SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-12695
INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2669985
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2975 Stender Way, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 727-6116
NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, as of October 27, 1996, was 78,298,846.
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
INTEGRATED DEVICE TECHNOLOGY, INC.
----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(In thousands, except per share data)
(Unaudited)
Three months Ended Three months Ended
September 29, 1996 October 1, 1995
--------------------------------------
Revenues $ 120,485 $178,504
Cost of revenues 82,291 75,719
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Gross profit 38,194 102,785
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Operating expenses:
Research and development 37,753 33,118
Selling, general and administrative 18,262 21,387
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Total operating expenses 56,015 54,505
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Operating income (loss) (17,821) 48,280
Interest expense (2,812) (3,339)
Interest income and other, net 4,854 5,553
--------------------------------------
Income (loss) before income taxes (15,779) 50,494
Provision (benefit) for income taxes (5,445) 16,158
--------------------------------------
Net income (loss) $ (10,334) $34,336
======================================
Net income (loss) per share:
Primary $(0.13) $0.42
Fully Diluted $(0.13) $0.40
Weighted average shares:
Primary 77,898 82,548
Fully Diluted 77,898 89,579
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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INTEGRATED DEVICE TECHNOLOGY, INC.
----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In thousands, except per share data)
(Unaudited)
Six months Ended Six months Ended
September 29, 1996 October 1, 1995
----------------------------------------
Revenues $ 263,024 $330,699
Cost of revenues 153,907 140,041
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Gross profit 109,117 190,658
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Operating expenses:
Research and development 76,838 60,865
Selling, general and administrative 39,199 42,071
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Total operating expenses 116,037 102,936
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Operating income (loss) (6,920) 87,722
Interest expense (4,738) (4,845)
Interest income and other, net 8,921 9,957
----------------------------------------
Income (loss) before income taxes (2,737) 92,834
Provision (benefit) for income taxes (1,272) 29,707
----------------------------------------
Net income (loss) $ (1,465) $63,127
========================================
Net income (loss) per share:
Primary $(0.02) $0.77
Fully Diluted $(0.02) $0.75
Weighted average shares:
Primary 77,797 82,014
Fully Diluted 77,797 87,060
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
----------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands, except share amounts)
(Unaudited)
<CAPTION>
September 29, 1996 March 31, 1996
-------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $142,207 $157,228
Short-term investments 77,481 104,046
Accounts receivable, net 67,089 85,026
Inventory 49,410 46,630
Deferred tax assets 38,712 38,712
Prepayments and other current assets 28,636 15,658
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Total current assets 403,535 447,300
Property, plant and equipment, net 471,399 415,214
Other assets 72,816 76,920
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TOTAL ASSETS $947,750 $939,434
=================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $82,388 $78,821
Accrued compensation and related expense 14,987 29,237
Deferred income on shipments to distributors 34,518 31,325
Other accrued liabilities 12,876 17,918
Current portion of long-term obligations 6,367 3,799
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Total current liabilities 151,136 161,100
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5.5% Convertible Subordinated Notes, net of
issuance costs 182,858 182,558
-------------------------------------------------
Long-term obligations 62,407 46,049
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Commitments and Contingencies
Stockholders' equity:
Preferred stock; $.001 par value:
10,000,000 shares authorized; no shares issued
Common stock; $.001 par value: 200,000,000
shares authorized; 77,971,014 and
77,496,833 shares issued and outstanding 78 77
Additional paid-in capital 290,570 287,064
Retained earnings 261,524 262,989
Unrealized gain (loss) on available-for-sale
securities, net (248) 102
Cumulative translation adjustment (575) (505)
--------------------------------------------------
Total stockholders' equity 551,349 549,727
--------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $947,750 $939,434
==================================================
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
(Unaudited)
<CAPTION>
Six months Ended Six months Ended
September 29,1996 October 1, 1995
------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (1,465) $63,127
Adjustments:
Depreciation and amortization 46,039 23,629
Changes in assets and liabilities:
Accounts receivable 17,937 (34,016)
Inventory (2,780) (6,670)
Prepaid expenses and other current assets (11,602) (1,533)
Other assets (747) (278)
Accounts payable 5,846 49,400
Accrued compensation and related expense (14,250) 2,960
Deferred income on shipments to distributors 3,193 8,396
Income taxes payable (5,626) 7,587
Other accrued liabilities (545) 2,864
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Net cash provided by operating activities 36,000 115,466
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Investing activities:
Purchases of property, plant and equipment (152,868) (143,473)
Proceeds from sale of property, plant and equipment 49,714 205
Purchases of short-term investments (16,710) (153,627)
Proceeds from sales of short-term investments 42,925 88,058
Purchases of equity investments (6,960) --
Proceeds from (purchases of) sales of investments
collateralizing facility lease 10,662 (45,902)
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Net cash used for investing activities (73,237) (254,739)
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Financing activities:
Issuance of common stock, net 3,507 4,124
Proceeds from issuance of convertible subordinated
notes, net of issuance costs -- 196,721
Proceeds from secured equipment financing 20,959 --
Proceeds from sale of subsidiary stock -- 6,117
Payments on capital leases and other debt (2,250) (3,130)
------------------------------------------------------
Net cash provided by financing activities 22,216 203,832
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Net increase (decrease) in cash and cash equivalents (15,021) 64,559
Cash and cash equivalents at beginning of period 157,228 130,211
------------------------------------------------------
Cash and cash equivalents at end of period $142,207 $194,770
======================================================
Supplemental disclosures:
Interest paid $5,701 $838
Income taxes paid 11,514 20,636
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
4
<PAGE>
INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the financial
information included therein. These financial statements should be read in
conjunction with the audited consolidated financial statements and
accompanying notes included in the Company's Annual Report on Form 10-K for
the year ended March 31, 1996. The results of operations for the three and
six-month periods ending September 29, 1996 are not necessarily indicative
of the results to be expected for the full year.
2. Inventory consists of the following (in thousands):
September 29, 1996 March 31, 1996
------------------ --------------
Raw materials $ 8,013 $ 5,171
Work-in-process 22,793 22,538
Finished goods 18,604 18,921
---------- -----------
$ 49,410 $ 46,630
========== ===========
3. For the first six months of fiscal 1997 the Company recognized a benefit for
income taxes at an effective tax rate different from the U.S. statutory rate
of 35% because of the timing of available loss carrybacks and due to
earnings of foreign subsidiaries being taxed at different rates. Income
taxes in state jurisdictions are not significant due to available investment
tax credits and research and development credits.
4. Primary net income (loss) per common share is computed using the weighted
average number of common shares and the dilutive effects of common stock
equivalent shares outstanding during the period. Common stock equivalent
shares include shares issuable under the Company's stock option plans. Fully
diluted net income (loss) per share is computed by adjusting the primary
shares outstanding and net income (loss) for the potential effect of the
conversion of the 5.5% Convertible Subordinated Notes (the Notes)
outstanding and the elimination of the related interest and deferred debt
issue costs (net of income taxes). When the effect of including common stock
equivalents or the conversion of the Notes on primary or fully diluted net
income (loss) per share is antidilutive, as is the case in the quarter and
six months ended September 29, 1996, these securities are not included in
the calculation of net income (loss) per share.
5. The Company's obligations under the five-year $64 million Tax Ownership
Lease transaction for the construction of the Hillsboro, Oregon facility are
secured by a
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line of credit trust deed on the building. Initially, this lease was
collateralized by cash and/or investments (restricted securities) up to 105%
of the lessor's construction costs. During the first quarter of fiscal 1997,
in accordance with the terms of the lease, the collateral requirement was
reduced to 89.25% of the lessor's cost. Restricted securities
collateralizing this lease, included in other non-current assets, were
$57,120,000 at September 29, 1996 compared to $67,782,000 at March 31, 1996.
6. In September 1996, the Company completed two secured equipment financing
agreements which amounted to $21 million at interest rates of 8.41% and
8.48% collaterized by equipment purchased for the Oregon fabrication
facility. The borrowing arrangements fully amortize over the 60 month terms
of the notes. The Company also completed several sale and leaseback
transactions with various leasing companies. The sale and leaseback
transactions generated financing proceeds of $49.7 million. Under these
leasing arrangements, equipment purchased for the Oregon fabrication
facility with a net book value at the time of the sale and leaseback
transaction of $50.1 million was sold to the leasing companies and leased
back for use at the Oregon facility under leases classified as operating
leases. With respect to the secured equipment financing and leasing
arrangements, the Company is not required to maintain compliance with any
financial covenants.
7. Certain amounts in the condensed consolidated financial statements for the
prior year's quarter and six-month periods have been reclassified to conform
with the fiscal 1997 presentation.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All references are to the Company's fiscal periods ended September 29,
1996, and October 1, 1995, unless otherwise indicated. Quarterly financial
results may not be indicative of the financial results of future periods. The
following discussion contains forward looking statements that involve a number
of risks and uncertainties. Factors that could cause actual results to differ
materially are included, but are not limited to, those identified in "Factors
Affecting Future Results".
RESULTS OF OPERATIONS
Revenues
Revenues in the second quarter and six months of fiscal 1997 decreased
to $120.5 million and $263 million respectively, representing decreases of 33%
for the quarter and 20% for the six-month period, over the respective periods in
fiscal 1996. Total units shipped remained approximately constant when comparing
the same periods in the current year to those of the prior year. When comparing
the second quarter and six months of fiscal 1997 to the same periods of fiscal
1996, net unit sales of the RISC microprocessor family more than doubled, and
specialty memory and logic units sold increased, but offsetting these increases
were declines in SRAM unit sales of approximately 25% for the quarter and 18%
for six months.
The revenue decrease in both periods was primarily attributable to
lower average selling prices for industry standard SRAM products in all
geographic regions and sales channels, and fewer net SRAM units sold. SRAM
average selling prices have experienced market price declines of as much as 80%
over the last twelve months. Lower average SRAM and related module product
selling prices in the quarter and six months of 1997 were also attributable to
maturation of certain products. Microprocessor average selling prices also
declined as product mix sold in fiscal 1997 reflects a greater proportion of
embedded controller products which command lower average selling prices in the
market than standard microprocessor products. The microprocessor product family
mix sold is expected to continue to include a greater proportion of embedded
controllers.
The semiconductor industry is highly cyclical and is subject to
significant downturns. Such downturns are characterized by diminished product
demand, production over-capacity and accelerated average selling price erosion.
The price the Company receives for its industry standard SRAM products is
therefore dependent upon industry-wide demand and capacity, and such prices have
been historically subject to rapid change. Reflecting market conditions, average
selling prices of SRAM-related products were favorable for the first two
quarters of fiscal 1996, while orders shipped in the first two quarters of
fiscal 1997 were at significantly lower prices. New SRAM orders continue to be
at low prices, and the Company expects that these prices will continue to
adversely affect the Company's operating results.
7
<PAGE>
Gross Profit
Gross profit in the second quarter of fiscal 1997 decreased by $64.6
million to $38.2 million and gross margin decreased from 57.6% to 31.7% when
comparing the second quarter of fiscal 1997 to the same quarter of the prior
year. For the six-month period, gross profit decreased to $109.1 million or to
41.5% of revenues, as compared to $190.7 million or 57.7%, respectively, for the
comparable period of the prior year. The decrease in gross profit in the second
quarter and six-month periods of fiscal 1997 compared to the fiscal 1996 periods
was primarily attributable to significant erosion of average selling prices for
SRAM and related module products as well as adjustments for SRAM and other
component inventories.
Also adversely impacting gross profit during the second quarter of
fiscal 1997 were costs associated with the new 8" wafer fabrication facility
located in Hillsboro, Oregon. During the first quarter of fiscal 1997,
significant production capacity at the Oregon facility was not available.
Therefore, during the first quarter, substantially all operating expenses
associated with the new Oregon facility were classified as process engineering
research and development expense, given that production of salable die was not
significant. In the second quarter, costs associated with the Oregon facility
negatively impacted gross margins, as this facility continued its production
ramp. A majority of total facility operating costs were allocated to the
manufacture of products charged to cost of goods sold, and the remainder of the
operating costs were charged to process engineering research and development
expense, based on activities performed. For the remaining quarters of fiscal
1997, the level of expense associated with the Oregon fabrication facility is
expected to increase over the levels of expense incurred during the first six
months of fiscal 1997. The anticipated increased costs are associated with
additional equipment to be installed and other costs incurred which are
necessary to achieve more effective utilization of the facility. Additionally,
in future quarters the percentage of these costs recorded as cost of goods sold
may increase, based upon production volumes and activities performed.
The Oregon facility provides the Company with significant additional
available production capacity, and, as a result of current market conditions,
the Company's production volumes at its wafer fabrication facilities have not
increased sufficiently to take full advantage of the additional capacity.
Further, the Company is unable to predict whether demand for industry standard
SRAM products or IDT's share of the available market will improve. Should IDT's
production volumes, especially at its fabrication facilities, remain constant or
decline and should the Company be unable to otherwise decrease costs per unit
sold, the Company's results of operations will continue to be adversely
impacted. Therefore, because pricing on industry-standard SRAM products and
market demand for production volumes may not improve and a greater percentage of
the Oregon facility's operating costs may be allocated to cost of goods sold,
based on activities performed, the Company can give no assurance of any
improvement in its gross profit in the third quarter of fiscal 1997.
The Company continued its efforts to shift to smaller die designs and
its most advanced wafer fabrication processes, which result in increased die per
wafer and therefore lower unit costs. However, declining average selling prices
primarily for SRAM
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products more than offset manufacturing efficiencies gained during the first
quarter and six months of fiscal 1997.
Research and Development
Research and development (R&D) expenses increased in absolute spending
and as a percentage of revenues for the quarter and the first six months of
fiscal 1997 when compared to the same periods of fiscal 1996. R&D expenses grew
$4.7 million from $33.1 million in the quarter ended October 1, 1995 to $37.8
million in the quarter ended September 29, 1996, and such expenses increased as
a percentage of revenues to 31.3% from 18.6%. For the six-month period, R&D
expenses increased 26.2% to $76.8 million and as a percentage of sales increased
to 29.2% up from 18.4% for the corresponding six-month period of fiscal 1996.
The Company's policy is to not capitalize preoperating costs associated
with new manufacturing facilities, and significant facility start-up and
staffing expenses were incurred at the new 8" wafer fabrication facility in
Hillsboro, Oregon. In the first quarter of fiscal 1997, substantially all
operating expenditures associated with the Oregon fabrication facility were
classified as process engineering R&D expense given that production of salable
die was not significant. Such expenditures were $13.3 million during the first
quarter of fiscal 1997 and were not significant during the first quarter of
fiscal 1996. In the second quarter of fiscal 1997, while total facility
operating costs increased, because a majority of the operating costs were
charged to cost of goods sold, only approximately $8 million of the costs were
classified as process R&D expenditure, based upon activities performed.
IDT continued development of several sub-0.5 micron CMOS process
technologies during the first six months of fiscal 1997. Additionally, with the
goal of expanding product offerings, the Company continues its research into
applications of Fusion Memory technology and continues its efforts to develop a
family of specialty memory products for the ATM market. IDT believes that high
levels of R&D investment are required to support its strategy of providing
products to its customers which are not readily available from its competitors.
However, there can be no assurance that additional research and development
investment will result in new product offerings or that any new offerings will
acheive market acceptance.
Selling, General and Administrative Expenses
Selling, general and administrative (S,G&A) expenses decreased by $3.1
million from $21.4 million in the quarter ended October 1, 1995 to $18.3 million
in the quarter ended September 29, 1996, but increased as a percentage of
revenues to 15.2% from 12.0%. S,G&A expenses decreased 6.8% to $39.2 million for
the first six months of fiscal 1997, but increased as a percentage of revenues
to 14.9% from 12.7% in the comparable period of the prior year. A portion of
S,G&A expenses, such as sales commissions, management bonuses and employee
profit sharing, vary with sales and Company profitability and have decreased as
sales and profitability have declined. While S,G&A expenses have decreased in
terms of absolute dollars, they have increased as a percentage of sales because
of the magnitude of the sales decrease in fiscal 1997 and the fixed nature
9
<PAGE>
of a majority of these costs. Also partially offsetting declines in expenses
which vary with sales and profitability are expenses associated with initiatives
to implement enterprise-wide management information systems. The Company
anticipates the S,G&A expenses for the remainder of fiscal 1997 will remain
constant as a percentage of revenues. However, should revenues decrease or
expenses increase significantly, S,G&A as a percentage of sales may increase.
Interest expense
Interest expense decreased to $2.8 million in the second quarter of
fiscal 1997 compared with $3.3 million for the same quarter a year ago. Interest
expense is primarily associated with debt sold during the first quarter of
fiscal 1996. $201.3 million of 5.5% Convertible Subordinated Notes due in 2002
(the "Notes") were issued, of which $15 million was subsequently retired at a
discount. The decrease in interest expense between the quarters is primarily
attributable to debt retirement. For the six-month period, interest expense
decreased to $4.7 million from $4.8 million. During the first six months of
fiscal 1997, interest capitalization associated with the Oregon fabrication
facility and the Philippines assembly and test facility amounted to
approximately $1.7 million. As the construction of both the Oregon and
Philippines facilities is complete, interest capitalization in connection with
these projects has ceased. With the cessation of interest capitalization for the
Oregon and Philippine projects, the Company anticipates that for the remainder
of fiscal 1997, interest expense will increase when compared to fiscal 1996.
Further, as discussed under Liquidity and Capital Resources, late in the second
quarter of fiscal 1997, the Company borrowed $21 million under secured lending
facilities. Interest incurred under these 60 month borrowing arrangements will
increase interest expense in future quarters.
Interest income and other
Interest income and other, net, decreased to $4.9 million in the second
quarter and $8.9 million for the six-month period of fiscal 1997 compared to
$5.6 million and $10.0 million for the same periods of the prior year. Interest
income decreased because of lower average cash balances as the Company has
continued to pay cash for significant capital expenditures in fiscal 1997. Also
included as other income in the second quarter of fiscal 1997 is a gain in the
amount of $1.9 million realized on the sale of an equity investment. The Company
expects that interest income and other, net, will decrease for the remainder of
fiscal 1997 when compared to fiscal 1996 because of lower interest income
associated with lower average cash balances.
Income taxes
For the first six months of fiscal 1997 the Company recognized a
benefit for income taxes at an effective tax rate of 46%. This benefit rate
reflects carryback of the current loss for Federal purposes in the United
States. The rate differs from the U. S. statutory rate of 35% because of the
timing of available loss carrybacks and due to earnings of foreign subsidiaries
being taxed at different rates. Historically, income taxes in state
jurisdictions have not been significant due to available investment tax credits
and
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research and development credits. The Company has consumed substantially all of
the tax benefits associated with its Malaysian subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $36.0 million of funds from operations in the
first six months of fiscal 1997, down from $115.5 million of funds from
operations during the first six months of fiscal 1996. At September 29, 1996,
cash and cash equivalents were $142.2 million, a decrease of $15.0 million
during the first six months of fiscal 1997. Cash provided by operating
activities primarily reflects a net loss offset by depreciation and amortization
and changes to working capital. Significant changes in operating assets and
liabilities result from collection of accounts receivable, timing of payments
for accrued payroll and bonus, increased deferred income on shipments to
distributors and an accrual of an income tax refund receivable. Increased
depreciation and amortization charges in fiscal 1997 are associated with new
facilities, improvements to existing facilities and new equipment.
During the first six months of fiscal 1997, the Company's net cash used
in investing activities was $73.2 million. $152.9 million was used for capital
equipment and property and plant improvements. Cash proceeds from the equipment
sale and lease back arrangements in September 1996 amounted to $49.7 million.
Cash generated from the sale of short-term investments, net of purchases of
short-term investments, was $26.2 million. In addition, at September 29, 1996,
the Company had $57.1 million of restricted securities as collateral under a Tax
Ownership Operating Lease entered into in January 1995 related to the
construction of the new 8" wafer fabrication facility in Oregon. At March 31,
1996, the securities pledged as collateral amounted to 105% of the lessor's
construction costs, as required until the building was completed. During the
first quarter of fiscal 1997, the facility was completed, and in accordance with
the terms of the facility lease, the collateral requirement was reduced to
89.25% of the lessor's cost to construct the facility. Therefore, as the
facility was completed during the first quarter of fiscal 1997, the lessor
released as collateral $10.7 million of restricted securities.
In view of current capacity requirements, the Company anticipates total
fiscal 1997 capital expenditures of approximately $155 million, net of assets
purchased and then sold and leased back, which is a reduction of approximately
$100 million from the amount originally planned for the fiscal year. This
reduction in planned capital spending primarily reflects a reduction in planned
equipment additions associated with lower capacity requirements to meet current
market demand for industry standard SRAM parts. In the first six months of
fiscal 1997, $103.1 million, net, was expended for planned capital additions.
Fiscal 1997 capital requirements are principally in connection with continued
installation of equipment in the new Oregon facility plus continued equipping of
the new Philippine plant and other capacity improvements. These expenditures are
required to achieve more effective utilization of these facilities.
The Company's ability to invest to satisfy its capacity requirements is
in part dependent on the Company's ability to generate cash from operations.
Cash flow from operations depends significantly on the average selling prices,
variable cost per unit and other industry conditions which the Company cannot
predict. Future declines in selling
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prices for industry standard SRAM products or other products manufactured by the
Company, which cannot be otherwise offset, will adversely impact the Company's
ability to generate funds from operations. If the Company is not able to
generate sufficient funds from operations or other sources to fund its capacity
and R&D requirements, the Company's results from operations, cash flows and
financial condition will be adversely impacted.
In September 1996, the Company completed secured equipment financing
agreements which total approximately $21.0 million for equipment purchased for
the Oregon fabrication facility. The borrowing arrangements fully amortize over
the 60 month terms of loans. Additionally, in September 1996 the Company
completed equipment sale and lease back arrangements with several leasing
companies. Equipment purchased by the Company for the Oregon fabrication
facility with a net book value of $50.1 million was sold to the leasing
companies and leased back for use at the Oregon facility under leases classified
as operating leases.
In May 1995, the Company completed the sale of $201.3 million of the
5.5% Convertible Subordinated Notes (the Notes), netting $196.7 million in
proceeds. The Notes are convertible into shares of common stock at $28.625 per
share. In January 1996, the Company completed the repurchase of approximately
$15.0 million of the Notes at a price of approximately $790 per bond. During the
remainder of fiscal 1997, the Company does not anticipate making additional
repurchases of debt.
The Company believes that existing cash and cash equivalents, cash flow
from operations and existing credit facilities, will be sufficient to meet its
working capital, mandatory debt repayment and anticipated capital expenditure
requirements for the next twelve months. While the Company is reviewing all
operations with respect to cost savings opportunities and has implemented a
reduction of approximately 5% of its domestic work force and is planning other
cost containment measures, there can be no assurance that the Company will not
be required to seek other financing sooner or that such financing, if required,
will be available on terms satisfactory to the Company. If the Company is
required to seek other financing sooner, the unavailability of financing on
terms satisfactory to IDT could have a material adverse effect on the Company.
FACTORS AFFECTING FUTURE RESULTS
Except for the historical information contained in this Quarterly
Report on Form 10-Q, the matters discussed in this report are forward looking
statements. These forward looking statements concern matters that involve risks
and uncertainties, including but not limited to those set forth below, that
could cause actual results to differ materially from those projected in the
forward looking statements. In any event, the matters set forth below should be
carefully considered when evaluating the Company's business and prospects.
IDT's operating results have been, and in the future may be, subject to
fluctuations due to a wide variety of factors including the timing of or delays
in new product and process technology announcements and introductions by the
Company or its competitors, competitive pricing pressures, particularly in the
SRAM memory market,
12
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fluctuations in manufacturing yields, changes in the mix of product sold,
availability and costs of raw materials, the cyclical nature of the
semiconductor industry, industry-wide wafer processing capacity, economic
conditions in various geographic areas, and costs associated with other events,
such as underutilization or expansion of production capacity, intellectual
property disputes, or other litigation. Further, there can be no assurance that
the Company will be able to compete successfully in the future against existing
or potential competitors or that the Company's operating results will not be
adversely affected by increased price competition.
The semiconductor industry is highly cyclical. Early in fiscal 1996,
markets for some of the Company's SRAMs were characterized by excess demand
relative to supply and the resulting favorable pricing. During the later part of
fiscal 1996, a number of companies, principally foreign, shifted manufacturing
capacity to SRAMs causing rapid adjustments to supply and consequently impacting
market prices. The resulting significant downward trend in prices in an
extremely short period negatively affected SRAM gross margins, and adversely
affected the Company's operating results. Current market conditions
characterized by excess supply of SRAMs relative to demand and resultant pricing
declines may continue. Although recently some competitors have made adjustments
to the rate at which they will implement capacity expansion programs, the
Company is unable to accurately estimate the amount of worldwide production
capacity dedicated to industry standard products which it produces. A material
increase in industry-wide production capacity, shift in industry capacity toward
products competitive with the Company's products, reduced demand, or other
factors could result in a further decline in product pricing and could also
materially adversely affect the Company's operating results.
The Company has taken measures to manage costs, including deferral of
capacity expansion plans and work force reductions, but there can be no
assurance that these measures will be sufficient to return to profitability.
Where necessary to achieve more full and effective use of the facilities, the
Company continues to install new equipment at the Oregon facility and to equip
the new Philippine plant. However, the amount of capacity to be placed into
production and future yield improvements by the Company's competitors could
dramatically increase the world-wide supply of products which compete with the
Company's products and could create further downward pressure on pricing.
The Company ships a substantial portion of its quarterly sales in the
last month of a quarter. If anticipated shipments in any quarter do not occur,
the Company's operating results for that quarter could be adversely affected. In
addition, a substantial percentage of the Company's products are incorporated
into computer and computer-related products, which have historically been
characterized by significant fluctuations in demand. Furthermore, any decline in
the demand for advanced microprocessors which utilize SRAM cache memory could
adversely affect the Company's operating results. In addition, demand for
certain of the Company's products is dependent upon growth in the communications
market. Any slowdown in the computer and related peripherals or communications
markets could also materially adversely affect the Company's operating results.
13
<PAGE>
In the first six months of fiscal 1997, the Company began producing
saleable products at the Oregon fabrication and Philippines assembly and test
facilities. Historically, the Company has utilized subcontractors for the
majority of its incremental assembly requirements, typically at higher costs
than its own Malaysian assembly and test operations. The Company expects to
continue utilizing subcontractors extensively as its Philippines assembly and
test plant ramps its production volumes. Due to production lead times and
current capacity constraints, especially in the assembly and test production
areas, any failure by the Company to adequately forecast the mix of product
demand could adversely affect the Company's sales and operating results. These
capacity expansion programs in Oregon and the Philippines face a number of
substantial risks including, but not limited to cost overruns, equipment delays
or shortages, manufacturing start-up or process problems or difficulties in
hiring key managers and technical personnel. In addition, the Company has never
operated an eight-inch wafer fabrication facility. Accordingly, the Company
could incur unanticipated process or production problems. From time to time, the
Company has experienced production difficulties that have caused delivery delays
and quality problems. There can be no assurance that the Company will not
experience manufacturing problems and product delivery delays in the future as a
result of, among other things, changes to its process technologies, ramping
production and installing new equipment at its facilities, including the
facilities in Oregon and the Philippines. Further, the Company's older wafer
fabrication facilities are located relatively near each other in Northern
California. If the Company were unable to use these facilities, as a result of a
natural disaster or otherwise, the Company's operations would be materially
adversely affected until the Company was able to obtain other production
capability.
The Company's capacity additions result in a significant increase in
fixed and operating expenses. Historically, the Company has expensed the
operating expenses associated with bringing a new fabrication facility to
commercial production as R&D in the period such expenses are incurred. However,
as commercial production at a new fabrication facility commences, the operating
costs are classified as cost of revenues, and the Company begins to recognize
depreciation expense relating to the facility. Accordingly, as the Oregon
fabrication facility now contributes to revenues, the Company recognizes
substantial operating expenses associated with the facility as cost of goods
sold, which, in the second quarter of fiscal 1997, has reduced gross margins. As
commercial production continues in fiscal 1997, the Company anticipates
incurring substantial additional operating costs and depreciation expenses
relating to the facility. Accordingly, if revenue levels do not increase
sufficiently to offset these additional expense levels, or if the Company is
unable to achieve gross margins from products produced at the Oregon facility
that are comparable to the Company's current products, the Company's future
results of operations will be adversely impacted.
New products and process technology costs associated with the Oregon
wafer fabrication facility will continue to require significant research and
development expenditures. However, there can be no assurance that the Company
will be able to develop and introduce new products in a timely manner, that new
products will gain market acceptance or that new process technologies can be
successfully implemented. If the Company is unable to develop new products in a
timely manner, and to sell them at
14
<PAGE>
gross margins comparable to the Company's current products, the future results
of operations could be adversely impacted.
The Company's manufacturing operations depend upon obtaining adequate
raw materials on a timely basis. The number of vendors of certain raw materials,
such as silicon wafers, ultra-pure metals and certain chemicals and gases, is
very limited. In addition, certain packages used by the Company require long
lead times and are available from only a few suppliers. From time to time,
vendors have extended lead times or limited supply to the Company due to
capacity constraints. The Company's results of operations would be adversely
affected if it were unable to obtain adequate supplies of raw materials in a
timely manner or if there were significant increases in the costs of raw
materials.
The semiconductor industry is extremely capital-intensive. To remain
competitive, the Company must continue to invest in advanced manufacturing and
test equipment. In fiscal 1997, the Company expects to expend approximately $155
million in capital expenditures, net of assets sold and leased back and
anticipates significant continuing capital expenditures in the next several
years. There can be no assurance that the Company will not be required to seek
financing to satisfy its cash and capital needs or that such financing will be
available on terms satisfactory to the Company. If such financing is required
and if such financing is not available on terms satisfactory to the Company, its
operations would be materially adversely affected.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. In recent years,
there has been a growing trend of companies to resort to litigation to protect
their semiconductor technology from unauthorized use by others. The Company in
the past has been involved in patent litigation, which adversely affected its
operating results. Although the Company has obtained patent licenses from
certain semiconductor manufacturers, the Company does not have licenses from a
number of semiconductor manufacturers who have a broad portfolio of patents. The
Company has been notified that it may be infringing patents issued to certain
semiconductor manufacturers and other parties and is currently involved in
several license negotiations. There can be no assurance that additional claims
alleging infringement of intellectual property rights will not be asserted in
the future. The intellectual property claims that have been made or that may be
asserted against the Company could require that the Company discontinue the use
of certain processes or cease the manufacture, use and sale of infringing
products, to incur significant litigation costs and damages and to develop
noninfringing technology. There can be no assurance that the Company would be
able to obtain such licenses on acceptable terms or to develop noninfringing
technology. Further, the failure to renew or renegotiate existing licenses, or
significant increases in amounts payable or the inability to obtain a license,
could have a materially adverse effect on the Company.
A substantial percentage of the Company's revenues are derived from
export sales, which are generally denominated in local currencies. The Company's
offshore assembly and test operations and export sales are subject to risks
associated with foreign operations, including political instability, currency
controls and fluctuations,
15
<PAGE>
changes in local economic conditions and import and export controls, as well as
changes in tax laws, tariffs and freight rates. Recently, contract pricing for
raw materials used in the fabrication and assembly processes, as well as for
subcontract assembly services, has been impacted by currency exchange rate
fluctuations.
The Company is subject to a variety of regulations related to hazardous
materials used in its manufacturing process. Any failure by the Company to
control the use of, or to restrict adequately the discharge of, hazardous
materials under present or future regulations could subject it to substantial
liability or could cause its manufacturing operations to be suspended.
The Company's Common Stock and the Notes have experienced substantial
price volatility and such volatility may occur in the future, particularly as a
result of quarter-to-quarter variations in the actual or anticipated financial
results of the Company, the companies in the semiconductor industry or in the
markets served by the Company, or announcements by the Company or its
competitors regarding new product introductions. In addition, the stock market
has experienced extreme price and volume fluctuations that have affected the
market price of many technology companies' stock in particular. These factors
may adversely affect the price of the Common Stock and the Notes.
16
<PAGE>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
(a) On Wednesday, August 28, 1996 the Company held its 1996 Annual Meeting
of Shareholders. At the meeting, 72,498,795 shares of Common Stock were
represented in person or by proxy, representing 93.01% of the total
outstanding shares.
(b) The meeting involved the election of two Class III Directors - D. John
Carey and Carl E. Berg
Votes For Votes Withheld
D. John Carey 71,098,140 1,400,655
Carl E. Berg 71,042,409 1,456,386
The term of office of the following directors also continued after the
meeting:
Leonard C. Perham
Federico Faggin
John C. Bolger
(c) Two additional matters were voted upon at the meeting, the results of
which were as follows:
(i) Amendment to the Company's 1994 Stock Option Plan to increase the
number of shares reserved thereunder from 7,250,000 to 10,750,000:
Votes For: 57,234,157
Votes Against: 10,537,125
Votes Withheld: 658,543
Broker Non Votes: 4,068,970
(ii) Ratification of appointment of Price Waterhouse LLP as independent
auditors for fiscal 1997:
Votes For: 71,842,086
Votes Against: 371,380
Votes Withheld: 285,329
Broker Non Votes: 0
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit
No. Description Page
- --------------------------------------------------------------------------------
11 Statement re: Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports have been filed on Form 8-K during this quarter
18
<PAGE>
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.
INTEGRATED DEVICE TECHNOLOGY, INC.
Date: November 4, 1996 /s/ Leonard C. Perham
------------------------------------
Leonard C. Perham
Chief Executive Officer
Date: November 4, 1996 /s/ William D. Snyder
------------------------------------
William D. Snyder
Vice President Finance (principal
financial and accounting officer)
19
Part II. Other information, Item 6a.
EXHIBIT 11
<TABLE>
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
29-Sep-96 1-Oct-95 29-Sep-96 1-Oct-95
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 77,898 76,987 77,797 76,706
Net effect of dilutive stock options - 5,561 - 5,308
---------------------- --------------------
Total 77,898 82,548 77,797 82,014
====================== ====================
Net income (loss) $ (10,334) $ 34,336 $ (1,465) $63,127
====================== ====================
Net income (loss) per share $ (0.13) $ 0.42 $ (0.02) $ 0.77
====================== ====================
Fully diluted:
Weighted average shares outstanding 77,898 76,987 77,797 76,706
Net effect of dilutive stock options - 5,561 - 5,473
Assumed conversion of
5.5% Convertible Subordinated Notes
(Note 1) - 7,031 - 4,881
---------------------- --------------------
Total 77,898 89,579 77,797 87,060
====================== ====================
Net income (loss) $ (10,334) $ 34,336 $ (1,465) $63,127
Add:
Convertible subordinated notes interest
and related expenses, net of taxes
(Note 1) - 1,903 $ - 2,496
---------------------- --------------------
Adjusted net income (loss) $ (10,334) $ 36,239 $ (1,465) $65,623
====================== ====================
Net income (loss) per share $ (0.13) $ 0.40 $ (0.02) $ 0.75
====================== ====================
<FN>
Note 1: The potential effect of stock options and conversion of the 5.5%
Convertible Subordinated Notes have not been included in the primary and
fully diluted EPS calculation respectively, for the second quarter and
first six months of fiscal 1997 because the stock options and Notes have
an anti-dilutive impact on the calculation.
</FN>
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-30-1997
<PERIOD-END> SEP-29-1996
<CASH> 142,207
<SECURITIES> 77,481
<RECEIVABLES> 73,694
<ALLOWANCES> 6,605
<INVENTORY> 49,410
<CURRENT-ASSETS> 403,535
<PP&E> 752,659
<DEPRECIATION> 281,260
<TOTAL-ASSETS> 947,750
<CURRENT-LIABILITIES> 151,136
<BONDS> 182,858
<COMMON> 78
0
0
<OTHER-SE> 551,271
<TOTAL-LIABILITY-AND-EQUITY> 947,750
<SALES> 263,024
<TOTAL-REVENUES> 263,024
<CGS> 153,907
<TOTAL-COSTS> 153,907
<OTHER-EXPENSES> 116,037
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,738
<INCOME-PRETAX> (2,737)
<INCOME-TAX> (1,272)
<INCOME-CONTINUING> (1,465)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,465)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
