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 27, 1999
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 of (I.R.S. Employer
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 23, 1999, was approximately 89,016,000.
===============================================================================
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended
------------------
Jun. 27, Jun. 28,
1999 1998
--------------------
Revenues $ 153,981 $ 153,021
Cost of revenues 85,612 106,618
Restructuring charges, asset
impairment and other -- 28,916
--------------------
Gross profit 68,369 17,487
--------------------
Operating expenses:
Research and development 27,039 42,145
Selling, general and
administrative 31,213 30,297
Merger expenses 4,840 --
--------------------
Total operating expenses 63,092 72,442
--------------------
Operating income (loss) 5,277 (54,955)
Interest expense (3,656) (3,504)
Interest income and other, net 7,303 1,430
--------------------
Income (loss) before income
taxes 8,924 (57,029)
Provision for income taxes 446 (6,084)
--------------------
Net income (loss) $ 8,478 $ (50,945)
====================
Basic net income (loss)
per share $ 0.10 $ (0.59)
Diluted net income (loss)
per share $ 0.09 $ (0.59)
Weighted average shares:
Basic 88,320 86,744
Diluted 90,754 86,744
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS)
Jun. 27, Mar. 28,
1999 1999
-------------------------
ASSETS
Current assets:
Cash and cash equivalents $163,135 $144,598
Short-term investments 62,439 56,516
Accounts receivable, net 60,620 58,899
Inventories, net 53,781 60,787
Prepayments and other current assets 21,076 42,015
-------------------------
Total current assets 361,051 362,815
Property, plant and equipment, net 284,095 299,235
Other assets 55,196 59,155
-------------------------
TOTAL ASSETS $700,342 $721,205
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,899 $ 37,076
Accrued compensation and related expenses 16,353 16,736
Deferred income on shipments to
distributors 43,004 41,759
Other accrued liabilities 60,348 63,100
-----------------------
Total current liabilities 159,604 158,671
Convertible subordinated notes, net 180,327 184,354
Other liabilities 72,640 78,854
------------------------
Total liabilities 412,571 421,879
Stockholders' equity:
Preferred stock -- --
Common stock and additional paid-in capital 374,080 372,988
Treasury stock -- (1,638)
Accumulated deficit (82,485) (68,315)
Accumulated other comprehensive loss (3,824) (3,709)
------------------------
Total stockholders' equity 287,771 299,326
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $700,342 $721,205
========================
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 CASH FLOWS
(UNAUDITED; IN THOUSANDS)
Three Months Ended
------------------------
Jun. 27, Jun. 28,
1999 1998
------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 8,478 $ (50,945)
Adjustments:
Depreciation and amortization 21,657 34,161
(Gain) loss on sale of property, plant and
equipment (4,658) 753
Deferred tax assets -- (5,968)
Restructuring, asset impairment and other -- 18,916
Changes in assets and liabilities:
Accounts receivable (2,524) 15,929
Inventories 3,867 3,281
Prepayments and other assets 6,054 7,798
Accounts payable 3,547 (14,226)
Accrued compensation and related expenses (143) (2,888)
Deferred income on shipments to distributors 1,245 (728)
Other accrued liabilities (5,015) 9,259
-----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 32,508 15,342
-----------------------
INVESTING ACTIVITIES:
QSI net cash used during the period from
October 1, 1998 to March 31, 1999 (1,146) --
Purchases of property, plant and equipment (25,992) (52,944)
Proceeds from sales of property, plant and
equipment 27,502 1,261
Purchases of short-term investments (16,093) (20,328)
Proceeds from sales of short-term investments 7,477 27,230
-----------------------
NET CASH USED FOR INVESTING ACTIVITIES (8,252) (44,781)
-----------------------
FINANCING ACTIVITIES:
Issuance of common stock, net 2,524 2,824
Proceeds from secured equipment financing -- 23,961
Payments on capital leases and other debt (8,243) (1,685)
------------------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (5,719) 25,100
------------------------
Net increase (decrease) in cash and cash
equivalents 18,537 (4,339)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 144,598 155,517
------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 163,135 $ 151,178
========================
Supplemental schedule of non-cash investing
and financing activities:
Capital lease obligations -- $ 5,022
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
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 28, 1999. The
results of operations for the three-month period ended June 27, 1999 are not
necessarily indicative of the results to be expected for the full year.
Note 2 - QSI Merger
In May 1999, IDT completed the acquisition of Quality Semiconductor, Inc. (QSI).
QSI had been engaged in the design, development and marketing of
high-performance logic and networking semiconductor products.
To consummate the merger, IDT issued approximately 5,214,000 shares of its
common stock in exchange for all of the outstanding common stock of QSI and
granted options to purchase approximately 1,509,000 shares of IDT common stock
in exchange for all of the outstanding options to purchase QSI stock. The merger
is being accounted for as a pooling of interests, and the condensed consolidated
financial statements give effect to the merger for all periods presented.
Because the fiscal year ends of IDT and QSI differ, the statements of operations
data for QSI have been recast as shown below:
IDT QSI
Fiscal year ended March 28, 1999 Fiscal year ended September 30, 1998
Fiscal year ended March 29, 1998 Fiscal year ended September 30, 1997
Fiscal year ended March 30, 1997 Fiscal year ended September 30, 1996
QSI's net loss of $22.6 million for the period October 1, 1998 through March 31,
1999 has been recorded as a decrease to stockholders' equity for the quarter
ended June 27, 1999.
For the first quarter of fiscal 1999, the results of operations of IDT for the
quarter ended June 28, 1998 have been combined with the results of operations of
QSI for the quarter ended December 31, 1997. The results of operations
previously reported by the separate companies and the combined amounts presented
in the accompanying condensed consolidated financial statements are presented
below.
Three months ended June 28, 1998
(In thousands)
IDT QSI Total
--------- --------- ---------
Total revenue $ 134,487 $ 18,534 $ 153,021
Net loss $ (49,956) $ (989) $ (50,945)
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As of June 27, 1999, IDT has incurred $5.8 million in merger-related costs. Of
this amount, $4.6 million relates to payments for severance, retention and
change-of-control agreements. The remainder consists primarily of accounting and
legal fees and printing costs.
Note 3 - Restructuring Charges, Asset Impairment and Other
During fiscal 1999, the Company recorded $204.2 million of charges in cost of
sales relating primarily to asset impairment, restructuring associated with
closure of a manufacturing facility and costs associated with certain technology
licensing matters.
Included in these charges were $28.9 million in asset impairment and other
charges which were recorded in the first quarter of fiscal 1999. These charges
consisted primarily of $15.1 million for excess SRAM manufacturing equipment and
$10 million in costs associated with technology licensing matters. The excess
SRAM manufacturing equipment charge represents the write down to estimated fair
market value based primarily on appraisals and estimates obtained from third
parties. The charge resulted from prevailing economic conditions in the SRAM
market, which had experienced declines in both demand and price.
In the fourth quarter of fiscal 1999, the Company reversed $3 million of the
costs associated with technology licensing matters upon favorable settlement of
certain of those matters.
Separately in the first quarter of fiscal 1999, the Company also recorded $5.5
million in research and development expenses and $0.2 million in selling,
general and administrative expenses for costs associated with discontinuance of
certain development efforts, including a graphics chip and a specialized logic
chip. These charges were composed primarily of severance costs and technology
license payments associated with the discontinued efforts.
During the second quarter of fiscal 1999, the Company incurred restructuring
charges which aggregated $46.4 million and related primarily to a provision for
exit and closure costs associated with the San Jose, Calif. wafer fabrication
facility, which the Company closed in the third quarter of fiscal 1999. The
Company completed the sale of the San Jose facility in the first quarter of
fiscal 2000 and continues to pursue the sale of surplus used equipment.
The following table sets forth the Company's restructuring activities through
June 27, 1999:
Balance Balance
Mar. 28, Utilized Jun. 27,
1999 1999
------- -------- -------
Write-down of fixed assets $ -- $ -- $ --
Severance and other employee
related charges 300 (212) 88
Closure costs for
manufacturing facility 5,232 (1,662) 3,570
------- -------- -------
$ 5,532 $(1,874) $ 3,658
======= ======== =======
As of June 27, 1999, the net book value of equipment held for sale aggregated
$1.5 million and has been included in other current assets. Given the continuing
oversupply conditions in the used semiconductor equipment market, the Company
cannot determine the amount of time required to completely liquidate the surplus
equipment.
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Note 4 - Earnings Per Share
Basic and diluted net income (loss) per share are computed using
weighted-average common shares outstanding in accordance with SFAS No. 128,
"Earnings Per Share." Diluted net income per share also includes the effect of
stock options and convertible debt. The following table sets forth the
computation of basic and diluted net income (loss) per share:
Three months ended
--------------------
(in thousands except per Jun. 27, Jun. 28,
share amounts) 1999 1998
--------------------
Basic:
Net income (loss)(numerator) $ 8,478 $ (50,945)
===================
Weighted average shares
outstanding (denominator) 88,320 86,744
===================
Net income (loss) per share $ 0.10 $ (0.59)
===================
Diluted:
Net income (loss)(numerator) $ 8,478 $ (50,945)
===================
Weighted average shares
outstanding 88,320 86,744
Net effect of dilutive stock
options 2,434 --
-------------------
Total shares (denominator) 90,754 86,744
===================
Net income (loss) per share $ 0.09 $ (0.59)
===================
Total stock options outstanding, including antidilutive options, were 19.6
million and 19.3 million at June 27, 1999 and June 28, 1998, respectively. The
Company's convertible debt was antidilutive for all periods presented.
Note 5 - Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
Three months ended
(in thousands) ----------------------
Jun. 27 Jun. 28
1999 1998
----------------------
Net income (loss) $ 8,478 $(50,945)
Currency translation adjustments 678 (538)
Unrealized gain (loss) on
available-for-sale investments (793) 82
----------------------
Comprehensive income (loss) $ 8,363 $(51,401)
======================
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The components of accumulated other comprehensive loss (not tax affected) were
as follows:
Jun. 27, Mar. 28,
(in thousands) 1999 1999
----------------------
Cumulative translation adjustments $ (2,979) $ (3,657)
Unrealized loss on available-for-sale
investments (845) (52)
----------------------
$ (3,824) $ (3,709)
======================
Note 6 - New Accounting Pronouncements
The Company plans to adopt Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments," as of the beginning of fiscal
2001. SFAS No. 133 requires that all derivatives be recognized in the balance
sheet as assets or liabilities and measured at fair value. SFAS No. 133 also
requires current recognition in earnings of changes in these fair values,
depending on the intended use and designation of the derivative. The Company is
currently evaluating the impact of SFAS No. 133 but does not expect any material
effects on its financial position or results of operations.
Note 7 - Inventories, Net
Inventories, net, consisted of the following:
Jun. 27, Mar. 28,
(in thousands) 1999 1999
----------------------
Raw materials $ 2,745 $ 5,986
Work-in-process 32,841 36,995
Finished goods 18,195 17,806
----------------------
$ 53,781 $ 60,787
======================
Note 8 - Industry Segments
The Company has three reportable segments: Communications and High-Performance
Logic, SRAMs and other, and x86 Microprocessors. The Communications and
High-Performance Logic segment includes communications memories, networking
devices, embedded RISC microprocessors and high-performance logic and clock
management devices. The SRAMs and other segment consists mainly of high-speed
SRAMs. The tables below provide information about these segments for the three
month periods ended June 27, 1999 and June 28, 1998:
Revenues by Segment
In thousands
Three months ended
Jun. 27, Jun. 28,
1999 1998
----------------------
Communications and High-Performance Logic $113,174 $120,032
SRAMs and other 37,445 29,747
x86 Microprocessors 3,362 3,242
----------------------
Total consolidated revenues $153,981 $153,021
======================
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Profit (loss) by Segment
In thousands
Three months ended
Jun. 27, Jun. 28,
1999 1998
----------------------
Communications and High-Performance Logic $ 23,498 $ 21,002
SRAMs and other (7,141) (24,644)
x86 Microprocessors (11,080) (22,397)
Restructuring charges, asset impairment and other - (28,916)
Interest income and other 7,303 1,430
Interest expense (3,656) (3,504)
----------------------
Income (loss) before income taxes $ 8,924 $(57,029)
======================
Note 9 - Subsequent Events
On July 14, 1999, the Company announced that it will exit the x86 microprocessor
market and license or transfer ownership of the WinChip microprocessor
technology and certain assets of its Centaur design subsidiary, based in Austin,
Texas. The Company has been in substantive discussions with several interested
parties and expects to conclude a transaction or close the business by the end
of the second quarter of fiscal 2000. On August 4, 1999, the Company announced
that it had signed a letter of commitment to sell certain assets of the Centaur
subsidiary, including intellectual property related to microprocessor technology
and the x86 microprocessor design team located in Austin.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All references are to the Company's fiscal quarters ended June 27, 1999 ("Q1
2000"), June 28, 1998 ("Q1 1999") and March 28, 1999 ("Q4 1999"), unless
otherwise indicated. Quarterly financial results may not be indicative of the
financial results of future periods. All non-historical information contained in
this discussion and analysis constitutes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are not guarantees of future
performance and involve a number of risks and uncertainties, including but not
limited to: operating results; new product introductions and sales; competitive
conditions; capital expenditures and capital resources; manufacturing capacity
utilization, and the Company's efforts to consolidate and streamline production;
customer demand and inventory levels; protection of intellectual property in the
semiconductor industry; and the risk factors set forth in the section "Factors
Affecting Future Results." Future results may differ materially from such
forward-looking statements as a result of such risks. 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.
HISTORICAL INFORMATION RELATING TO FISCAL 1999 RESTRUCTURING AND ASSET
IMPAIRMENT AND OTHER CHARGES AND ACTIONS TAKEN
During fiscal 1999, IDT recorded $204.2 million in charges related to asset
impairment and restructuring, which were specifically identified in the
Condensed Consolidated Statements of Operations, and an additional $9.0 million
of charges which were recorded as operating expenses. These charges related
principally to closure of one of three wafer fabrication facilities located in
the United States, recording an asset impairment charge to reduce the carrying
value of one of the remaining facilities, discontinuing research initiatives and
costs associated with intellectual property matters. These charges are discussed
below under the captions "Gross Profit," "Research and Development" and
"Selling, General and Administrative."
During the period from fiscal 1994 through fiscal 1996, IDT's sales volume more
than doubled, growing from $330 million to $679 million. The growth was
principally based upon strong demand for SRAM products, especially cache memory
products for use in personal computers. At the peak of demand for IDT's SRAM
products, sales of SRAM and related products accounted for approximately 45% of
IDT's revenues.
As business conditions in the semiconductor industry improved through the
mid-1990s, the Company took steps to significantly expand its manufacturing
capacity. Most notably, the Company constructed the Hillsboro, Oregon
fabrication facility and the assembly and test facility located in Manila, the
Philippines. During the period fiscal 1995 through fiscal 1998, IDT expended
more than $700 million for acquisitions of property, plant and equipment.
In addition to providing incremental manufacturing capacity, the Hillsboro
facility provides the Company with advanced wafer fabrication technology and
capability. However, the cost of such advanced wafer manufacturing technology
and capability is significant. To recover such costs, semiconductor
manufacturers must be able to amortize device design, equipment and facility
acquisition costs over a significant volume of products with a selling price
that reasonably reflects the advanced level of technology employed in their
design and manufacture.
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As IDT's additions to manufacturing capacity became available for use in fiscal
1997, business conditions in the memory sector of the semiconductor industry
changed dramatically. Selling prices of industry-standard SRAM components fell
as much as 80% over an approximate 12-month period. The price decreases were the
result of a significant increase in market supply of industry standard SRAM
parts from principally foreign competitors, such as Samsung, Winbond, UMC and
other Taiwanese and Korean companies, which allocated increased capacity to SRAM
products. Also, U.S.-based companies with Taiwan- and Korean-sourced SRAM wafers
from foundries such as TSMC provided additional product supply. These
competitors reduced prices at a time when market demand slowed as customers
reduced the level of inventories carried.
As a result of the difficult operating conditions that have existed in the
semiconductor industry for the past few years, and which intensified in the
middle of calendar 1998, including excess product supply and low prices, IDT
consolidated and streamlined manufacturing operations, including closing its
wafer fabrication facility located in San Jose, California. This operational
decision primarily reflected industry oversupply conditions.
The Company is moving away from dependence on industry-standard products, is
planning to expand the range of its products manufactured at Hillsboro, and, as
noted above, has taken active steps to increase the level of manufacturing
facility utilization. However, as of early fiscal 1999, the products
historically manufactured in the Hillsboro facility and planned for the near
term were principally SRAM and x86 microprocessor products (x86 products
represented a small percentage of IDT's total revenues). IDT has since decided
to exit the market for x86 microprocessors. In fiscal 1999, the pricing of SRAM
and x86products in the marketplace remained low. As a result of low market
prices, the cash flows generated by sales of products manufactured at Hillsboro
were disproportionate to the cost of the facility and significantly less than
the cash flows generated by IDT's other comparable manufacturing activities.
The Company performed an asset impairment review for the Hillsboro facility
based upon IDT's operating conditions, and concluded that, despite the closure
of its San Jose facility, IDT was still in a position of overcapacity. The
impairment review revealed that then projected production volumes and related
cash flows from the Hillsboro facility would not be sufficient to recover the
carrying value of that manufacturing facility. Therefore, in accordance with
current accounting literature, IDT concluded that the carrying value of the
Hillsboro manufacturing assets was impaired and wrote down the carrying values
of these assets to fair market value, as estimated by third parties with
significant experience in marketing and selling used semiconductor equipment.
As discussed below, the semiconductor industry is cyclical in nature, and while
demand and price levels for the products manufactured at the Hillsboro facility
may improve, the timing and degree of any such recovery is uncertain.
Throughout a difficult operating period, IDT remained focused on producing
value-added products for its communications customers. These products include
communications memories, embedded RISC microprocessors, high-speed, static
random access memories (SRAMs) and high-performance logic products. IDT has
successfully offered many of theses and similar products to its customers for
more than 10 years. IDT intends to continue its efforts to align its business
practices to focus on serving its markets in an efficient manner and providing
value to stockholders.
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RESULTS OF OPERATIONS
REVENUES
Pooling of interests accounting has been used to account for the merger of
Quality Semiconductor, Inc. (QSI) with IDT. Under pooling of interests
accounting, IDT's past results are restated to include the results of QSI (see
Note 2 of Notes to Condensed Consolidated Financial Statements).
Revenues for Q1 2000 were $154.0 million, an increase of $2.4 million compared
to the $151.6 million recorded in Q4 1999. In Q1 2000, revenues for the
Company's Communications and High-Performance Logic segment, which includes all
former QSI products, increased by $4.6 million, or 4.2%, compared to Q4 1999.
Revenues for the SRAMs and other segment increased by $2.5 million, or 7.2% over
this period, while x86 Microprocessor revenues declined by $4.6 million, or
58.0%, to $3.4 million. As announced in July 1999, IDT has decided to exit the
market for x86 microprocessors. In the cominq quarter, IDT expects that it will
continue to sell the remainder of its x86 microprocessor inventories, sell or
license to others some of the assets related to its x86 business, and in future
quarters, discontinue its x86 operations.
Revenues in Q1 1999 were $153.0 million. When comparing revenues for Q1 2000 to
Q1 1999, revenues from the sale of the Company's WinChip(TM) x86 microprocessors
were essentially unchanged, and sales of products in the SRAM and other segment
increased by $7.7 million, or 25.9%. Sales of products in the Company's
Communications and High-Performance Logic segment decreased by $6.9 million, or
5.7%, over this period. The decline in revenues in this segment results from
restating IDT's Q1 1999 results for pooling of interests accounting with QSI,
and declines in revenue associated with QSI networking related products. Sales
of IDT's own Communications and High-Performance Logic products were essentially
unchanged during these periods.
The Company believes revenues and costs associated with existing and new
products in the Communications and High-Performance Logic and SRAM segments will
increase in future quarters as the Company continues to execute product
introduction strategies and assuming overall levels of industry demand continue
to improve. In future quarters, excluding any remaining transaction related
costs and potential costs to combine manufacturing operations, the merger of QSI
into the Company is expected to benefit operating results.
Information on risks associated with the expansion of IDT's product families is
included in "Factors Affecting Future Results." The semiconductor industry is
highly cyclical and 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. Low SRAM prices have adversely affected, and may
continue to adversely affect, the Company's operating results.
- ---------
(TM) WinChip and RISController are trademarks of Integrated Device Technology,
Inc. All other brand names and products names are trademarks, registered
trademarks or trade names of their respective holders.
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GROSS PROFIT
Gross profit for Q1 2000 was $68.4 million, compared to $64.8 million in Q4 1999
and $17.5 million in Q1 1999.
In Q1 1999, the Company recorded a charge of $28.9 million which was
specifically identified in the Company's Condensed Consolidated Statements of
Operations as a reduction in gross profit. The $28.9 million charge related
primarily to excess SRAM manufacturing equipment ($18.9 million) and certain
technology licensing matters ($10.0 million). The net carrying value of
equipment before writedown was $17.4 million, and after writedown was $2.3
million. The portion of the charge which pertains to excess SRAM related
equipment was associated with equipment which was no longer used in the
Company's normal operations because of changes in demand in the semiconductor
marketplace or changes in the Company's product strategy. The equipment related
portion of the charge was computed as the difference between the net book value
of the equipment and estimates of fair market value, as estimated by third
parties with significant experience in marketing and selling used semiconductor
equipment. As a result of the charge related to excess manufacturing equipment,
the reduction in annual depreciation expense was approximately $4 million.
Additionally, the Company recorded a charge of $5.7 million relating primarily
to discontinuing certain technology development initiatives, which have been
classified as research and development expenses in the Company's Condensed
Statements of Operations.
At the end of Q1 2000, the net book value of assets held for sale totaled $1.5
million and has been included in other current assets. Due to current oversupply
conditions for used semiconductor equipment, the Company cannot estimate a date
for disposal of all used semiconductor equipment. In Q4 1999, the Company
reversed $3 million of the technology licensing costs upon favorable settlement
of certain of these matters.
The Company expects annual cost savings of approximately $45 million as a result
of manufacturing restructuring actions taken in Q2 1999 (see Note 3 of Notes to
Condensed Consolidated Financial Statements). The cost savings associated with
the manufacturing restructuring were partially realized in the Q4 1999 and fully
realized beginning in Q1 2000. As a result of asset impairment charges in fiscal
1999, which reduced the carrying value of manufacturing equipment, IDT's annual
depreciation expense is expected to be reduced by approximately $25 million.
IDT's gross margin has improved in Q1 2000 over Q4 1999 because of higher
revenues and the fiscal 1999 consolidation of fabrication production volumes,
which has allowed IDT to improve utilization of its remaining fabrication
facilities. Improved utilization of the manufacturing facilities results in a
lower overall cost per unit produced. IDT's gross margin has improved in Q1 2000
over Q1 1999 because of the manufacturing consolidation, a reduction in
depreciation expense resulting from lower carrying values of impaired
manufacturing assets, and improved overall utilization of remaining
manufacturing assets.
Historically, SRAM and x86 microprocessor products have been produced at the
Hillsboro facility and the Company is unable to predict whether demand for
industry-standard SRAM products, or IDT's share of the available markets, will
improve. Should IDT's production volumes, especially at its fabrication
facilities, decline and should the Company be unable to otherwise decrease costs
per unit sold, the Company's gross profit would be adversely impacted. Further,
if prices on industry-standard SRAM products do not improve or the Company is
not able to manufacture and sell other products at comparable or better margins,
and if a greater percentage of the Hillsboro facility's operating costs are
allocated to cost of goods sold based on activities performed, then gross margin
may not improve, or may decrease.
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RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses decreased by $3.0 million (10.1%) from
Q4 1999 and decreased by $15.1 million (35.8%) compared to Q1 1999. R&D expenses
for Q1 1999 included $5.5 million in charges, primarily associated with
discontinuing certain development efforts, severance and termination costs
associated with development personnel and related payments under technology
license agreements associated with such development efforts. Development efforts
discontinued included a graphics chip and a specialized logic chip. Cost savings
associated with discontinuing these development efforts are approximately $1
million per quarter.
Management expects that in the coming quarters, R&D expense will decrease as a
result of the sale or closure of the Austin x86 microprocessor design center and
as the allocation of manufacturing costs associated with process R&D declines as
a result of continued improved manufacturing facility utilization.
Current R&D activities include enhancing IDT's family of specialty memory
products for the communications and networking markets, conducting research into
applications of high-speed DRAM technology for the communications market,
developing RISController(TM) microprocessors primarily for communications and
embedded control applications and developing an advanced SRAM architecture that
significantly improves performance of communications applications requiring
frequent switches between reads and writes.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased by $1.6 million
and $0.9 million for Q1 2000 compared to Q4 1999 and Q1 1999, respectively.
The Company expects that in the coming quarters, excluding the impact of merging
QSI into IDT, recurring SG&A expenses will remain relatively constant, except
for costs such as sales commissions and sales bonuses which will vary in
relation to sales volumes. After eliminating QSI-specific SG&A expenses,
completion of IDT/QSI merger activity and upon the completion of the management
information systems implementation projects, both of which are anticipated to
occur within the first half of fiscal 2000, management expects that SG&A
expenses as a percentage of sales will decrease.
MERGER EXPENSES
The Company incurred $4.8 million in expenses related to the QSI merger in Q1
2000, including $4.6 million in severance and employee retention costs. In Q4
1999, merger expenses were $0.4 million, consisting mainly of professional fees
for accounting and legal services.
INTEREST EXPENSE
Interest expense is primarily associated with the 5.5% Convertible Subordinated
Notes, due in 2002, and secured equipment financing agreements which amortize
over the term of the financing agreements. Interest expense of $3.7 million for
Q1 2000 was essentially unchanged compared to Q4 1999 and Q1 1999.
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INTEREST INCOME AND OTHER, NET
Interest income and other, net, was $7.3 million in Q1 2000, an increase of $4.5
million and $5.9 million compared to Q4 1999 and Q1 1999, respectively. The
Company recognized a $4.6 million gain on the sale of its closed San Jose
fabrication facility and a $0.8 million gain on the repurchase of a portion of
its convertible subordinated notes in Q1 2000.
TAXES
The Company's effective tax rate for Q1 2000 was 5%. The Company recorded a tax
benefit in Q1 1999, but realized no federal tax benefit in fiscal 1999 as a
whole because of IDT's inability to carry back losses. Included in income taxes
of $2.7 million in Q4 1999 is a $2.4 million provision for QSI's fiscal quarter
ended September 1998, which has been recast in Q4 1999 for financial reporting
purposes under the pooling rules.
LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1999, cash and cash equivalents were $163.1 million, an increase of
$18.5 million from $144.6 million at March 28, 1999.
The Company generated $32.5 million in cash from operating activities for Q1
2000, up from $15.3 million for the same period in fiscal 1999.
During the first quarter of fiscal 2000, the Company's net cash used for
investing activities was $8.3 million, including $26.0 million for capital
expenditures. The Company received $27.5 million in proceeds from the sale of
property, plant and equipment, consisting primarily of the sale of the San Jose
fabrication facility, which had been closed during fiscal 1999 in connection
with the Company's restructuring efforts.
The Company used $5.7 million for financing activities in Q1 2000, including the
repurchase and retirement of convertible subordinated notes for $3.3 million.
The notes had a face value of $4.2 million. The Company may retire additional
portions of its 5.5% Convertible Subordinated Notes from time to time, as
authorized by the Board of Directors.
Cash provided by financing activities was $25.1 million in Q1 1999, due mainly
to several equipment financing transactions during that period. The Company
entered into capital leases under which it sold certain previously purchased
semiconductor manufacturing equipment to leasing companies which leased them
back to IDT for use at the Oregon fabrication facility. These lease transactions
generated $19.0 million in cash proceeds. The Company also entered into other
capital leases for manufacturing equipment during the quarter. In total, the
Company's lease obligations under capital leases increased by $24.0 million in
connection with these transactions.
Under another leasing arrangement, equipment purchased for the Oregon
fabrication facility with a net book value of $11.9 million at the time of the
sale and leaseback transaction was sold to a leasing company and leased back for
use at the Oregon facility under a lease classified as operating. The Company
also entered into a $5.0 million secured loan arrangement which is
collateralized by certain manufacturing assets.
IDT anticipates capital expenditures of approximately $60 million during the
remaining three quarters of fiscal 2000. The Company plans to finance these
expenditures primarily through cash generated from operations and existing cash
and investments. The Company may also investigate other financing alternatives,
depending on whether available terms are favorable to the Company.
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The Company believes that existing cash and cash equivalents, cash flow from
operations and credit facilities available to the Company will be sufficient to
meet its working capital, mandatory debt repayment and anticipated capital
expenditure requirements through fiscal 2000 and 2001. 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 other financing
sooner, the unavailability of financing on terms satisfactory to IDT could have
a material adverse effect on the Company.
SUBSEQUENT EVENTS
On July 14, 1999, the Company announced that it will exit the x86 microprocessor
market and license or transfer ownership of the WinChip microprocessor
technology and certain assets of its Centaur design subsidiary, based in Austin,
Texas. The Company is currently in substantive discussions with several
interested parties and expects to conclude a transaction or close the business
by the end of Q2 2000. On August 4, 1999, the Company announced that it had
signed a letter of commitment to sell certain assets of the Centaur subsidiary,
including intellectual property related to microprocessor technology and the x86
microprocessor design team located in Austin.
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FACTORS AFFECTING FUTURE RESULTS
The preceding discussion contains forward-looking statements, which are based on
management's current expectations. These include, in particular, the statements
related to revenues and gross profit, R&D and SG&A expenses and activities,
interest expense, interest income and other, taxes, capital spending and
financing transactions, as well as statements regarding successful development
and market acceptance of new products, industry conditions and demand, effects
of consolidation of production, capacity utilization and the acquisition of QSI.
Actual results may differ materially. The Company's results of operations and
financial condition are subject to the following risk factors:
IDT's Operating Results can Fluctuate Dramatically.
IDT's operating results can fluctuate dramatically. For example, the Company had
a net loss of $283.6 million for fiscal 1999 compared to net income of $8.2
million for fiscal 1998. The net loss for fiscal 1999 exceeded IDT's cumulative
net income for all of fiscal 1994, 1995, 1996 and 1998, which totaled $246.8
million. In addition, IDT had a net loss of $42.3 million for fiscal 1997.
Fluctuations in operating results can result from a wide variety of factors,
including:
o timing of new product and process technology announcements and
introductions from IDT or its competitors;
o competitive pricing pressures, particularly in the SRAM market;
o fluctuations in manufacturing yields;
o changes in the mix of products sold;
o availability and costs of raw materials;
o the cyclical nature of the semiconductor industry and industry-wide wafer
processing capacity;
o economic conditions in various geographic areas; and
o costs associated with other events, such as underutilization or expansion
of production capacity, intellectual property disputes, or other
litigation.
In addition, many of these factors also impact the recoverability of the cost of
manufacturing, taxes and other assets. As business conditions change, future
writedowns or abandonment of these assets may occur. Also, 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, IDT's operating results for
that quarter could be harmed. Further, IDT may be unable to compete successfully
in the future against existing or potential competitors, and IDT's operating
results could be harmed by increased competition. The recent economic downturn
and continued uncertainties in some Asian economies, including Korea, have
reduced demand for IDT's products. Should economic conditions in Asia
deteriorate, especially in Japan, the Company's sales and business results would
be harmed.
The Cyclicality of the Semiconductor Industry Exacerbates the Volatility of
IDT's Operating Results.
The semiconductor industry is highly cyclical. Market conditions characterized
by excess supply relative to demand and resultant pricing declines have occurred
in the past and may occur in the future. Such pricing declines adversely affect
IDT's operating results and force IDT and its competitors to modify their
capacity expansion programs. As an example, in prior years a significant
increase in manufacturing capacity of commodity SRAMs caused significant
downward trends in pricing, which adversely affected IDT's gross margins and
operating results. IDT is unable to accurately estimate the amount
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of worldwide production capacity dedicated to industry-standard commodity
products, such as SRAM, that it produces. IDT's operating results can be
adversely affected by such cyclical factors in the semiconductor industry as: a
material increase in industry-wide production capacity; a shift in industry
capacity toward products competitive with IDT's products; and reduced demand or
other factors that may result in material declines in product pricing and could
affect the portion of IDT's operating results derived from the sale of
industry-standard products. Although IDT seeks to manage costs, these efforts
may not be sufficient to offset the adverse effect of these factors.
Demand for IDT's Products Depends on Demand in the Computer and Communications
Markets.
The Company's customers incorporate a substantial percentage of IDT's products,
including SRAMs, into computer and computer-related products, which have
historically been characterized by rapid technological change and significant
fluctuations in demand. Demand for certain other IDT products depends upon
growth in the communications market. Any slowdown in the computer or
communications markets could materially adversely affect IDT's operating
results.
IDT Faces Significant Competition in the x86 Microprocessor Market, Particularly
from Intel.
Intel has held its dominant position over all other x86 microprocessor
competitors for a substantial period of time, and has significantly greater
financial, technical, manufacturing and marketing strength than IDT. Intel's
financial strength and market dominance have enabled it to reduce prices on its
microprocessor products within a short period of time following their
introduction, which reduces the margins and profitability of its competitors.
Currently, Intel's dominant position allows it to set and control x86
microprocessor standards and therefore dictate many aspects of the products that
PC manufacturers require in this market. Accordingly, Intel may dictate
standards that are not compatible with the WinChip, and such standards could
limit the ability of IDT to sell its products and could require IDT to incur
significant redesign costs.
For customers to purchase IDT's x86 microprocessors, IDT's products must also be
compatible with other components supplied to PC manufacturers and dealers, such
as core logic chip sets, motherboards, BIOS software and other parts. These
components in turn must be compatible with the Intel microprocessors and are
often manufactured by Intel, companies in which Intel has strategic investments
or independent companies. Accordingly, in marketing its microprocessors to PC
manufacturers and dealers, IDT is dependent upon companies other than Intel for
the design and manufacture of these components. There could be no assurance that
these third party designers and manufacturers, who may also be dependent upon
Intel for early access to Intel proprietary information regarding microprocessor
standards, will continue to gain such access or be able to compete with Intel,
which could have an adverse effect on IDT.
IDT's x86 Microprocessors Depend on the Socket 7 Infrastructure.
All sales of IDT's x86 microprocessor products since their introduction in
fiscal 1998 have been from products configured for the Socket 7 motherboard
infrastructure. Intel has effectively ceased support for the Socket 7
infrastructure in favor a new chip module and the new Socket 370 standard. IDT's
processor is designed to be Socket 7 compatible, and will not work with
motherboards designed for Intel's new chip module or Socket 370. If IDT and
other companies serving the x86 microprocessor market are not successful in
offering products that extend the life of the Socket 7 infrastructure, IDT would
be required to expend potentially significant resources to redesign its
microprocessor product offerings.
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The Market For x86 Microprocessors is Competitive, Particularly from Intel, and
has Short Product Life Cycles and Declining Prices.
The market for x86 microprocessors is highly competitive and characterized by
short product life cycles, rapid decreases in average selling prices and
migration to increasingly higher-performance microprocessors. IDT may be unable
to produce sufficient quantities of WinChip microprocessors at a competitive
cost and with the speed and other performance characteristics desired by
customers. Intel has held its dominant position over all other x86
microprocessor competitors for a substantial period of time, and has
significantly greater financial, technical, manufacturing and marketing strength
than IDT. Intel's financial strength and market dominance have enabled it to
reduce prices on its microprocessor products within a short period of time
following their introduction, which reduces the margins and profitability of its
competitors, including IDT. IDT does not have the financial resources to compete
with Intel on such a large scale. In addition to Intel, AMD and National
Semiconductor's Cyrix subsidiary also currently offer commercial quantities of
x86 microprocessors for sale.
In 1992, in exchange for payments toward product development costs, IDT licensed
the right to make, use and sell an initial version of the WinChip C6
microprocessor to a third party, NKK Corporation of Japan. Although NKK does not
have rights with respect to subsequent WinChip products, IDT may face
competition from NKK in the future.
Further, in fiscal 1999, IDT entered into a manufacturing and sales agreement
with a third party to manufacture and purchase from IDT WinChip products.
IDT has Limited Experience Manufacturing its x86 Microprocessor Products.
The pace at which IDT is able to enter its target market category for x86
microprocessors depends, in part, on how quickly it is able to ramp production
of its microprocessor products in its wafer fabrication and assembly and test
facilities. Before fiscal 1998, IDT had not previously manufactured x86
microprocessors and has processed only limited quantities of x86 microprocessors
to date. Therefore, as production volumes of x86 microprocessors increase, IDT
could encounter unexpected production problems or delays as a result of, among
other things, changes required to process technologies, product design
limitations, installation of equipment, and development of programs and
methodologies that test overall product quality. If IDT were unable to ramp
production of its x86 microprocessor successfully, IDT's operating results would
be adversely affected.
IDT's x86 Microprocessor Products must be Compatible with Software and
Performance Certifications.
IDT has obtained WinChip certifications from Microsoft Corporation and other
recognized testing organizations. Failure to obtain and maintain such
certifications for future microprocessor products could substantially impair the
Company's ability to market and sell its future x86 products.
IDT's Product Manufacturing Operations are Complex and Subject to Interruption.
From time to time, IDT has experienced production difficulties, including
reduced manufacturing yields or products that do not meet IDT's specifications,
that have caused delivery delays and quality problems. While production
deliveries and delays have been infrequent and generally short in duration, IDT
could experience manufacturing problems and product delivery delays in the
future as a result of, among other things, complexity of manufacturing
processes, changes to its process technologies, and ramping production and
installing new equipment at its facilities.
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IDT also has wafer fabrication facilities located in Salinas, California and, as
a result of the QSI merger, in Australia. If IDT were unable to use these
facilities, as a result of a natural disaster or otherwise, IDT's operations
would be materially adversely affected until the Company was able to obtain
other production capability. IDT does not carry earthquake insurance on its
facilities, as adequate protection is not offered at economically justifiable
rates.
Historically, IDT has utilized subcontractors for the majority of its
incremental assembly requirements, typically at higher costs than its own
Malaysian and Philippines assembly and test operations. IDT expects to continue
utilizing subcontractors extensively to supplement its own production volume
capacity. Due to production lead times, any failure by IDT to adequately
forecast the mix of product demand could adversely affect IDT's sales and
operating results.
IDT's Operating Results can be Substantially Impacted by Facility Expansion,
Utilization and Consolidation.
Facility and capacity additions have resulted in a significant increase in fixed
and variable operating expenses that may not be fully offset should revenues
decline. IDT records as R&D expense the operating costs associated with bringing
a new fabrication facility to commercial production status 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
IDT begins to recognize depreciation expense relating to the facility. As a
result of IDT's closure of the San Jose facility in fiscal 1999, IDT incurs
additional operating costs in Hillsboro as commercial production continues.
Accordingly, if current revenue levels are not maintained and cost savings from
closing the San Jose plant do not offset these additional expense levels, or if
IDT is unable to achieve gross margins from products produced at the Hillsboro
facility that are comparable to IDT's other products, IDT's future results of
operations could be adversely impacted.
The Company has announced plans to improve its operating results through
consolidation of certain manufacturing and other activities, together with
headcount reductions and other actions. For example, in fiscal 1999, IDT closed
its San Jose facility, resulting in a $46.4 million restructuring charge, and
revalued certain assets at its Hillsboro facility, resulting in a $131.9 million
asset impairment and other charge. The expected cost savings from these actions
might not be sufficient to return IDT to sustained profitability.
IDT's Results are Dependent on the Success of New Products.
New products and process technology costs associated with the Hillsboro wafer
fabrication facility will continue to require significant R&D expenditures.
However, the Company may not be able to develop and introduce new products in a
timely manner, its new products may not gain market acceptance, and it may not
be successful in implementing new process technologies. If IDT is unable to
develop new products in a timely manner, and to sell them at gross margins
comparable to or better than IDT's current products, its future results of
operations could be adversely impacted.
IDT is Dependent on a Limited Number of Suppliers.
IDT'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 IDT 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 IDT due to capacity constraints. IDT'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
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increases in the costs of raw materials.
From time to time, IDT contracts with third party semiconductor designers. As
with all new products, there is risk that IDT or its contractors will not be
successful in their efforts to design new products.
IDT May Require Additional Capital on Satisfactory Terms to Remain Competitive.
The semiconductor industry is extremely capital intensive. To remain
competitive, IDT must continue to invest in advanced manufacturing and test
equipment. IDT could be required to seek financing to satisfy its cash and
capital needs, and such financing might not be available on terms satisfactory
to IDT. If such financing is required and if such financing is not available on
terms satisfactory to IDT, its operations could be adversely affected.
Intellectual Property Claims Could Adversely Affect IDT's Business and
Operations.
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. IDT has been involved in patent
litigation in the past, which adversely affected its operating results. Although
IDT has obtained patent licenses from certain semiconductor manufacturers, IDT
does not have licenses from a number of semiconductor manufacturers that have a
broad portfolio of patents. IDT has been notified that it may be infringing on
patents issued to certain semiconductor manufacturers and other parties and is
currently involved in several license negotiations. Because the patents others
are asserting primarily involve manufacturing processes, revenues from
substantially all of IDT's products could be subject to the alleged infringement
claims. Additional claims alleging infringement of intellectual property rights
could be asserted in the future. The intellectual property claims that have been
made or that may be asserted against IDT could require that IDT 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. The Company might not be able to obtain such licenses
on acceptable terms or to develop non-infringing technology. Further, the
failure to renew or renegotiate existing licenses on favorable terms, or the
inability to obtain a key license, could adversely affect IDT.
International Operations Add Increased Volatility to IDT's Operating Results.
A substantial percentage of IDT's revenues are derived from non-U.S. sales.
During Q1 2000, fiscal 1999, fiscal 1998 and fiscal 1997, non-U.S. sales
accounted for 35%, 37%, 39% and 38% of IDT's revenues, respectively. During
these periods, Asia-Pacific sales accounted for 8%, 8%, 10% and 8% of IDT's
revenues, respectively. In addition, IDT's offshore assembly and test operations
incur payroll, facilities and other expenses in local currencies. Accordingly,
movements in foreign currency exchange rates, such as those seen recently in the
Far East, can impact both pricing and demand for IDT's products as well as its
cost of goods sold. IDT's offshore operations and export sales are also subject
to risks associated with foreign operations, including:
o political instability;
o currency controls and fluctuations;
o changes in local economic conditions and import and export controls; and
o changes in tax laws, tariffs and freight rates.
Contract pricing for raw materials used in the fabrication and assembly
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processes, as well as for subcontract assembly services, can also be impacted by
currency exchange rate fluctuations.
IDT is Subject to Risks Associated with Using Hazardous Materials in its
Manufacturing.
IDT is subject to a variety of environmental and other regulations related to
hazardous materials used in its manufacturing process. Any failure by IDT 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.
IDT's Common Stock is Subject to Price Volatility.
IDT's common stock has experienced substantial price volatility. Such volatility
may occur in the future, particularly as a result of quarter-to-quarter
variations in the actual or anticipated financial results of IDT, the companies
in the semiconductor industry or in the markets served by IDT and announcements
by IDT or its competitors regarding new product introductions. In addition, our
stock price can fluctuate due to price and volume fluctuations in the stock
market, especially those that have affected technology stocks.
Impact of Year 2000 on IDT's Operations.
Year 2000 Problem Defined. In brief, the Year 2000 problem is a programming
problem found in many computer applications that conform to older commonly
accepted standards. These applications might not function properly after
December 31, 1999 or after the start of a company's fiscal year 2000. The
problem dates back to the days when computer memory was limited and data storage
was expensive. To save space, some dates are stored using only two digits (1998
is stored as 98). This poses no problem when the "missing" digits are all the
same (e.g. 19). However, when two dates are compared, used in a calculation or
sorted and the dates span the January 1, 2000 boundary, problems can occur. For
example, 1999 is earlier than 2000, but without the first two digits, the result
would be that 00 is earlier than 99. The fact that most business software is
heavily dependent on dates means the problem is widespread. Some systems will
fail in very visible and obvious ways, but others will continue to process,
producing erroneous results which might not surface until later. The longer it
takes before these problems are found, the more difficult, and costly, they will
be to correct. All aspects of operations at any company could be impacted, from
financial to shipping, and even such areas as elevators and security systems can
be affected.
IDT utilizes numerous software programs throughout its operations that include
dates and make date-sensitive calculations based on two-digit fields which are
assumed to begin with the year 1900. Software programs written based on this
assumption are vulnerable, as the year 2000 approaches, to miscalculations and
other operational errors that may be significant to their overall effectiveness.
In addition, the Company relies upon products and information from critical
suppliers, large customers and other outside parties, in the normal course of
business, whose software programs are also subject to the same problem. Should
miscalculations or other operational errors occur as a result of the Year 2000
issue, IDT or the parties on which it depends may be unable to produce reliable
information or process routine transactions. Furthermore, in the worst case, IDT
or the parties on which it depends may, for an extended period of time, be
incapable of conducting critical business activities, which include but are not
limited to, manufacturing and shipping products, invoicing customers and paying
vendors.
IDT'S Approach. In October 1997, IDT engaged the services of Keane, Inc., a
software services firm with more than 30 years of relevant experience, to assist
in defining IDT's approach. To date, IDT has paid approximately $165,000 in
consulting fees to Keane. The methodology IDT is using consists of the
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following five phases:
o Inventory -- In this initial phase, an inventory is taken of all software
and hardware that may be affected by the Year 2000 problem.
o Impact assessment -- In the second phase, the impact of the Year 2000
problem is assessed for the items identified in the Inventory phase. The
assessment includes estimates of how large the impact really is, along with
rough estimates for fixing the problem.
o Strategy development and confirmation -- Using the information from the
previous two steps, IDT develops and maintains a strategy for each affected
item. This phase includes the development of any contingency plans that may
be required to mitigate IDT's risk in a particular area.
o Remediation plan -- In this phase, fixes necessary to bring hardware and
software into Year 2000 compliance are defined. This may include code
modifications, software upgrades, or hardware upgrades.
o Remediation and testing -- In this phase, Year 2000 affected items are
remediated and tested to verify their proper operation into the Year 2000
and beyond. IDT's rule is that any item in the critical business path must
be tested. While initial testing has been completed, there will be an
ongoing process of remediation followed by testing until all testing is
completed. The target date for all testing to be completed is August 1,
1999.
IDT has completed the Inventory, Impact Assessment, Strategy Development and
Confirmation and Remediation Plan phases of its Year 2000 plan. The Remediation
and Testing phase is in process as of the date of this filing.
IDT Products. IDT has completed an initial assessment of the extent to which
Year 2000 issues may be incorporated into products that it sells to its
customers. It did not find any Year 2000-related issues in products that IDT
sells to customers.
IDT Business Partners. IDT has contacted all of its major suppliers and other
critical business partners in an effort to identify and mitigate Year 2000
matters originating from third parties which may adversely affect IDT.
Contingency plans, if required, will be developed for transactions with
suppliers that appear to be lagging with their Year 2000 readiness programs.
This may include replacing these suppliers. IDT is currently reviewing supplier
responses and is obtaining additional information.
IDT Business Systems. Based on IDT's continuing assessment, IDT needs to replace
or materially modify many of its software applications, including those critical
to IDT's normal operations, in order to both meet IDT's business requirements
and avoid significant Year 2000 issues.
IDT is in the process of installing business and planning software licensed from
SAP America, Inc. and i2 Technologies, Inc. With the installation of these
software systems, and upgrades to a small number of in-house developed legacy
software applications, IDT believes its critical business systems will be Year
2000 compliant. In February 1999 IDT successfully brought the first portion of
the SAP implementation online.
By the year 2000, over a five-year period, IDT will have replaced substantially
all of its enterprise-wide systems. IDT has not allocated a portion of the total
project cost to the Year 2000 issue. While IDT continues to monitor its system
implementation costs, IDT does not believe the incremental project cost
associated with Year 2000 compliance to be material, as this feature is included
with software purchased by IDT to satisfy its business needs. Implementation
projects, dates and timelines have been determined primarily by IDT's expanding
and changing business requirements and have not been accelerated to date for
Year 2000 reasons.
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Manufacturing Systems. Manufacturing systems represent IDT's only significant
non-information technology (IT) systems. Each manufacturing site has taken an
inventory of its equipment and is working closely with the equipment vendors
regarding Year 2000 issues. The Company is awaiting software and/or hardware
upgrades from its vendors. It is IDT's goal to have all equipment compliant by
August 1999. While IDT is still negotiating with its manufacturing equipment
vendors, amounts paid to these vendors to obtain software upgrades to remediate
Year 2000 issues may approximate $400,000, including approximately $200,000
already incurred. Contingency plans include such techniques as rolling back the
date on equipment and custom upgrades and interfaces.
There can be no assurance that all critical Year 2000 problems have or will be
identified or that IDT will be able to procure all of the resources necessary to
replace all critical Year 2000-deficient software applications on a timely
basis. In addition, the critical Year 2000-deficient software programs of the
parties on which IDT depends might not be converted on a timely basis or could
be converted to systems that are incompatible with IDT's systems.
Worldwide Contingency Plans. IDT is in the process of developing worldwide
contingency plans in all critical business areas throughout the Company.
Requirements Associated with the Introduction of the Euro
IDT is in the process of addressing the issues raised by the introduction of the
Single European Currency (Euro) in January 1999. IDT does not expect the cost of
any system modifications to be material and does not currently expect that the
introduction and use of the Euro will materially affect its foreign exchange and
hedging activities or result in any material increase in transaction costs.
During the transition period, which will extend through January 1, 2000, the
Company will continue to evaluate the impact of the Euro. However, based on
currently available information, management does not believe that the
introduction of the Euro will have a material adverse impact on IDT's financial
condition or overall trends in results of operations.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports have been filed on Form 8-K during this quarter.
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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: August 5, 1999 /s/ Leonard C. Perham
---------------------------------------
Leonard C. Perham
Chief Executive Officer
(duly authorized officer)
Date: August 5, 1999 /s/ Alan F. Krock
---------------------------------------
Alan F. Krock
Vice President, Chief Financial Officer
(principal accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF INTEGRATED DEVICE TECHNOLOGY,
INC. AND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-02-2000
<PERIOD-START> MAR-29-1999
<PERIOD-END> JUN-27-1999
<CASH> 163,135
<SECURITIES> 62,439
<RECEIVABLES> 60,620 <F1>
<ALLOWANCES> 0
<INVENTORY> 53,781
<CURRENT-ASSETS> 361,051
<PP&E> 284,095 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 700,342
<CURRENT-LIABILITIES> 159,604
<BONDS> 180,327
0
0
<COMMON> 89
<OTHER-SE> 287,682
<TOTAL-LIABILITY-AND-EQUITY> 700,342
<SALES> 153,981
<TOTAL-REVENUES> 153,981
<CGS> 85,612
<TOTAL-COSTS> 85,612
<OTHER-EXPENSES> 27,039
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,656
<INCOME-PRETAX> 8,924
<INCOME-TAX> 446
<INCOME-CONTINUING> 8,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,478
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.09
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCE
<F2>ITEM SHOWN NET OF DEPRECIATION
</FN>
</TABLE>
