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 June 29, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File No. 0-12695
INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2669985
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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 July 25, 1997, was 79,926,194.
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Three Months Ended
June 29, 1997 June 30, 1996
--------------------------------------
Revenues $ 148,873 $ 142,539
Cost of revenues 92,537 71,616
--------------------------------------
Gross profit 56,336 70,923
--------------------------------------
Operating expenses:
Research and development 29,822 39,085
Selling, general and administrative 22,364 20,937
--------------------------------------
Total operating expenses 52,186 60,022
--------------------------------------
Operating income 4,150 10,901
Interest expense (3,743) (1,926)
Interest income and other, net 2,219 4,067
--------------------------------------
Income before income taxes 2,626 13,042
Provision for income taxes 735 4,173
--------------------------------------
Net income $ 1,891 $ 8,869
=====================================
Net income per share:
Primary $ 0.02 $ 0.11
Fully Diluted $ 0.02 $ 0.11
Weighted average shares:
Primary 83,359 81,650
Fully Diluted 83,359 81,650
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
<CAPTION>
June 29, 1997 March 30, 1997
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 148,975 $ 155,149
Short-term investments 45,109 35,747
Accounts receivable, net 74,397 77,600
Inventory 49,647 47,618
Deferred tax assets 44,493 44,493
Income tax refund receivable 22,752 34,055
Prepayments and other current assets 16,065 19,148
--------------------------------
Total current assets 401,438 413,810
Property, plant and equipment, net 442,949 424,217
Other assets 77,024 65,557
--------------------------------
TOTAL ASSETS $ 921,411 $ 903,584
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,923 $ 44,875
Accrued compensation and related expenses 14,496 15,612
Deferred income on shipments to distributors 54,689 42,084
Other accrued liabilities 24,890 25,022
Current portion of long-term obligations 5,754 6,049
--------------------------------
Total current liabilities 148,752 133,642
5.5% Convertible Subordinated Notes, net of issuance costs 183,306 183,157
Long-term obligations 51,490 52,622
Deferred tax liabilities 9,925 9,925
--------------------------------
Total liabilities 393,473 379,346
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; 79,893,549 and
79,654,104 shares issued and outstanding 80 80
Additional paid-in capital 306,169 304,840
Retained earnings 222,608 220,717
Cumulative translation adjustment (732) (886)
Unrealized gain on available-for-sale securities, net (187) (513)
--------------------------------
Total stockholders' equity 527,938 524,238
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 921,411 $ 903,584
================================
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended Three Months Ended
June 29, 1997 June 30, 1996
-----------------------------------
<S> <C> <C>
Operating activities:
Net income $ 1,891 $ 8,869
Adjustments:
Depreciation and amortization 26,654 19,275
Changes in assets and liabilities:
Accounts receivable 3,203 1,952
Inventory (2,029) (2,113)
Income tax refund receivable 11,303
Prepayments and other assets 3,338 (2,310)
Accounts payable 4,048 1,321
Accrued compensation and related expense (1,116) (14,773)
Deferred income on shipments to distributors 12,605 6,500
Income taxes payable (5,332)
Other accrued liabilities 73 (1,840)
-----------------------------------
Net cash provided by operating activities 59,970 11,549
Investing activities:
Purchases of property, plant and equipment (44,869) (80,607)
Purchases of short-term investments (13,941) (8,100)
Proceeds from sales of short-term investments 4,905 18,275
Purchases of equity investments (12,090)
Proceeds from sales of investments
collateralizing facility lease 10,252
-----------------------------------
Net cash used for investing activities (65,995) (60,180)
Financing activities:
Issuance of common stock, net 1,329 1,780
Payments on capital leases and other debt (1,478) (950)
-----------------------------------
Net cash (used) provided by financing activities (149) 830
-----------------------------------
Net decrease in cash and cash equivalents (6,174) (47,801)
Cash and cash equivalents at beginning of period 155,149 157,228
-----------------------------------
Cash and cash equivalents at end of period $ 148,975 $ 109,427
==================================
Supplemental disclosures:
Interest paid $ 5,788 $ 5,277
Income taxes paid (refunded), net (10,897) 4,903
<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 Integrated Device Technology, Inc. (IDT or 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 30, 1997. The
results of operations for the three month period ended June 29, 1997, are
not necessarily indicative of the results to be expected for the full year.
2. Inventory consisted of the following:
June 29, 1997 March 30, 1997
------------------------------
(in thousands)
Raw materials $ 5,571 $ 4,800
Work-in-process 27,002 29,375
Finished goods 17,074 13,443
------------------------------
$49,647 $47,618
==============================
3. The provision for income taxes reflects management's estimated annualized
effective tax rate applied to earnings for the interim period. The rate
used differs from the U.S. statutory rate of 35% primarily due to total
earnings of foreign subsidiaries, considered permanently reinvested, being
taxed at lower average rates than the U.S. statutory rate. Income taxes in
state jurisdictions are not significant due to available investment tax
credits and research and development credits.
4. Primary net income 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 per share is computed by adjusting the primary shares
outstanding for the potential effect of the conversion of the 5.5%
Convertible Subordinated Notes (the Notes) outstanding and net income for
the elimination of the related interest and deferred debt issue costs (net
of income taxes), when the effect of such potential conversion would be
dilutive to net income per primary share. For both quarters ended June 29,
1997, and June 30, 1996, the potential effect of the conversion of the
Notes has not been included in the fully diluted share calculation because
the results are anti-dilutive.
5
<PAGE>
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
This statement is effective for the Company's fiscal quarter ending
December 28, 1997. The Statement redefines earnings per share under
generally accepted accounting principles. Under the new standard, primary
earnings per share is replaced by basic earnings per share and fully
diluted earnings per share is replaced by diluted earnings per share. If
the Company had adopted this Statement for each of the quarters presented,
the Company's net income per share would have been as follows:
June 29, 1997 June 30, 1996
---------------------------------
Basic net income per share $ 0.02 $ 0.11
Diluted net income per share $ 0.02 $ 0.11
5. The Company's obligations under a five-year $64 million Tax Ownership Lease
transaction for the construction of the Hillsboro, Oregon facility are
secured by a line of credit trust deed on the building. In accordance with
the terms of the lease, collateral in the form of cash and/or investments
(restricted securities) is required. Restricted securities collateralizing
this lease, included in non-current other assets, were $57,120,000 at both
June 29, 1997, and March 30, 1997.
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 June 29, 1997, and June
30, 1996, 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, including but not limited to operating results, capital
expenditures and capital resources, SRAM market prices, manufacturing capacity
utilization, customer demand and customer inventory levels. Factors that could
cause actual results to differ materially are included in, but are not limited
to, those identified in "Factors Affecting Future Results". The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof.
Results of Operations
Revenues
Revenue for the first quarter of fiscal 1998 was $148.9 million, an increase of
4% over revenue of $143.2 million recognized in the immediately prior quarter
and an increase of 4% over revenue of $142.5 million for the same period one
year ago. Total units shipped increased approximately 19% and 75% when compared
to the immediately prior quarter and the first quarter of fiscal 1997,
respectively.
The revenue increase in the first period of fiscal 1998 over the first and
fourth quarters of fiscal 1997 was primarily attributable to increased units
shipped across all product lines. The increase in revenue due to greater units
shipped was partially offset by a decline in average selling prices for the
Company's products. During late fiscal 1996 and into fiscal 1997, SRAM average
selling prices experienced market price declines of as much as 80% over twelve
months. During the first quarter of fiscal 1998, prices of SRAM components were
essentially stable, while prices for SRAM modules declined. In the future, as
described below, market prices and customer demand for these products may
change, especially during periods of seasonal demand weaknesses. RISC
microprocessor average selling prices also declined as product mix sold reflects
a greater proportion of embedded controller products which command lower average
selling prices in the market than standard microprocessor products. The RISC
microprocessor product family mix sold is expected to continue to include a
greater proportion of embedded controllers. The average selling price realized
per unit for logic products also decreased. Lower average product selling prices
in the first quarter of fiscal 1998 were also attributable to maturation of
certain products.
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 and other 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 realized for SRAM-related products in fiscal 1997 and thus far in
fiscal 1998, were at significantly lower prices than previous fiscal periods.
While current SRAM prices are essentially stable, 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 quarter increased by $1.3 million to $56.3 million when
compared to the fourth quarter of fiscal 1997 and decreased by $14.6 million
when compared to the first quarter of fiscal 1997. As a percentage of revenue
(gross margin) gross profit remained constant with the immediately preceding
quarter at 38% and decreased from 50% when compared to the first quarter of
fiscal 1997. The decrease in gross profit over the first quarter of fiscal 1997
was primarily attributable to significant erosion of average selling prices for
SRAM and related module products. 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 for primarily SRAM products more than offset
manufacturing efficiencies gained.
In the first quarter of fiscal 1998, costs associated with the new eight-inch
wafer fabrication facility located in Hillsboro, Oregon, continued to adversely
impact gross margin, as these costs were not fully absorbed by additional
revenues. During fiscal 1997, as this facility began its production ramp, the
facility manufactured production wafers and incurred operating costs. During the
first quarter of fiscal 1997, substantially all operating expenses associated
with the new Oregon facility were classified as process engineering research and
development expense, as production of salable die was not significant, and IDT's
policy is to expense new plant startup costs to research and development (R&D)
expense until a facility is ready to begin commercial production. In the latter
quarters of fiscal 1997, costs associated with the Oregon facility negatively
impacted gross margins, as a majority of total facility operating costs were
allocated to the manufacture of products, the costs of which were charged to
cost of goods sold. The remainder of the operating costs were charged to process
engineering research and development expense, based on activities performed.
While costs incurred at the facility did not significantly increase during the
first quarter of fiscal 1998, over the remainder of the fiscal year, the level
of expense associated with the Oregon fabrication facility is expected to
increase on a quarterly basis over the levels of expense incurred during each
quarter 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 the current quarter and in future quarters, the percentage of these costs
recorded as cost of revenues did and may continue to increase, based upon
production volumes and activities performed.
The Oregon facility provides the Company with significant additional available
production capacity, but, 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 gross profit will continue to be adversely impacted.
Further, if prices on industry standard SRAM products and market demand for
production volumes do not improve and if a greater percentage of the Oregon
facility's operating costs are allocated to cost of goods sold, based on
activities performed, without commensurate increase in production, then it will
be unlikely that gross profit in the second quarter of fiscal 1998 will improve.
Research and Development
Research and development (R&D) expenses decreased in absolute spending and as a
percentage of revenues for the first quarter of fiscal 1998 when compared to the
immediately preceding quarter and the same period of fiscal 1997. R&D expenses
decreased $4.2 million from the quarter ended March 30, 1997 to $29.8 million
and decreased $9.2 million from the quarter ended June 30, 1996. As a percentage
of revenues R&D expenses amounted to 20%, down from 24% during the prior quarter
and 27% during the first quarter of fiscal 1997.
8
<PAGE>
The Company's policy is not to capitalize pre-operating costs associated with
new manufacturing facilities, and in fiscal 1997 significant facility start-up
and staffing expenses were incurred at the new eight-inch wafer fabrication
facility in Hillsboro, Oregon. In fiscal 1997, operating expenditures associated
with the start up of the Oregon fabrication facility were classified in part as
process engineering R&D expense and, in part, cost of revenues, based upon the
nature of the activities performed. In the first quarter of fiscal 1998, total
R&D expense as a percentage of revenue declined principally because a greater
proportion of manufacturing facility operating costs, including Oregon facility
costs, were classified as cost of goods sold, rather than process engineering
R&D.
Other continuing R&D activities include developing microprocessors for use in
general applications, conducting research into applications of high speed DRAM
technology for the communications market, developing RISC microprocessors for
primarily communications and embedded control applications, developing an
advanced SRAM architecture that significantly improves performance of
communications applications requiring frequent switches between reads and
writes, and developing 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 achieve market acceptance.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased by $2.4 million
from $19.9 million in the quarter ended March 30, 1997 to $22.4 million in the
quarter ended June 29, 1997. SG&A expense during the first quarter of fiscal
1997 was $20.9 million. As a percentage of revenues SG&A increased to 15.0% in
the current quarter from 13.9% in the immediately preceding quarter and 14.7% in
the first quarter of fiscal 1997. A portion of SG&A expenses, such as sales
commissions, management bonuses and employee profit sharing, vary with sales and
Company profitability and increase or decrease as sales and profitability
change. The dollar increase in sequential quarters is primarily the result of
expenses associated with initiatives to implement and upgrade enterprise-wide
management information systems; as well as marketing efforts associated with new
products. The Company anticipates SG&A expenses for the remainder of fiscal 1998
will remain approximately constant as a percentage of revenues. However, should
revenues decrease significantly, SG&A as a percentage of revenues is subject to
increase.
Interest Expense
Interest expense of $3.7 million for the first fiscal quarter of 1998 was flat
relative to the last quarter of fiscal 1997 and up $1.8 million when compared to
the $1.9 million for the same quarter a year ago. Interest expense is primarily
associated with the 5.5% Convertible Subordinated Notes, due in 2002, (the
"Notes") and $21.0 million of secured equipment financing agreements completed
in September 1996. The increase in interest expense in the first quarter of
fiscal 1998 over the same quarter one year ago is primarily attributable to the
cessation of capitalizing interest in connection with the construction of the
eight-inch wafer fabrication plant in Oregon. Interest capitalized during the
first quarter of fiscal 1997 was $1.2 million. Additionally, interest expense
increased because of incremental interest associated with secured equipment
financing agreements, which were not completed until the third fiscal quarter of
1997. Management expects that in fiscal 1998 interest expense will remain
constant.
9
<PAGE>
Interest Income and Other
Interest income and other, net, decreased to $2.2 million for the first fiscal
quarter of 1998 compared to $4.1 million for the same quarter a year ago and
$6.5 million in the immediately proceeding quarter. Interest income and other
decreased $1.9 million from the first quarter of fiscal 1997 primarily due to
lower short-term investment balances resulting from the use of cash for capital
expenditures, primarily associated with the Oregon fabrication facility and the
Philippines assembly and test facility. Interest income for the first quarter of
fiscal 1998 was flat when compared to the fourth quarter of fiscal 1997. Also
included in interest income and other, net is the Company's share of net
earnings or losses of unconsolidated affiliates. When comparing the first
quarter of fiscal 1998 to the first quarter of fiscal 1997, balances associated
with the Company's share of net losses of affiliates (which offset interest
income) increased. In the fourth quarter of fiscal 1997, IDT recorded income in
the net amount of approximately $.4 million associated with the earnings of the
investee companies.
Taxes
Income taxes have been provided in the current quarter at a rate of 28% versus
32% for the entire fiscal year of 1997. The provision for income taxes reflects
management's estimated annualized effective tax rate applied to earnings for the
interim period. The fiscal 1998 effective rate utilized is lower than the
effective rate for fiscal 1997 primarily because the earnings of foreign
subsidiaries, taxed at a lower average rate, are expected to comprise a higher
percentage of the Company's anticipated world-wide income for the current year.
The rate used differs from the U.S. statutory rate of 35% primarily due to
earnings of foreign subsidiaries, considered permanently reinvested, being taxed
at lower average rates than the U.S. statutory rate. Income taxes in state
jurisdictions are not significant due to available investment tax credits and
research and development credits.
Liquidity and Capital Resources
At June 29, 1997, cash and cash equivalents were $149.0 million, a decrease of
$6.1 million from $155.1 million at March 30, 1997. The Company generated $60.0
million of funds from operations in the first quarter of fiscal 1998, up from
$11.5 million of funds from operations during the same quarter for fiscal 1997.
Cash provided by operating activities for the first fiscal quarter of 1998
primarily reflected net income adjusted for depreciation and amortization of
$26.7 million, $11.3 million in tax refunds, $12.6 million in deferred income on
shipments to distributors and various other changes to working capital.
Increased depreciation and amortization charges in the current quarter were
associated with new facilities, improvements to existing facilities and new
equipment.
During the first quarter of fiscal 1998, the Company's net cash used for
investing activities was $66.0 million, with $44.9 million used to purchase
capital equipment and property and plant improvements. In addition, during the
quarter, the Company increased its equity investment in an affiliate by $12.1
million. Cash used for the purchase of short-term investments, net of sales of
short-term investments, was $9.0 million.
Cash used for financing activities during the current quarter was $.1 million as
compared to cash provided by financing activities of $.8 million for the same
quarter one year ago. Financing activity consists primarily of issuance of
common stock through employee benefit plans offset by payments on capital leases
and other debt.
In view of current and anticipated capacity requirements, IDT anticipates
capital expenditures of approximately $103 million for the remainder of fiscal
1998, principally in connection with continued installation of equipment in the
Oregon facility, the Philippines plant and ongoing investments to maintain
current technology equipment.
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 of the
Company's products, variable cost per unit and other industry conditions which
the Company cannot predict. Future declines in selling 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.
10
<PAGE>
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, 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 additional financing sooner, the
unavailability of financing on terms satisfactory to IDT could have a material
adverse effect on the Company.
Factors Affecting Future Results
The Company's results of operations and financial condition are subject to the
following risk factors:
Fluctuations in Operating Results
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, 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. Additionally, many of the preceding
factors also impact the recoverability of the cost of manufacturing and other
assets, and as business conditions change, writedowns or abandonment of these
assets may occur. 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 competition.
Cyclicality of the Semiconductor Industry
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, however, 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 which historically have been dependent
on SRAM revenues. Current market conditions characterized by excess supply of
SRAMs relative to demand and resultant pricing declines may continue. Although
some competitors have recently 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 sustain
profitability.
11
<PAGE>
The Company ships a substantial portion of its products 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 or towards
microprocessors which incorporate on-chip primary SRAM cache 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.
In order to achieve more full and effective use of the facilities, the Company
continues to install new equipment at all of its fabrication and test and
assembly facilities. Additional production capacity and future yield
improvements by the Company's competitors could dramatically increase the
worldwide supply of products which compete with the Company's products and could
thereby create further downward pressure on pricing.
Risks Associated with Planned Expansion; Manufacturing Risks
In fiscal 1997, the Company began producing salable 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 continues to ramp 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, power interruptions or
failures, manufacturing start-up or process problems or difficulties in hiring
key managers, technical personnel or operators. In addition, before fiscal 1997,
the Company had 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.
In response to reduced protection offered by the Company's insurance carrier at
economically justifiable rates, in fiscal 1997, the Company eliminated
earthquake insurance coverage on all facilities.
The Company's capacity additions have resulted in a significant increase in
fixed and variable operating expenses which may not be fully offset by
additional revenues for some time. Historically, the Company has expensed the
operating expenses associated with bringing a new fabrication facility to
commercial production status as R&D in the period such expenses were 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 and Manila assembly and test facilities now contribute to
revenues, the Company recognizes substantial operating expenses associated with
the facilities as cost of revenues, which, in the last three quarters of fiscal
1997, reduced gross margins. As commercial production continues in fiscal 1998,
the Company anticipates incurring substantial additional operating costs and
depreciation expenses relating to these facilities. 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 and Manila facilities that are comparable to the Company's current
products, the Company's future results of operations could be adversely
impacted.
12
<PAGE>
Dependence on New Products
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 gross margins comparable to the Company's
current products, the future results of operations could be adversely impacted.
Dependence on Limited Suppliers
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.
IDT has been significantly dependent on the design capabilities of Quantum
Effect Design, Inc., an equity affiliate, for the design and development of
derivatives of 64 bit MIPS RISC based microprocessors. Currently there are no
development contracts in effect between QED and IDT. While the Company is now
designing and developing derivatives of MIPS RISC based microprocessors
in-house, there is significant risk that the Company will not do so
successfully.
Capital Needs
The semiconductor industry is extremely capital-intensive. To remain
competitive, the Company must continue to invest in advanced manufacturing and
test equipment. In fiscal 1998, the Company expects to expend approximately $148
million in capital expenditures 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 could be materially adversely
affected.
Intellectual Property Risks
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights, which have resulted in significant and often
protracted and expensive litigation. In recent years, there has been a growing
trend by companies to resort to litigation to protect their semiconductor
technology from unauthorized use by others. 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 non-infringing
technology. There can be no assurance that the Company would be able to obtain
such licenses on acceptable terms or to develop non-infringing 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.
13
<PAGE>
Risks of International Operations
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, changes in local economic conditions and import and
export controls, as well as changes in tax laws, tariffs and freight rates.
Contract pricing for raw materials used in the fabrication and assembly
processes, as well as for subcontract assembly services, can be impacted by
currency exchange rate fluctuations.
Environmental Risks
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.
Volatility of Stock and Notes Prices
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.
14
<PAGE>
PART II OTHER INFORMATION
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 17
27 Financial Data Schedule 18
(b) Reports on Form 8-K:
No reports have been filed on Form 8-K during this quarter.
15
<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: July 28, 1997 /s/ Leonard C. Perham
------------------------------------
Leonard C. Perham
Chief Executive Officer
Date: July 28, 1997 /s/ Alan F. Krock
------------------------------------
Alan F. Krock
Vice President and Corporate Controller
(chief accounting officer)
16
<TABLE>
EXHIBIT 11
INTEGRATED DEVICE TECHNOLOGY, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
June 29, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Primary:
Weighted average shares outstanding 79,769 77,696
Net effect of dilutive stock options 3,590 3,954
------- -------
Total shares 83,359 81,650
======= =======
------- -------
Net Income $ 1,891 $ 8,869
======= =======
------- -------
Net income per share $ 0.02 $ 0.11
======= =======
Fully Diluted:
Weighted average shares outstanding 79,769 77,696
Net effect of dilutive stock options 3,590 3,954
"If Converted" conversion of convertible subordinated notes 0 0
(See Note 1)
------- -------
Total 83,359 81,650
======= =======
Net Income $ 1,891 $ 8,869
Add:
Convertible subordinated notes interest, net of taxes 0 0
Expenses attributable to convertible notes issue 0 0
------- -------
Adjusted Net Income $ 1,891 $ 8,869
======= =======
------- -------
Net income per share $ 0.02 $ 0.11
======= =======
<FN>
Note 1 The effects of the potential conversion of the 5.5% Convertible
Subordinated Notes have not been included in the fully diluted EPS
calculations for both of the first fiscal quarters of 1998 and 1997
because they are anti-dilutive.
</FN>
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-29-1998
<PERIOD-START> MAR-31-1997
<PERIOD-END> JUN-29-1997
<CASH> 148,975
<SECURITIES> 45,109
<RECEIVABLES> 84,931
<ALLOWANCES> 10,534
<INVENTORY> 49,647
<CURRENT-ASSETS> 401,438
<PP&E> 810,012
<DEPRECIATION> 367,063
<TOTAL-ASSETS> 921,411
<CURRENT-LIABILITIES> 148,752
<BONDS> 183,306
0
0
<COMMON> 80
<OTHER-SE> 527,858
<TOTAL-LIABILITY-AND-EQUITY> 921,411
<SALES> 148,873
<TOTAL-REVENUES> 148,873
<CGS> 92,537
<TOTAL-COSTS> 92,537
<OTHER-EXPENSES> 52,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,743
<INCOME-PRETAX> 2,626
<INCOME-TAX> 735
<INCOME-CONTINUING> 1,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,891
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
