mix
of crystal oscillator products and recently higher margin products in the
PC/notebook end market.
Future gross profit and
gross margin are highly dependent on the level and product mix of net revenues.
This includes the mix of sales between lower margin FCP products and our higher
margin IC products. Although we have been successful at favorably improving our
integrated circuit product mix and penetrating new end markets, there can be no
assurance that this will continue. Accordingly, we are not able to predict
future gross profit levels or gross margins with certainty.
During the three month
periods ended September 26, 2015 and September 27, 2014, gross profit and gross
margin benefited as a result of the sale of inventory of $29,000 and $88,000
respectively, that we had previously identified as excess and written down to
zero value.
Research and
Development (R&D)
|
|
Three Months
Ended |
|
|
September
26, |
|
September
27, |
|
% |
(in
thousands) |
|
2015 |
|
2014 |
|
Change |
Net
revenues |
|
$ |
31,570 |
|
|
$ |
33,259 |
|
|
-5.1 |
% |
Research and development |
|
|
4,452 |
|
|
|
4,588 |
|
|
-3.0 |
% |
|
R&D as a percentage of net
revenues |
|
|
14.1 |
% |
|
|
13.8 |
% |
|
|
|
Research and development
expenses consist primarily of costs related to personnel and overhead,
non-recurring engineering charges, and other costs associated with the design,
prototyping, testing, manufacturing process design support, and technical
customer applications support of our products. The expense decrease of $136,000
for the three month period ended September 26, 2015 as compared to the same
period of the prior year included decreases of $276,000 for masks and $148,000
for outside services, partially offset by increased expenses of $152,000 for
software maintenance and $121,000 for depreciation.
23
We believe that continued
spending on research and development to develop new products and improve
manufacturing processes is critical to our long-term success, and as a result we
expect to continue to invest in research and development projects. In the short
term, we intend to continue to focus on cost control as business conditions
improve. If business conditions deteriorate or the rate of improvement does not
meet our expectations, we may implement further cost-cutting actions.
Selling, General and
Administrative (SG&A)
|
|
Three Months
Ended |
|
|
September 26, |
|
September 27, |
|
% |
(in thousands) |
|
2015 |
|
2014 |
|
Change |
Net
revenues |
|
$ |
31,570 |
|
|
$ |
33,259 |
|
|
-5.1 |
% |
Selling, general and administrative |
|
|
9,066 |
|
|
|
7,300 |
|
|
24.2 |
% |
|
SG&A as a percentage of net
revenues |
|
|
28.7 |
% |
|
|
21.9 |
% |
|
|
|
Selling, general and
administrative expenses consist primarily of personnel and related overhead
costs for sales, marketing, finance, administration, human resources and general
management. The expense increase of approximately $1.8 million for the three
month period ended September 26, 2015 as compared to the same period of the
prior year is attributable primarily to the incurrence of $1.7 million in legal
services, financial advisor and shareholder relations related to the proposed
merger, $152,000 for share-based compensation and $58,000 for software
maintenance.
We anticipate that selling,
general and administrative expenses will increase modestly in future periods
over the long term due to increased commission expense to the extent we achieve
higher sales levels. We intend to continue our focus on controlling costs. If
business conditions deteriorate or the rate of improvement does not meet our
expectations, we may implement further cost-cutting actions.
Interest and Other
Income, Net
|
|
Three Months
Ended |
|
|
September 26, |
|
September 27, |
|
% |
(in thousands) |
|
2015 |
|
2014 |
|
Change |
Interest income |
|
$ |
618 |
|
$ |
647 |
|
-4.5 |
% |
Other income |
|
|
798 |
|
|
44 |
|
1713.6 |
% |
Foreign exchange transaction gain |
|
|
1,829 |
|
|
583 |
|
213.7 |
% |
Interest
and other income, net |
|
$ |
3,245 |
|
$ |
1,274 |
|
154.7 |
% |
Interest and other income
for the three month period ended September 26, 2015 increased $2.0 million as
compared with the same period of the prior year due primarily to a $1.2 million
increase in foreign exchange transaction gains and $805,000 of other income from
a release of reserves held for a government subsidy grant to our Yangzhou
facility.
24
Income Tax
Expense
|
|
Three Months
Ended |
|
|
September 26, |
|
September 27, |
|
% |
(in thousands) |
|
2015 |
|
2014 |
|
Change |
Pre-tax income |
|
$ |
4,068 |
|
|
$ |
3,466 |
|
|
17.4 |
% |
Income tax expense |
|
|
535 |
|
|
|
1,010 |
|
|
-47.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
13.2 |
% |
|
|
29.1 |
% |
|
|
|
The difference in the
effective tax rate for the three months ended September 26, 2015 as compared
with the same period of the prior year is due primarily to the allocation of
earnings between different tax jurisdictions and the inability to utilize losses
in certain non-includable entities.
Our effective tax rate
differs from the federal statutory rate primarily due to state income taxes, the
effect of foreign income tax and foreign losses and stock-based compensation
from equity grants.
Equity in Net Income
of Unconsolidated Affiliate
Equity in net income of
unconsolidated affiliate consists of our allocated portion of the net income of
Jiyuan Crystal Photoelectric Frequency Technology Ltd. (JCP), an FCP
manufacturing company located in Science Park of Jiyuan City, Henan Province,
China. JCP is a key manufacturing partner of PSE-TW, and PSE-TW has acquired a
49% equity interest in JCP. For the three month periods ended September 26, 2015
and September 27, 2014, the Companys allocated portion of JCPs results was
income of $26,000 and $39,000, respectively.
Liquidity and Capital
Resources
As of September 26, 2015,
our principal sources of liquidity included cash, cash equivalents and
short-term investments of approximately $120.5 million as compared with $129.1
million on June 27, 2015.
Our investment in debt
securities includes government securities, corporate debt securities and
mortgage-backed and asset-backed securities. Government securities include US
treasury securities, US federal agency securities, foreign government and agency
securities, and US state and municipal bond obligations. Many of the municipal
bonds are insured; those that are not are nearly all AAA/Aaa rated. The
corporate debt securities are all investment grade and nearly all are single
A-rated or better. The asset-backed securities are AAA/Aaa rated and are backed
by auto loans, student loans, credit card balances and residential or commercial
mortgages. Most of our mortgage-backed securities are collateralized by prime
residential mortgages issued by government agencies including FNMA, FHLMC and
FHLB. Those issued by banks are AAA-rated. As of September 26, 2015, unrealized
gains on marketable securities net of taxes were $125,000. When assessing
marketable securities for other than temporary declines in value, we consider a
number of factors. Our analyses of the severity and duration of price declines,
portfolio manager reports, economic forecasts and the specific circumstances of
issuers indicate that it is reasonable to expect marketable securities with
unrealized losses as of September 26, 2015 to recover in fair value up to our
cost bases within a reasonable period of time. We have the ability and intent to
hold investments with unrealized losses until maturity, when the obligors are
required to redeem them at full face value or par, and we believe the obligors
have the financial resources to redeem the debt securities. Accordingly, we do
not consider our investments to be other than temporarily impaired as of
September 26, 2015.
As of September 26, 2015,
$41.5 million was classified as cash and cash equivalents compared with $38.8
million as of June 27, 2015. The maturities of our short term investments are
staggered throughout the year so that cash requirements are met. Because we are
a fabless semiconductor manufacturer, we have lower capital equipment
requirements than other semiconductor manufacturers who own wafer fabrication
facilities. For the three month period ended September 26, 2015, we spent
approximately $2.0 million on property, plant and equipment, compared to $1.1
million for the three month period ended September 27, 2014. We generated
approximately $618,000 of interest income for the three month period ended
September 26, 2015, as compared with $647,000 of interest income for the three
month period ended September 27, 2014. In the longer term we may generate less
interest income if our total invested balance decreases and these decreases are
not offset by rising interest rates or increased cash generated from operations
or other sources.
25
Our net cash provided by
operating activities of $2.9 million for the three months ended September 26,
2015 was primarily the result of $3.6 million of net income and the addition of
non-cash expenses of $2.3 million in depreciation and amortization, $960,000 of
share-based compensation expense, $797,000 of tax benefit from share-based
transactions, $441,000 from deferred taxes and $66,000 from the write off of
assets, partially offset by deductions of $220,000 of excess tax benefit from
share-based transactions and $26,000 of equity in net income of unconsolidated
affiliate. An additional contribution to cash included reductions of $77,000 in
prepaid expenses and other current assets, and an increase of $2.7 million in
accounts payable. Such contributions were partially offset by increases of $4.0
million in accounts receivable, $2.1 million in inventory and decreases of $1.7
million in accrued liabilities. Our net cash provided by operating activities
was $7.1 million in the three months ended September 27, 2014.
Our cash provided by
investing activities of $8.6 million for the three months ended September 26,
2015 was the result of sales and maturities of available for sale investments
exceeding purchases of available for sale investments by approximately $10.6
million, partially offset by additions to property and equipment of
approximately $2.0 million. Our cash used in investing activities was $11.6
million for the three months ended September 27, 2014.
Our cash used in financing
activities for the three months ended September 26, 2015 of $6.9 million was the
result of expenditures of $5.8 million for the repurchase of our common stock,
and $1.3 million of cash dividends paid, partially offset by $220,000 of excess
tax benefit from share-based transactions. Our cash used in financing activities
was $775,000 for the three months ended September 27, 2014.
A portion of our cash may
be used to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. From time to time, in the
ordinary course of business, we may evaluate potential acquisitions of such
businesses, products or technologies.
Our long-term future
capital requirements will depend on many factors, including our level of
revenues, the timing and extent of spending to support our product development
efforts, the expansion of sales and marketing efforts, the timing of our
introductions of new products, the costs to ensure access to adequate
manufacturing capacity, and the continuing market acceptance of our products. We
could be required, or could elect, to seek additional funding through public or
private equity or debt financing and additional funds may not be available on
terms acceptable to us or at all. We believe our current cash balances and cash
flows generated by operations will be sufficient to satisfy our anticipated cash
needs for working capital and capital expenditures.
Contractual Obligations
and Commitments
Our contractual obligations
and commitments at September 26, 2015 are as follows:
|
|
|
|
|
Payments Due
by Period |
|
|
|
(in thousands) |
|
|
|
|
Less than 1 |
|
1 3 |
|
3 5 |
|
|
|
|
Total |
|
Year |
|
Years |
|
Years |
|
Thereafter |
Operating lease payments |
|
$ |
945 |
|
$ |
427 |
|
$ |
499 |
|
$ |
17 |
|
$ |
2 |
Capital equipment purchase
obligations |
|
|
11 |
|
|
11 |
|
|
- |
|
|
- |
|
|
- |
Facility modifications |
|
|
330 |
|
|
330 |
|
|
- |
|
|
- |
|
|
- |
Total obligations |
|
$ |
1,286 |
|
$ |
768 |
|
$ |
499 |
|
$ |
17 |
|
$ |
2 |
The operating lease
commitments are primarily facility leases at our various Asian subsidiaries.
The facility modification
commitments have been made by our Shandong, China manufacturing operation for a
general contractor and architecture firm to develop feasibility studies, plans
and cost estimates for potential additional development of our plant site. We
have no other purchase obligations beyond routine purchase orders and the
facility modifications shown in the table as of September 26, 2015.
Off-Balance Sheet
Arrangements
We have no off-balance
sheet arrangements, defined by Regulation S-K Item 303(a)(4).
26
Critical Accounting
Policies
Our condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of such
statements requires us to make estimates and assumptions that affect the
reported amounts of revenues and expenses during the reporting period and the
reported amounts of assets and liabilities as of the date of the financial
statements. Our estimates are based on historical experience and other
assumptions that we consider to be reasonable given the circumstances. Actual
results may vary from our estimates.
The methods, estimates and
judgments we use in applying our most critical accounting policies have a
significant impact on the results we report in our financial statements. The
Securities and Exchange Commission has defined the most critical accounting
policies as the ones that are most important to the portrayal of our financial
condition and results of operations, and require us to make our most difficult
and subjective accounting judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
our most critical accounting policies include revenue recognition and accounts
receivable allowances, which impact the recording of revenues; valuation of
inventories, which impacts costs of goods sold and gross margins; accounting for
income taxes, which impacts the income tax provision and net income; impairment
of intangible assets and investments, which impacts the intangible asset and
investment accounts; and share-based compensation, which impacts costs of goods
sold and operating expenses.
For further information
about the Companys critical accounting policies, see the discussion of critical
accounting policies in the Companys Form 10-K for the fiscal year ended June
27, 2015. Management believes that there has been no significant change during
the three month period ended September 26, 2015 to the items identified as
critical accounting policies in the Companys Form 10-K for the fiscal year
ended June 27, 2015.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of September 26, 2015
our investment portfolio consisted of investment-grade fixed income securities,
excluding those classified as cash equivalents, of $79.0 million. These
securities are subject to interest rate risk and will decline in value if market
interest rates increase. However, we do not believe that such a decrease would
have a material effect on our results of operations over the next fiscal year.
Due to the short duration and conservative nature of these instruments, we do
not believe that we have a material exposure to interest rate risk.
When the general economy
weakens significantly, the credit profile, financial strength and growth
prospects of certain issuers of interest-bearing securities held in our
investment portfolios may deteriorate, and our interest-bearing securities may
lose value either temporarily or other than temporarily. We may implement
investment strategies of different types with varying duration and risk/return
trade-offs that do not perform well. As of September 26, 2015, we held a
significant portion of our corporate cash in diversified portfolios of
investment-grade marketable securities, mortgage- and asset-backed securities,
and other securities that had unrealized gains net of tax of $125,000. Although
we consider unrealized gains and losses on individual securities to be
temporary, there is a risk that we may incur other-than-temporary impairment
charges if credit and equity markets are unstable and adversely impact
securities issuers.
We transact business in
various non-U.S. currencies, primarily the New Taiwan Dollar, the Hong Kong
Dollar and the Chinese Renminbi. We are exposed to fluctuations in foreign
currency exchange rates on accounts receivable and accounts payable from sales
and purchases in these foreign currencies and the net monetary assets and
liabilities of our foreign subsidiaries. Of our $120.5 million of cash, cash
equivalents and short-term investments as of September 26, 2015, $73.9 million
is in our foreign subsidiaries. A hypothetical 10% favorable or unfavorable
change in foreign currency exchange rates would have a material impact on our
financial position and results of operations.
27
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation of Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) that are designed to ensure that information required to be disclosed by
us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Our management, with the
participation of our principal executive officer and principal financial officer
has evaluated the effectiveness of our disclosure controls and procedures. Based
on such evaluation, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures were
effective as of September 26, 2015.
Changes in Internal
Control over Financial Reporting
There were no changes in
our internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
September 26, 2015 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
28
PART II. OTHER INFORMATION
Item 1A: Risk Factors
This quarterly report on
Form 10-Q contains forward-looking statements which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
by such forward-looking statement as a result of various factors, including
those set forth below. The listing below includes any material changes to and
supersedes the description of the risk factors affecting our business previously
disclosed in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K
for the fiscal year ended June 27, 2015.
RISKS RELATED TO THE
MERGER
The Merger Agreement may
be terminated in accordance with its terms and the Merger may not be
consummated.
On September 2, 2015, the
Company entered into an Agreement and Plan of Merger (Merger Agreement) with
Diodes Incorporated, a Delaware Corporation (Diodes) and PSI Merger Sub, Inc., a
California corporation and a wholly-owned subsidiary of Diodes (Merger Sub),
pursuant to which, subject to satisfaction or waiver of the conditions therein,
Merger Sub will merge with and into the Company (the Merger), with the Company
surviving as a wholly-owned subsidiary of Diodes. Pursuant to the terms of the
Merger Agreement, at the effective time of the Merger (the Effective Time),
each share of the Companys common stock issued and outstanding immediately
prior to the Effective Time, excluding shares owned by shareholders who have
exercised dissenters rights under California law and shares owned by the
Company, Diodes, Merger Sub or any of their respective subsidiaries, will be
converted into the right to receive $17.00 in cash, without interest. The Merger
Agreement contains a number of conditions that must be fulfilled to complete the
Merger. Those conditions include, but are not limited to: the approval of the
Merger by our shareholders; absence of any law enacted, issued, promulgated
enforced or entered by any specified governmental entity of competent
jurisdiction that is in effect and makes illegal, permanently enjoining or
otherwise prohibiting the consummation of the merger; the continued accuracy of
the representations and warranties of both parties subject to specified
materiality standards; the performance by both parties of their covenants and
agreements in all material respects; and that, since the date of the Merger
Agreement, there has been no occurrence, effect, incident, action, failure to
act or transaction that has had or would reasonably be expected to have, a
material adverse effect on our company. These conditions to the closing of the
Merger may not be fulfilled and, accordingly, the Merger may not be consummated.
In addition, if the Merger is not completed by March 2, 2016, either we or
Diodes may choose not to proceed with the Merger. In addition, we or Diodes may
elect to terminate the Merger Agreement in certain other circumstances, and the
parties can mutually decide to terminate the Merger Agreement at any time prior
to the closing of the Merger, whether before or after our shareholders approve
the Merger. If the Merger Agreement is terminated under certain circumstances,
we would be required to pay Diodes a termination fee equal to $15
million.
Failure to complete the
Merger could negatively impact our stock price and our future business and
financial results.
If the Merger is not
consummated, our ongoing businesses may be materially and adversely affected
and, without realizing any of the benefits of having completed the Merger, we
will be subject to a number of risks, including the following:
● |
matters relating to
the Merger (including integration planning) have required and will
continue to require substantial commitments of time and resources by our
management, which could otherwise have been devoted to
ongoing research and development activities, day-to-day operations and
other opportunities that may have been beneficial to us as
an independent company; |
29
● |
we will be required
to pay certain costs relating to the Merger, including legal, accounting,
filing and other fees and mailing, financial printing and other expenses,
whether or not the Merger is completed; |
● |
the current price of
our common stock may reflect a market assumption that the Merger will
occur, meaning that a failure to complete the Merger could result in a
material decline in the price of our common stock; |
● |
we may experience
negative reactions from investors, customers, regulators and
employees; |
● |
the Merger Agreement
places certain restrictions on the conduct of our business prior to the
closing of the Merger. Such restrictions, the non-compliance of which is
subject to the consent of Diodes, may prevent us from making certain
acquisitions or taking certain other specified actions during the pendency
of the Merger; and
|
● |
any shareholder litigation in connection
with the Merger or the Merger Agreement may result in significant costs of
defense, indemnification and liability. |
In addition to the above
risks, we may be required to pay to Diodes a termination fee equal to $15
million, which may materially adversely affect our financial results. If the
Merger is not consummated, these risks may materialize and may materially and
adversely affect our business, financial results and share price.
The Merger Agreement
contains provisions that restrict our ability to pursue or solicit alternatives
to the Merger and for our board of directors to change its recommendation that
our shareholders vote for the approval of the Merger and, in specified
circumstances, could require us to pay Diodes a termination fee of $15
million. However, the Merger Agreement does not prevent our
board of directors from considering and responding to unsolicited offers if the
board of directors determines in good faith that the failure to do so would be
inconsistent with its fiduciary duties.
Under the Merger Agreement,
we are subject to customary restrictions on our ability to solicit alternative
acquisition proposals from third parties and to provide information to, and
enter into discussions or negotiations with, third parties regarding alternative
acquisition proposals. However, prior to the receipt of the approval of the
Merger from our shareholders, the solicitation restrictions are subject to a
customary fiduciary-out provision that allow us, under certain circumstances,
to provide information to and participate in negotiations or discussions with
third parties with respect to an alternative acquisition proposal if our board
of directors determines in good faith, after consultation with outside legal
counsel, that the failure to take such action would reasonably be expected to be
inconsistent with its fiduciary duties under applicable law. In addition, our
board of directors, after satisfying certain notice requirements to Diodes, may
change its recommendation with respect to the Merger if it determines in good
faith, after consultation with outside legal counsel, that the failure to do so
under certain circumstances specified in the Merger Agreement would reasonably
be expected to be inconsistent with the board of directors fiduciary duties
under applicable law.
Under certain
circumstances, we may terminate the Merger Agreement in order to enter into an
agreement with respect to a superior proposal, if our board of directors (after
consultation with our outside legal counsel and our financial advisor)
determines in good faith that such proposal is more favorable from a financial
point of view to our shareholders (taking into account any revisions to the
Merger Agreement agreed by Diodes within three business days of Diodes receipt
of the terms of such proposal, or within two business days of Diodes receipt of
any material amendment to such proposal) than the Merger. If our board of
directors recommends such superior proposal to our shareholders but does not
terminate the Merger Agreement, Diodes would be entitled to terminate the Merger
Agreement. Under either of these circumstances, we would be required to pay
Diodes a termination fee equal to $15 million. These provisions could discourage
a third party that may have an interest in acquiring all or a significant part
of us from considering or proposing that acquisition, or might result in a third
party proposing to pay a lower price than it might otherwise have proposed to
pay because of the added expense of the termination fee that may become payable
in certain circumstances.
30
While the Merger is
pending, we will be subject to business uncertainties that could adversely
affect our business.
Uncertainty about the
effect of the Merger on our employees, customers and suppliers may have an
adverse effect on our company. These uncertainties may impair our ability to
attract, retain and motivate key personnel until the Merger is consummated and
for a period of time thereafter, and could cause customers, suppliers and others
who deal with us to become uncertain about future business relationships with us
that could possibly lead to reduced partnership and business momentum. Employee
retention may be challenging during the pendency of the Merger, as certain of
our employees may experience uncertainty about their future roles. If our key
employees depart because of issues related to the uncertainty and difficulty of
integration or a desire not to remain with the Company, our business could be
seriously harmed. In addition, the Merger Agreement restricts us from taking
specified actions until the Merger occurs without the consent of Diodes. These
restrictions may prevent us from pursuing attractive business opportunities that
may arise prior to the consummation of the Merger.
Our directors and
officers may have interests in the Merger different from the interests of our
shareholders.
Certain of our directors
and executive officers negotiated the terms of the Merger Agreement, and our
board of directors approved the Merger Agreement and recommended that our
shareholders vote in favor of the Merger. These directors and executive officers
may have interests in the Merger that are different from, or in addition to,
those of our shareholders generally. These interests include, but are not
limited to, the treatment in the Merger of stock options, restricted stock
units, change of control employment agreements and other rights held by our
directors and executive officers, and provisions in the Merger Agreement
regarding continued indemnification of and advancement of expenses to our
directors and officers. Our shareholders should be aware of these interests when
they consider our board of directors recommendation that they vote in favor of
the Merger Proposal. In connection with the Merger, certain of our directors and
executive officers, in their capacities as holders of shares or other equity
interests of the Company entered into voting agreements pursuant to which they
agreed, among other things, to vote or cause to be voted all of the Company
shares beneficially owned by such shareholders for the approval of the Merger
and the Merger Agreement and against any alternative proposal.
Our board of directors was
aware of these interests when it determined that the Merger, on the terms and
subject to the conditions set forth in the Merger Agreement, was fair to and in
the best interests of the Company and its shareholder and approved and declared
advisable the Merger Agreement, the Merger and the other transactions
contemplated by the Merger Agreement.
Because the Merger
Consideration to be paid to our shareholders is a fixed amount of cash per share
of our common stock and does not include the issuance of any Diodes shares, our
shareholders will not realize any potential future gains from the post-Merger
combined business.
The amount of cash to be
paid under the Merger Agreement is fixed and will not be adjusted for changes in
our business, assets, liabilities, prospects, outlook, financial condition or
results of operations, including any potential long-term value of the successful
execution of our current strategy as an independent company or in the event of
any change in the market price of, analyst estimates of, or projections relating
to, our common stock.
We will incur direct and
indirect costs as a result of the Merger.
We will incur substantial
expenses in connection with and as a result of completing the Merger and over a
period of time following the consummation of the Merger. For the three months
ended September 26, 2015, we have incurred direct transaction costs of
approximately $1.7 million. While we have assumed that a certain level of
transaction expenses will be incurred, factors beyond our control could affect
the total amount or the timing of these expenses. Many of the expenses that will
be incurred, by their nature, are difficult to estimate accurately.
31
RISKS RELATED TO OUR
BUSINESS AND OPERATING RESULTS
In the past, our
operating results have varied significantly and are likely to fluctuate in the
future, making it difficult to predict our future operating results.
We continue to face
a challenging business environment and limited
visibility on end-market demands. Wide varieties of factors affect our operating
results, many of which are beyond our control. These factors and risks include,
but are not limited to, the following:
● |
changes in the quantity of our products
sold; |
● |
changes in the
average selling price of our products; |
● |
general conditions in
the semiconductor industry; |
● |
changes in our
product mix; |
● |
a change in the gross
margins of our products; |
● |
the operating results
of the FCP product line, which normally has a lower profit margin than IC
products; |
● |
expenses incurred in
obtaining, enforcing, and defending intellectual property
rights; |
● |
the timing of new
product introductions and announcements by us and by our
competitors; |
● |
customer acceptance
of new products introduced by us; |
● |
delay or decline in
orders received from distributors; |
● |
growth or reduction in the size of the market for interface
ICs; |
● |
the availability of
manufacturing capacity with our wafer suppliers, especially to support
sales growth and new products; |
● |
changes in
manufacturing costs; |
● |
fluctuations in
manufacturing yields; |
● |
disqualification by
our customers for quality or performance related issues; |
● |
the ability of
customers to pay us; |
● |
increased research
and development expenses associated with new product introductions or
process changes; |
● |
the impairment of our
intangible assets or other long-lived assets; and |
● |
fluctuations in our
effective tax rate from quarter to quarter. |
All of these factors are
difficult to forecast and could seriously harm our operating results. Our
expense levels are based in part on our expectations regarding future sales and
are largely fixed in the short term. Therefore, we may be unable to reduce our
expenses fast enough to compensate for any unexpected shortfall in sales. Any
significant decline in demand relative to our expectations or any material delay
of customer orders could harm our operating results. In addition, if our
operating results in future quarters fall below public market analysts' and
investors' expectations, the market price of our common stock would likely
decrease.
The demand for our
products depends on the growth of our end users' markets.
Our continued success
depends in large part on the continued growth of markets for the products into
which our semiconductor and frequency control products are incorporated. These
markets include the following:
● |
computers, notebooks, tablets and
connectivity to related peripherals; |
● |
data communications
and telecommunications equipment including switches and
routers; |
● |
servers and storage
equipment including cloud computing requirements; |
● |
consumer electronics
equipment; and |
● |
embedded systems
including video surveillance, medical and automotive.
|
Any decline in the demand
for products in these markets could seriously harm our business, financial
condition and operating results. These markets have also historically
experienced significant fluctuations in demand, and over the past two years
weve been impacted by declines in the markets for PCs and notebook computers.
We may also be seriously harmed by slower growth in the other markets in which
we sell our products.
Customer demands for the
Companys products are volatile and difficult to predict.
Our business is
characterized by short-term orders and shipment schedules. We do not have
long-term purchase agreements with any of our customers. Customers can typically
cancel or reschedule their orders without significant penalty. We typically plan
production and inventory levels based on forecasts of customer demand generated
with input from customers and sales representatives. Our customers continuously
adjust their inventories in response to changes in end market demand for their
products and the availability of semiconductor components. This results in
frequent changes in demand for our products. Accordingly, we must rely on
multiple assumptions to forecast customer demand. Various external factors that are outside of our control can make it
difficult to accurately make such forecasts, and the volatility of customer
demand limits our ability to predict future levels of sales and
profitability.
32
Further, as end customer
demand can change very quickly, the supply of semiconductors can quickly and
unexpectedly match or exceed demand. Also, semiconductor suppliers can rapidly
increase production output. This can lead to a sudden oversupply situation and a
subsequent reduction in order rates and revenues as customers adjust their
inventories to true demand rates. A rapid and sudden decline in customer demand
for our products can result in excess quantities of certain of our products
relative to demand. Under such circumstances, we may be required to record
significant provisions for excess and obsolete inventories. This could
materially and adversely affect our results of operations and financial
condition.
The markets for our
products are characterized by rapidly changing technology, and our financial
results could be harmed if we do not successfully develop and implement new
manufacturing technologies or develop, introduce and sell new
products.
The markets for our
products are characterized by rapidly changing technology, frequent new product
introductions and declining selling prices over product life cycles. We
currently offer a comprehensive portfolio of silicon and quartz based products.
Our future success depends upon the timely completion and introduction of new
products, across all our product lines, at competitive price and performance
levels. The success of new products depends on a variety of factors, including
the following:
● |
product performance
and functionality; |
● |
customer
acceptance; |
● |
competitive cost
structure and pricing; |
● |
successful and timely
completion of product development; |
● |
sufficient wafer
fabrication capacity; and |
● |
achievement of
acceptable manufacturing yields by our wafer
suppliers. |
Our failure to successfully
develop new products that achieve market acceptance in a timely fashion and that
can be efficiently and successfully integrated with our customers products
could adversely affect our ability to grow our business and improve our
operating results. The development, introduction and market acceptance of new
products is critical to our ability to sustain and grow our business. Any
failure to successfully develop, introduce, market and sell new products could
materially adversely affect our business and operating results.
We may also experience
delays, difficulty in procuring adequate fabrication capacity for the
development and manufacture of new products, or other difficulties in achieving
volume production of these products. Even relatively minor errors may
significantly affect the development and manufacture of new products. If we fail
to complete and introduce new products in a timely manner at competitive price
and performance levels, our business would be significantly harmed.
If we do not develop
products that our customers and end-users design into their products, or if
their products do not sell successfully, our business and operating results
would be harmed.
We have relied in the past
and continue to rely upon our relationships with our customers and end-users for
insights into product development strategies for emerging system requirements.
We generally incorporate new products into a customer's or end-user's product or
system at the design stage. Our success has been, and will continue to be,
dependent upon manufacturers designing our connectivity products into their
products. To achieve design wins, which are decisions by manufacturers to design
our products into their systems, we must define and deliver cost effective and
innovative connectivity solutions on a timely basis that satisfy the
manufacturers requirements and specifications. Our ability to achieve design
wins is subject to numerous risks including competitive pressures as well as
technological risks and delays in our product development cycle. However, these
design efforts, which can often require significant expenditures by us, may
precede product sales, if any, by a year or more. With the increasing complexity
of new generation products the development cost of each new product increases,
making the selection process ever more critical with limited staff and financial
resources. Moreover, the value to us of any design win will depend in large part
on the ultimate success of the customer or end-user's product and on the extent
to which the system's design accommodates components manufactured by our
competitors. If we fail to achieve design wins or if the design wins fail to
result in significant future revenues, our operating results would be harmed. If we have problems developing or
maintaining our relationships with our customers and end-users, our ability to
develop well-accepted new products may be impaired.
33
Intense competition in
the semiconductor industry may reduce the demand for our products or the prices
of our products, which could reduce our revenues and gross profits and limit our
ability to maintain or grow our business.
The semiconductor industry
is intensely competitive, and we expect competition in this industry to continue
to increase. This competition has resulted in rapid technological change,
evolving standards, reductions in product selling prices and rapid product
obsolescence leading to excess and obsolete inventory writedowns (for further
detail, see Part I, Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations, Critical Accounting Policies
Inventories). If we are unable to successfully meet these competitive
challenges, we may be unable to maintain and grow our business. Any inability on
our part to compete successfully would also adversely affect our results of
operations and impair our financial condition.
Our competitors include
Analog Devices, Avago Technologies, Cypress Semiconductor, Fairchild
Semiconductor, Hitachi, Integrated Device Technology, Maxim Integrated Products,
Motorola, On Semiconductor, NXP, Parade Technologies, Silicon Laboratories,
STMicroelectronics, Texas Instruments, and Toshiba. Most of those competitors
have substantially greater financial, technical, marketing, distribution and
other resources, broader product lines and longer-standing customer
relationships than we do. We also compete with other major or emerging companies
that sell products to certain segments of our markets. Competitors with greater
financial resources or broader product lines may have a greater ability to
sustain price reductions in our primary markets in order to gain or maintain
market share.
We believe that our future
success will depend on our ability to continue to improve and develop our
products and processes. Unlike us, many of our competitors maintain internal
manufacturing capacity for the fabrication and assembly of semiconductor
products. This ability may provide them with more reliable manufacturing
capability, shorter development and manufacturing cycles and time-to-market
advantages. In addition, competitors with their own wafer fabrication facilities
that are capable of producing products with the same design geometries as ours
may be able to manufacture and sell competitive products at lower prices. Any
introduction of products by our competitors that are manufactured with improved
process technology could seriously harm our business. As is typical in the
semiconductor industry, our competitors have developed and marketed products
that function similarly or identically to ours. If our products do not achieve
performance, price, size or other advantages over products offered by our
competitors, we might lose market share. Competitive pressures could also reduce
market acceptance of our products, reduce our prices and increase our
expenses.
We also face competition
from the makers of ASICs and other system devices. These devices may include
interface logic functions that may eliminate the need or sharply reduce the
demand for our products in particular applications.
Downturns in the
semiconductor industry, rapidly changing technology, accelerated selling price
erosion and evolving industry standards can harm our operating
results.
The semiconductor industry
has historically been cyclical and periodically subject to significant economic
downturns, characterized by diminished product demand, accelerated erosion of
selling prices, overcapacity and excess and obsolete inventory as well as
rapidly changing technology and evolving industry standards. In the future, we
may experience substantial period-to-period fluctuations in our business and
operating results due to general semiconductor industry conditions, overall
economic conditions or other factors. Our business is also subject to the risks
associated with the effects of legislation and regulations relating to the
import or export of semiconductor products.
Past domestic and
worldwide economic conditions adversely affected us, and future economic
conditions could have adverse effects on our business, results of operations,
financial condition and cash flows.
Our revenues and earnings
have fluctuated significantly in the past and may fluctuate significantly in the
future. General economic or other conditions could cause a downturn in the
market for our products or technology. In the past, financial disruptions
affecting the banking system, investment banks, insurance companies and the financial markets negatively
impacted general domestic and global economic conditions. These economic
conditions have resulted in our facing very challenging periods leading to
reduced sales and earnings.
34
Our sales have been
adversely impacted due to continued economic softness in many parts of the world
and only tepid growth in others.
There could be a number of
effects on our business that could also adversely affect our operating results.
Disruptions may result in the insolvency of key suppliers resulting in product
delays; the inability of our customers to obtain credit to finance purchases of
our products and/or customer insolvencies that cause our customers to change
delivery schedules, cancel or reduce orders; a slowdown in global economies
which could result in lower end-user demand for our products; and increased
impairments of our investments. Net income could vary from expectations
depending on the gains or losses realized on the sale or exchange of securities,
gains or losses from equity method investments, and impairment charges related
to intangible assets, long-term assets, investments and marketable securities.
Our cash and marketable securities investments represent significant assets that
may be subject to fluctuating or even negative returns depending upon interest
rate movements and financial market conditions in fixed income
securities.
Volatility in the financial
markets and overall economic uncertainty increases the risk of substantial
quarterly and annual fluctuations in our earnings. Given the current economic
environment, we remain cautious and we expect our customers to be cautious as
well, which could affect our future results. If the economic recovery slows down
or dissipates, our business, financial condition, results of operations and cash
flows could be materially and adversely affected.
The complexity of our
products makes us susceptible to manufacturing problems, which could increase
our costs and delay our product shipments.
The manufacture and
assembly of our products is highly complex and sensitive to a wide variety of
factors, including:
● |
the level of contaminants in the
manufacturing environment; |
● |
impurities in the
materials used; and |
● |
the performance of
manufacturing personnel and production
equipment. |
In a typical semiconductor
manufacturing process, silicon wafers produced by a foundry are cut into
individual die. These die are assembled into individual packages and tested for
performance. Our wafer fabrication suppliers have from time to time experienced
lower than anticipated yields of suitable die. In the event of such decreased
yields, we would incur additional costs to sort wafers, an increase in average
cost per usable die and an increase in the time to market or availability of our
products. These conditions could reduce our net revenues and gross margin and
harm our customer relations.
We rely on independent
manufacturers who may not be able to meet our manufacturing requirements.
We do not manufacture any
of our IC products. Therefore, we are referred to in the semiconductor industry
as a "fabless" producer. We depend upon third party foundries to produce wafers
and subcontractors to manufacture IC products that meet our specifications. We
currently have third party manufacturers located in China, Taiwan, Singapore,
Malaysia, India, Korea and Japan that can produce products that meet our needs.
However, as the industry continues to progress to smaller manufacturing and
design geometries, the complexities of producing semiconductors will increase.
Decreasing geometries may introduce new problems and delays that may affect
product development and deliveries. Due to the nature of the industry and our
status as a "fabless" IC semiconductor company, we could encounter
fabrication-related problems that may affect the availability of our products,
delay our shipments or increase our costs.
35
Our contracts with our
wafer suppliers do not obligate them to a minimum supply or set prices. Any
inability or unwillingness of our wafer suppliers generally, and
GlobalFoundries, TSMC and MagnaChip in particular, to meet our manufacturing
requirements would delay our production and product shipments and harm our
business.
In recent years, we
purchased over 70% of our wafers from MagnaChip, TSMC and GlobalFoundries, with
the balance from other wafer suppliers. Our reliance on independent wafer
suppliers to fabricate our wafers at their production facilities subjects us to
possible risks such as:
● |
lack of adequate
capacity or assured product supply; |
● |
lack of available
manufactured products; |
● |
reduced control over
delivery schedules, quality assurance, manufacturing yields and production
costs; |
● |
unanticipated changes
in wafer prices; and |
● |
closure of production
facilities. |
Any inability or
unwillingness of our wafer suppliers to provide adequate quantities of finished
wafers to meet our needs in a timely manner would delay our production and
product shipments and seriously harm our business. In the past, a wafer supplier
shut down one of their production facilities used to manufacture our products.
We transitioned the production of these products to different facilities. The
transfer of production to other facilities subjects us to the above listed risks
as well as potential yield or other production problems, which could arise as a
result of any change.
At present, we purchase
wafers from our suppliers through the issuance of purchase orders based on our
rolling nine-month forecasts. The purchase orders are subject to acceptance by
each wafer supplier. We do not have long-term supply contracts that obligate our
suppliers to a minimum supply or set prices. We also depend upon our wafer
suppliers to participate in process improvement efforts, such as the transition
to finer geometries. If our suppliers are unable or unwilling to do so, our
development and introduction of new products could be delayed. Furthermore,
sudden shortages of raw materials or production capacity constraints can lead
wafer suppliers to allocate available capacity to customers other than us or for
their internal uses, interrupting our ability to meet our product delivery
obligations. Any significant interruption in our wafer supply would seriously
harm our operating results and our customer relations. Our reliance on
independent wafer suppliers may also lengthen the development cycle for our
products, providing time-to-market advantages to our competitors that have
in-house fabrication capacity.
In the event that our
suppliers are unable or unwilling to manufacture our key products in required
volumes, we will have to identify and qualify additional wafer foundries. The
qualification process can take up to nine months or longer. Furthermore, we are
unable to predict whether additional wafer foundries will become available to us
or will be in a position to satisfy any of our requirements on a timely basis,
or at all.
In the quarter ended
December 27, 2014, we were notified by MagnaChip that they will close a
production facility, from which we purchase wafers that support approximately
15% of our revenues, by December 2015. We are working with MagnaChip to transfer
production of these wafers to one of their alternate facilities. We have
successfully conducted fab transfers in the past, but we may suffer some
disruption in supply that could reduce our future revenues.
We depend on single or
limited source assembly subcontractors with whom we do not have written
contracts. Any inability or unwillingness of our assembly subcontractors to meet
our assembly requirements would delay our product shipments and harm our
business.
We primarily rely on
foreign subcontractors for the assembly and packaging of our products and, to a
lesser extent, for the testing of finished products. Some of these
subcontractors are our single source supplier for some of our packages. In
addition, changes in our or a subcontractor's business could cause us to become
materially dependent on a single subcontractor. We have from time to time
experienced difficulties in the timeliness and quality of product deliveries
from our subcontractors and may experience similar or more severe difficulties
in the future. We generally purchase these single or limited source components
or services pursuant to purchase orders and have no guaranteed arrangements with
these subcontractors. These subcontractors could cease to meet our requirements
for components or services, or there could be a significant disruption in
supplies from them, or degradation in the quality of components or services
supplied by them. Any circumstance that would require us to qualify alternative
supply sources could delay shipments, result in the loss of customers and limit
or reduce our revenues. Introducing new products or transferring existing
products to a new third party manufacturer or process may result in unforeseen
product specification and operating problems. These problems may affect our
shipments and may be costly to correct.
36
We may experience
integration or other problems with potential future acquisitions, which could
have an adverse effect on our business or results of operations. New
acquisitions could dilute the interests of existing stockholders, and the
announcement of new acquisitions could result in a decline in the price of our
common stock.
Our previous and potential
future acquisitions could result in the following:
● |
large one-time
write-offs; |
● |
the difficulty in
integrating newly-acquired businesses and operations in an efficient and
effective manner; |
● |
the challenges in
achieving strategic objectives, cost savings, and other benefits from
acquisitions as anticipated; |
● |
the risk of diverting
the attention of senior management from other business
concerns; |
● |
risks of entering
geographic and business markets in which we have no or limited prior
experience and potential loss of key employees of acquired
organizations; |
● |
the risk that our
markets do not evolve as anticipated and that the technologies and
capabilities acquired do not prove to be those needed to be successful in
those markets; |
● |
potentially dilutive
issuances of equity securities; |
● |
excessive usages of
cash; |
● |
the incurrence of
debt and contingent liabilities or amortization expenses related to
intangible assets; |
● |
difficulties in the
assimilation of operations, personnel, technologies, products and the
information systems of the acquired companies; and |
● |
difficulties in
integrating or expanding information technology systems and other
financial or business processes that may lead to financial reporting
issues. |
As part of our business
strategy, we may seek acquisition prospects that would complement our existing
product offerings, improve our market coverage or enhance our technological
capabilities. In addition, from time to time, we invest in other companies,
without actually acquiring them, and such investments involve many of the same
risks as are involved with acquisitions.
Implementation of new
Financial Accounting Standards Board (FASB) rules and the issuance of new
corporate governance regulations or other accounting regulations, or
reinterpretation of existing laws or regulations, could materially impact our
business or stated results.
In general, from time to
time the government, courts and the financial accounting boards may issue new
corporate governance regulations or accounting regulations, or modify or
reinterpret existing ones. There may be future changes in laws, interpretations
or regulations that would affect our financial results or the way in which we
present them. Additionally, changes in the laws or regulations could have
adverse effects on hiring and many other aspects of our business that would
affect our ability to compete, both nationally and internationally.
The Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 required the SEC to establish new
disclosure and reporting requirements for those companies who use conflict
minerals mined from the Democratic Republic of Congo and adjoining countries in
their products, whether or not these products are manufactured by third parties.
We filed our latest report with the SEC in May 2015 for the calendar year ended
December 31, 2014. There will be future costs associated with complying with the
disclosure requirements, including for due diligence in regard to the sources of
any conflict minerals used in our products and, beginning with the report for
calendar year 2015, an audit report of our Conflict Minerals Report prepared by
an independent private sector auditor. In addition, depending on the outcome of
such verification activities, there may be costs of remediation and other
changes to products, processes, or sources of supply.
37
If we are unable to
maintain processes and procedures to sustain effective internal control over our
financial reporting, our ability to provide reliable and timely financial
reports could be harmed and this could have a material adverse effect on our
stock price.
Under the rules promulgated
under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, we
are required to maintain, and evaluate the effectiveness of, our internal
control over financial reporting and disclosure controls and procedures. In our
annual reports on Form 10-K for the years ended July 3, 2010, June 27, 2009,
June 30, 2007 and July 2, 2005, we reported material weaknesses in our
internal control over financial
reporting. We have since remediated these deficiencies and continue to spend a
significant amount of time and resources to ensure compliance with Section 404
of the Sarbanes Oxley Act of 2002. As reported in Item 9A of this Form 10-K, our
management does not believe that we had any material weaknesses in our internal
control over financial reporting as of June 27, 2015, and management has
determined that as of June 27, 2015, our internal control over financial
reporting was effective. However, we have and will continue to evolve our
business in a changing marketplace. In addition, we are expanding our overseas
operations, and as we grow in these locations, we may have difficulty in
recruiting and retaining a complement of personnel with an appropriate level of
accounting knowledge, experience and training in the application of U.S.
generally accepted accounting principles commensurate with our financial
reporting requirements. Due to these factors, there can be no assurance that
other material weaknesses or significant deficiencies will not arise in the
future. Should we or our independent registered public accounting firm determine
in future periods that we have a material weakness in our internal control over
financial reporting, the reliability of our financial reports may be impacted,
and investors could lose confidence in the accuracy and completeness of our
financial reports, which could have an adverse effect on our stock price and we
could suffer other materially adverse consequences.
Changes to environmental
laws and regulations applicable to manufacturers of electrical and electronic
equipment are causing us to redesign our products, and may increase our costs
and expose us to liability.
The implementation of new
environmental regulatory legal requirements, such as lead free initiatives, may
affect our product designs and manufacturing processes. The impact of such
regulations on our product designs and manufacturing processes could affect the
timing of compliant product introductions as well as their commercial success.
Redesigning our products to comply with new regulations may result in increased
research and development and manufacturing and quality control costs. In
addition, the products we manufacture that comply with new regulatory standards
may not perform as well as our current products. Moreover, if we are unable to
successfully and timely redesign existing products and introduce new products
that meet new standards set by environmental regulation and our customers, sales
of our products could decline, which could materially adversely affect our
business, financial condition and results of operations.
We compete with others
to attract and retain key personnel, and any loss of or inability to attract key
personnel would harm us.
To a greater degree than
non-technology companies, our future success will depend on the continued
contributions of our executive officers and other key management and technical
personnel. None of these individuals has an employment agreement with us and
each one would be difficult to replace. We do not maintain any key person life
insurance policies on any of these individuals. The loss of the services of one
or more of our executive officers or key personnel or the inability to continue
to attract qualified personnel could delay product development cycles or
otherwise harm our business, financial condition and results of
operations.
Our future success also
will depend on our ability to attract and retain qualified technical, sales,
marketing, finance and management personnel, particularly highly skilled design,
process and test engineers, for whom competition can be intense. During strong
business cycles, we expect to experience difficulty in filling our needs for
qualified engineers and other personnel. If we do not succeed in hiring and
retaining candidates with appropriate qualifications, our revenues, operations
and product development efforts could be harmed.
38
Our limited ability to
protect our intellectual property and proprietary rights could harm our
competitive position. Litigation regarding intellectual property could divert
management attention, be costly to defend and prevent us from using or selling
the challenged technology.
Our success depends in part
on our ability to obtain patents and licenses and preserve other intellectual
property rights covering our products and development and testing tools. In the
United States, we currently hold 96 patents covering certain aspects of our
product designs and have five additional patent applications pending.
Copyrights, mask work protection, trade secrets and confidential technological
know-how are also key to our business. Additional patents may not be issued to
us or our patents or other intellectual property may not provide meaningful
protection. We may be subject to, or initiate, interference proceedings in the U.S. Patent and Trademark
Office. These proceedings can consume significant financial and management
resources. We may become involved in litigation relating to alleged infringement
by us of others' patents or other intellectual property rights. This type of
litigation is frequently expensive to both the winning party and the losing
party and takes up significant amounts of management's time and attention. In
addition, if we lose such a lawsuit, a court could require us to pay substantial
damages and/or royalties or prohibit us from using essential technologies. For
these and other reasons, this type of litigation could seriously harm our
business. Also, although we may seek to obtain a license under a third party's
intellectual property rights in order to bring an end to certain claims or
actions asserted against us, we may not be able to obtain such a license on
reasonable terms or at all.
Because it is important to
our success that we are able to prevent competitors from copying our
innovations, we intend to continue to seek patent, trade secret and mask work
protection for our technologies. The process of seeking patent protection can be
long and expensive, and we cannot be certain that any currently pending or
future applications will actually result in issued patents, or that, even if
patents are issued, they will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to us. Furthermore, others may
develop technologies that are similar or superior to our technology or design
around the patents we own.
We also rely on trade
secret protection for our technology, in part through confidentiality agreements
with our employees, consultants and third parties. However, these parties may
breach these agreements. In addition, the laws of some territories in which we
develop, manufacture or sell our products may not protect our intellectual
property rights to the same extent as do the laws of the United States.
Our independent foundries
use a process technology that may include technology we helped develop with
them, and that may generally be used by those foundries to produce their own
products or to manufacture products for other companies, including our
competitors. In addition, we may not have the right to implement key process
technologies used to manufacture some of our products with foundries other than
our present foundries.
We may not provide
adequate allowances for exchanges, returns and concessions.
We recognize revenue from
the sale of products when shipped, less an allowance based on future authorized
and historical patterns of returns, price protection, exchanges and other
concessions. We believe our methodology and approach are appropriate. However,
if the actual amounts we incur exceed the allowances, it could decrease our
revenue and corresponding gross profit.
Our future tax rates and
tax payments could be higher than we anticipate and may harm our results of
operations.
As a multinational
corporation, we conduct our business in many countries and are subject to
taxation in many jurisdictions. The taxation of our business is subject to the
application of multiple and sometimes conflicting tax laws and regulations as
well as multinational tax conventions. A number of factors, including
unanticipated changes in the mix of earnings in countries with differing
statutory tax rates or by unexpected changes in existing tax laws or our
interpretation of them, could unfavorably affect our future effective tax rate.
In the event our management determines it is no longer more likely than not that
we will realize a portion of our deferred tax assets we will be required to
increase our valuation allowance which will result in an increase in our
effective tax rate. Furthermore, our tax returns are subject to examination in
all the jurisdictions in which we operate which subjects us to potential
increases in our tax liabilities.
If our liability for
U.S. and foreign taxes is greater than we have anticipated and reserved for, our
operating results may suffer.
We are subject to taxation
in the United States and in foreign jurisdictions in which we do business,
including China. We believe that we have adequately estimated and reserved for
our income tax liability. However, our effective tax rates may not be as low as
we anticipate. As of June 27, 2015, one of the Companys subsidiaries in a
foreign tax jurisdiction is under audit for the years 2010 to 2013. Our business
operations, including our transfer pricing for transactions among our various
business entities operating in different tax jurisdictions, may be audited at
any time by the U.S., Chinese or other foreign tax authorities.
39
A number of factors may
adversely impact our future effective tax rates, such as:
● |
changes in the tax laws of any of the countries in which we pay
substantial taxes, including changes to tax rates or to transfer pricing
standards, or more fundamental changes such as the various proposals that
exist from time to time for U.S. international tax
reform; |
● |
challenges to our
transfer pricing methodologies; |
● |
changes in the
valuation of our deferred tax assets and liabilities; |
● |
changes in U.S.
general accepted accounting principles; and |
● |
the repatriation of
non-U.S. earnings with respect to which we have not previously provided
for U.S. taxes. |
A change in our effective
tax rate due to any of these factors may adversely impact our future results
from operations. Also, changes in tax laws could have a material adverse effect
on our ability to utilize cash in a tax efficient manner.
A large portion of our
revenues is derived from sales to a few key customers, and the loss of one or
more of our key customers, or their key end user customers, could significantly
reduce our revenues. In addition, our sales through distributor channels
increases the complexity of our business.
A relatively small number
of key customers have accounted for a significant portion of our net revenues in
each of the past several fiscal years. In general we expect this to continue for
the foreseeable future. We had two direct customers who each accounted for more
than 10% of net revenues during the three months ended September 26, 2015 and
September 27, 2014. As a percentage of net revenues, sales to our top five
direct customers during the three months ended September 26, 2015 and September
27, 2014 totaled 52% in both periods.
We do not have long-term
sales agreements with any of our customers. Our customers are not subject to
minimum purchase requirements, may reduce or delay orders periodically due to
excess inventory and may discontinue purchasing our products at any time. Our
distributors typically offer competing products in addition to ours. For the
three months ended September 26, 2015 and September 27, 2014, sales to our
domestic and international distributors were approximately 65% and 66% of net
revenues, respectively. Distributors therefore continue to account for a
significant portion of our sales. The loss of one or more significant customers,
or the decision by a significant distributor to carry additional product lines
of our competitors could decrease our revenues.
Selling through distributor
channels increases the complexity of our business, requiring us to, among other
matters:
● |
manage a more complex
supply chain; |
● |
monitor and
understand the drivers of inventory levels at each of our
distributors; |
● |
provide for credits,
return rights and price protection; |
● |
estimate the impact
of credits, return rights, price protection and unsold inventory at
distributors; and |
● |
monitor the financial
condition and creditworthiness of our distributors. |
Increases in inventory
could increase the complexity of one or more of the above factors. Any failure
to manage these challenges, or the occurrence of an imbalance in supply and
demand, could cause us or our distributors to inaccurately forecast sales and
carry excess or insufficient inventory, thereby adversely affecting our net
sales, operating results and cash flows. For further detail on credits, return
rights and price protection, see Part I, Item 2, Managements Discussion and
Analysis of Financial Condition and Results of Operations, Critical Accounting
Policies Revenue Recognition.
Because we sell products
in foreign markets and have operations outside of the United States, we face
foreign business, political, economic and currency risks that could seriously
harm us. Almost all of our wafer suppliers and assembly subcontractors are
located in Southeast Asia, as are our FCP manufacturing facilities, which
exposes us to the problems associated with international
operations.
Risks associated with
international business operations include the following:
● |
disruptions or delays in
shipments; |
● |
changes in economic
conditions in the countries where these subcontractors are located;
|
40
● |
currency fluctuations; |
● |
changes in political
conditions; |
● |
potentially reduced
protection for intellectual property; |
● |
foreign governmental
regulatory requirements and unexpected changes in them; |
● |
the burdens of
complying with a variety of foreign laws; |
● |
import and export
controls; |
● |
delays resulting from
difficulty in obtaining export licenses for technology; |
● |
changes in tax laws,
tariffs and other barriers, and freight rates; and |
● |
compliance with
Generally Accepted Accounting Principles in the United States (U. S.
GAAP). |
Regulatory, geopolitical
and other factors could seriously harm our business or require us to modify our
current business practices. We are subject to general geopolitical risks in
connection with our international operations, such as political and economic
instability and changes in diplomatic and trade relationships. Although most of
our products are sold in U.S. dollars, we incur a significant amount of certain
types of expenses, such as payroll, utilities, capital equipment purchases and
taxes in local currencies. The impact of currency exchange rate movements could
harm our results and financial condition. In addition, changes in tariff and
import regulations and in U.S. and non-U.S. monetary policies could harm our
results and financial condition by increasing our expenses and reducing our
revenue. Varying tax rates in different jurisdictions could harm our results of
operations and financial condition by increasing our overall tax
rate.
In the three months ended
September 26, 2015, we generated approximately 93%, 4% and 3% of our net
revenues from sales in Asia, the United States and the rest of the world,
respectively. In the three months ended September 27, 2014, we generated
approximately 91%, 6% and 3% of our net revenues from sales in Asia, the United
States and the rest of the world, respectively. We expect that foreign sales
will continue to represent by far the majority of net revenues. This will
require significant management attention and financial resources and further
subject us to international operating risks.
We have subsidiaries
located in Asia. We manufacture some of our FCPs in Taiwan as well as in the
Jinan Development Zone in the Shandong Province of the PRC. The development of
the Jinan facility depended upon various tax concessions, tax rebates and other
support from the local governmental entity. There can be no assurance that the
local governmental entity will not change their position regarding such tax and
other support and such a change might adversely affect the profitability of this
facility. In addition, there can be no assurance we will be able to assemble and
maintain sufficient management resources in our Asia subsidiaries, including a
sales force knowledgeable about our target markets and an accounting staff with
sufficient U. S. GAAP accounting expertise.
We are expanding our
presence in China with manufacturing and research and development activities. We
will be subject to increased risks relating to foreign currency exchange rate
fluctuations that could have a material adverse effect on our business,
financial condition and operating results. The value of the Chinese yuan against
the United States dollar and other currencies may fluctuate and is affected by,
among other things, changes in China's political and economic conditions.
Significant future appreciation of the yuan could increase our component and
other raw material costs as well as our labor costs, and could adversely affect
our financial results. Devaluation of the yuan could lower some of our costs and
make our operations more competitive, but would also reduce the value of sales
made in the currency. To the extent that we need to convert United States
dollars into yuan for our operations, appreciation of yuan against the United
States dollar could have a material adverse effect on our business, financial
condition and results of operations. Conversely, if we decide to convert our
yuan into United States dollars for other business purposes and the United
States dollar appreciates against the yuan, the United States dollar equivalent
of the yuan we convert would be reduced. The Chinese government now measures the
exchange rate of the yuan against a number of currencies, rather than just the
United States dollar. Fluctuations in the yuan exchange rate could increase and
could adversely affect our ability to operate our business.
In addition, there is a
potential risk of conflict and further instability in the relationship between
Taiwan and the PRC. Conflict or instability could disrupt the operations of one
of our principal wafer suppliers, several of our assembly subcontractors located
in Taiwan, and our FCP manufacturing operations in Taiwan and the PRC.
41
Our operations and
financial results could be severely harmed by natural disasters.
Our headquarters and some
of our major suppliers' manufacturing facilities are located near major
earthquake faults. In particular, our Asian operations and most of our third
party service providers involved in the manufacturing of our products are
located within relative close proximity. Therefore, any disaster that strikes
within or close to that geographic area could be extremely disruptive to our
business and could materially and adversely affect our operating results and
financial condition.
One of the foundries we use
is located in Taiwan, which has suffered severe earthquakes in the past. Taiwan
is also exposed to typhoons and tsunamis, which can affect not only foundries we
rely upon but also our PSE-TW subsidiary. In March 2011, an earthquake and
tsunami occurred off the northeast coast of Japan which disrupted the global
supply chain for core materials manufactured in Japan that are incorporated in
our products and manufacturing equipment. Thailand experienced floods in the
quarter ended December 31, 2011, which interrupted the industrys supply chain
for storage products and impacted our sales as well. If a major earthquake,
typhoon, tsunami or other natural disaster were to affect our operations or
those of our suppliers, our product supply could be interrupted, which would
seriously harm our business. Natural disasters could also affect the operations
of the distributors and contract manufacturers we sell to, as well as the
operations of our end use customers, which would adversely affect our operations
and financial results. Natural disasters anywhere in the world may potentially
adversely affect us by harming or causing interruptions to our supply chain or
the supply chains of our suppliers, direct customers or end use customers.
System security risks,
data protection or privacy breaches and cyber-attacks could disrupt our internal
operations and harm the reputation of the Company.
Breaches of our information
technology systems caused by computer viruses, unauthorized access, sabotage,
vandalism or terrorism could compromise our information technology networks and
result in unauthorized release of our, our customers or our suppliers
confidential or proprietary information, theft of our intellectual property,
cause a disruption to our manufacturing and other operations, result in release
of employee personal data, or cause us to incur increased information technology
protection costs, any of which could adversely affect our financial results,
stock price and reputation.
RISKS RELATED TO THE
SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
Our stock has been and
will likely continue to be subject to substantial price and volume fluctuations
due to a number of factors, many of which are beyond our control.
The trading price of our
common stock has been, and is likely to continue to be, highly volatile. The
securities markets have experienced significant price and volume fluctuations in
the past, and the market prices of the securities of semiconductor companies
have been especially volatile. This market volatility, as well as general
economic, market or political conditions, including the current global economic
situation, could reduce the market price of our common stock in spite of our
operating performance. Our stock price could fluctuate widely in response to
factors some of which are not within our control, including:
● |
general conditions in the semiconductor and
electronic systems industries; |
● |
actual or anticipated
fluctuations in our operating results; |
● |
changes in
expectations as to our future financial performance; |
● |
announcements of
technological innovations or new products by us or our
competitors; |
● |
changes in earnings
estimates by analysts; and |
● |
price and volume
fluctuations in the overall stock market, which have particularly affected
the market prices of many high technology companies.
|
42
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
On April 24, 2014, the
Board authorized a share repurchase program for $20 million of our common stock.
We were authorized to repurchase the shares from time to time in the open market
or private transactions, at the discretion of our management. The following
table summarizes the stock repurchase activity during the three months ended
September 26, 2015.
|
|
|
|
|
|
|
Total Number
of |
|
|
|
|
|
Total |
|
|
|
|
Shares
Purchased |
|
Maximum $
Value |
|
|
Number
of |
|
Average |
|
as Part of
Publicly |
|
That May Yet
be |
|
|
Shares |
|
Price
Paid |
|
Announced
Plans |
|
Purchased
Under the |
Period |
|
Purchased |
|
per Share |
|
or Programs |
|
Plans or Programs |
July,
2015 |
|
224,906 |
|
$ |
12.37 |
|
224,906 |
|
$ |
12,965,753 |
August,
2015 |
|
240,051 |
|
|
12.42 |
|
240,051 |
|
|
9,984,343 |
September,
2015 |
|
- |
|
|
- |
|
- |
|
|
9,984,343 |
Total |
|
464,957 |
|
$ |
12.39 |
|
464,957 |
|
$ |
9,984,343 |
Current cash balances and
the proceeds from stock option exercises and purchases in the stock purchase
plan have funded stock repurchases in the past, and we expect to fund future
stock repurchases from these same sources.
43
Item 6. Exhibits.
Exhibit |
|
Exhibit |
Number |
|
Description |
|
2.1* |
|
Agreement and Plan of
Merger, dated as of September 2, 2015, by and among Pericom Semiconductor Corporation, PSI Merger Sub,
Inc., and Diodes Incorporated, filed as Exhibit 10.2 to the Companys Form
8-K filed September 3, 2015, and incorporated herein by reference.
|
3.1 |
|
Amended and Restated
Bylaws, as amended on September 2, 2015, filed as Exhibit 10.2 to the
Companys Form 8-K filed September 3, 2015, and incorporated herein by
reference. |
31.1 |
|
Certification of Alex
C. Hui, Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
31.2 |
|
Certification of
Kevin S. Bauer, Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
32.1 |
|
Certification of Alex
C. Hui, Chief Executive Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
32.2 |
|
Certification of
Kevin S. Bauer, Chief Financial Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
99.1 |
|
Form of Voting
Agreement, dated as of September 2, 2015, by and among Diodes Incorporated
and certain holders of shares and other equity interests of Pericom
Semiconductor Corporation, filed as Exhibit 10.2 to the Companys Form 8-K
filed September 3, 2015, and incorporated herein by reference.
|
101.INS |
|
XBRL Instance
Document |
101.SCH |
|
XBRL Taxonomy
Extension Schema Document |
101.CAL |
|
XBRL Taxonomy
Extension Calculation Linkbase Document |
101.DEF |
|
XBRL Taxonomy
Extension Definition Linkbase Document |
101.LAB |
|
XBRL Taxonomy
Extension Label Linkbase Document |
101.PRE |
|
XBRL Taxonomy
Extension Presentation Linkbase Document |
* |
|
Certain schedules and
exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K promulgated
by the SEC. Pericom agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the SEC upon
request. |
44
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Pericom Semiconductor
Corporation
(Registrant)
Date: November 2, 2015 |
|
By: |
/s/ Alex C.
Hui |
|
|
|
|
Alex
C. Hui |
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
By: |
/s/ Kevin S.
Bauer |
|
|
|
|
Kevin S. Bauer |
|
|
|
|
Chief Financial Officer |
|
45
EXHIBIT 31.1
PERICOM SEMICONDUCTOR
CORPORATION
CERTIFICATION PURSUANT TO SECTION 302 OF
THE
SARBANES-OXLEY ACT OF
2002
I, Alex C. Hui, certify
that:
1. |
I have
reviewed this quarterly report on Form 10-Q of Pericom Semiconductor
Corporation; |
2. |
Based on my
knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report; |
3. |
Based on my
knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report; |
4. |
The
registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared; |
|
b) |
Designed such
internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally acceptable accounting principles; |
|
c) |
Evaluated the
effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and |
|
d) |
Disclosed in this
report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting;
and |
5. |
The
registrants other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of the registrants
board of directors (or persons performing the equivalent
functions): |
|
a) |
All significant
deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize
and report financial data; and |
|
b) |
Any fraud, whether or
not material, that involves management or other employees who have a
significant role in the registrants internal control over financial
reporting. |
Date: November 2, 2015
/s/ Alex C. Hui |
Alex
C. Hui |
Chief Executive Officer |
Pericom Semiconductor
Corporation |
EXHIBIT 31.2
PERICOM SEMICONDUCTOR
CORPORATION
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF
2002
I, Kevin S. Bauer, certify
that:
1. |
I have
reviewed this quarterly report on Form 10-Q of Pericom Semiconductor
Corporation; |
2. |
Based on my
knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report; |
3. |
Based on my
knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report; |
4. |
The
registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared; |
|
b) |
Designed such
internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally acceptable accounting principles; |
|
c) |
Evaluated the
effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and |
|
d) |
Disclosed in this
report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting;
and |
5. |
The
registrants other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of the registrants
board of directors (or persons performing the equivalent
functions): |
|
a) |
All significant
deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize
and report financial data; and |
|
b) |
Any fraud, whether or
not material, that involves management or other employees who have a
significant role in the registrants internal control over financial
reporting. |
Date: November 2, 2015
/s/ Kevin S. Bauer |
Kevin S. Bauer |
Chief Financial Officer |
Pericom Semiconductor
Corporation |
EXHIBIT 32.1
PERICOM SEMICONDUCTOR
CORPORATION
CERTIFICATION OF CHIEF
EXECUTIVE OFFICER
PURSUANT TO 18
U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this
quarterly report of Pericom Semiconductor Corporation (the Company) on Form
10-Q for the three months ended September 26, 2015 (the Report), I, Alex C.
Hui, Chief Executive Officer of the Company, hereby certify as of the date
hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United
States Code, that to the best of my knowledge:
(1) the Report fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, and
(2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company at the dates and for the periods indicated.
November 2, 2015 |
|
|
|
|
|
|
|
|
By: |
/s/ Alex C.
Hui |
|
|
|
|
Alex C. Hui |
|
|
|
|
Chief Executive Officer |
|
|
|
|
Pericom Semiconductor Corporation |
|
EXHIBIT 32.2
PERICOM SEMICONDUCTOR
CORPORATION
CERTIFICATION OF CHIEF
FINANCIAL OFFICER
PURSUANT TO 18
U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this
quarterly report of Pericom Semiconductor Corporation (the Company) on Form
10-Q for the three months ended September 26, 2015 (the Report), I, Kevin S.
Bauer, Chief Financial Officer of the Company, hereby certify as of the date
hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United
States Code, that to the best of my knowledge:
(1) the Report fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, and
(2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company at the dates and for the periods indicated.
November 2,
2015 |
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By: |
/s/ Kevin S. Bauer |
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Kevin S.
Bauer |
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Chief Financial
Officer |
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Pericom
Semiconductor Corporation |
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