FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 26, 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 October 22, 1999, was approximately 91,057,000.
<PAGE>
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 Six months ended
---------------------- ----------------------
Sep. 26, Sep. 27, Sep. 26, Sep. 27,
1999 1998 1999 1998
---------------------- ----------------------
Revenues $ 173,544 $ 146,731 $ 327,525 $ 299,752
Cost of revenues 89,246 101,159 174,858 207,777
Restructuring charges, asset
impairment and other -- 178,328 -- 207,244
---------------------- ----------------------
Gross profit 84,298 (132,756) 152,667 (115,269)
---------------------- ----------------------
Operating expenses:
Research and development 28,443 39,156 55,482 81,301
Selling, general and
administrative 28,049 29,439 59,262 59,736
Merger expenses -- -- 4,840 --
---------------------- ----------------------
Total operating expenses 56,492 68,595 119,584 141,037
---------------------- ----------------------
Operating income (loss) 27,806 (201,351) 33,083 (256,306)
Interest expense (3,487) (3,885) (7,143) (7,389)
Interest income and other, net 18,278 1,580 25,581 3,010
---------------------- ----------------------
Income (loss) before income
taxes 42,597 (203,656) 51,521 (260,685)
Provision for income taxes 2,130 35,706 2,576 29,622
---------------------- ----------------------
Net income (loss) $ 40,467 $(239,362) $ 48,945 $(290,307)
====================== ======================
Basic net income (loss)
per share $ 0.45 $ (2.74) $ 0.55 $ (3.33)
Diluted net income (loss)
per share $ 0.41 $ (2.74) $ 0.51 $ (3.33)
Weighted average shares:
Basic 89,536 87,504 88,928 87,124
Diluted 97,693 87,504 95,111 87,124
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 2
<PAGE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS)
Sep. 26, Mar. 28,
1999 1999
------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 240,553 $ 144,598
Short-term investments 79,790 56,516
Accounts receivable, net 72,855 58,899
Inventories, net 63,236 60,787
Prepayments and other current assets 17,296 42,015
------------------------
Total current assets 473,730 362,815
Property, plant and equipment, net 253,686 299,235
Other assets 58,527 59,155
------------------------
TOTAL ASSETS $ 785,943 $ 721,205
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,978 $ 37,076
Accrued compensation and related expenses 26,508 16,736
Deferred income on shipments to
distributors 49,336 41,759
Other accrued liabilities 55,740 63,100
--------- ---------
Total current liabilities 167,562 158,671
Convertible subordinated notes, net 180,221 184,354
Other liabilities 97,147 78,854
------------------------
Total liabilities 444,930 421,879
Stockholders' equity:
Preferred stock -- --
Common stock and additional paid-in capital 386,109 372,988
Treasury stock -- (1,638)
Accumulated deficit (42,018) (68,315)
Accumulated other comprehensive loss (3,078) (3,709)
------------------------
Total stockholders' equity 341,013 299,326
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 785,943 $ 721,205
========================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
<PAGE>
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
Six Months Ended
----------------------
Sep. 26, Sep. 27,
1999 1998
----------------------
OPERATING ACTIVITIES:
Net income (loss) $ 48,945 $(290,307)
Adjustments:
Depreciation and amortization 44,583 68,029
(Gain) loss on sale of property, plant and
equipment (12,425) 792
Deferred tax assets -- 29,169
Restructuring, asset impairment and other -- 179,428
Changes in assets and liabilities:
Accounts receivable (14,759) 18,710
Inventories (5,588) 5,428
Prepayments and other assets 5,856 14,494
Accounts payable (374) (21,572)
Accrued compensation and related expenses 10,012 (2,216)
Deferred income on shipments to distributors 7,576 (12,824)
Deferred revenue 32,033 --
Other accrued liabilities (946) 36,999
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 114,913 26,130
----------------------
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 (38,804) (81,364)
Proceeds from sales of property, plant and
equipment 43,714 1,354
Purchases of short-term investments (43,037) (38,503)
Proceeds from sales of short-term investments 17,321 42,088
----------------------
NET CASH USED FOR INVESTING ACTIVITIES (21,952) (76,425)
----------------------
FINANCING ACTIVITIES:
Issuance of common stock, net 14,553 4,804
Proceeds from secured equipment financing -- 33,164
Payments on capital leases and other debt (11,559) (8,576)
----------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,994 29,392
----------------------
Net increase (decrease) in cash and cash
equivalents 95,955 (20,903)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 144,598 155,517
----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 240,553 $ 134,614
======================
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.
Page 4
<PAGE>
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 six-month period ended September 26, 1999 are not
necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to prior-period balances, none of which
affected the Company's financial position or results of operations, to present
the financial statements on a consistent basis.
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
was 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
and balance sheet 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 fiscal 1999, the results of operations of IDT for the three- and six-month
periods ended September 27, 1998 have been combined with the results of
operations of QSI for the three- and six-month periods ended March 31, 1998,
respectively. 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.
Page 5
<PAGE>
Three months ended September 27, 1998
(In thousands)
IDT QSI Total
--------- --------- ---------
Total revenue $ 130,635 $ 16,096 $ 146,731
Net loss $(237,085) $ (2,277) $(239,362)
Six months ended September 27, 1998
(In thousands)
IDT QSI Total
--------- --------- ---------
Total revenue $ 265,122 $ 34,630 $ 299,752
Net loss $(287,041) $ (3,266) $(290,307)
Through September 26, 1999, IDT incurred $5.8 million in merger-related costs,
including $1.0 million in fiscal 1999 and $4.8 million in fiscal 2000. Of this
amount, $4.6 million related to payments for severance, retention and
change-of-control agreements. The remainder consisted primarily of accounting
and legal fees and printing costs.
Note 3 - Restructuring Charges, Asset Impairment and Other
During the first six months of fiscal 1999, the Company recorded $207.2 million
of charges in cost of revenues relating primarily to asset impairment,
restructuring associated with closure of a manufacturing facility and costs
associated with certain technology licensing matters. 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.
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 represented the writedown 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.
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.
Page 6
<PAGE>
The following table sets forth the Company's restructuring activities through
September 26, 1999:
Balance Balance
Mar. 28, Sep. 26,
1999 Utilized Adjustments 1999
------- -------- ----------- -------
Write-down of fixed assets $ -- $ -- $ -- $ --
Severance and other employee
related charges 300 (212) (88) --
Closure costs for
manufacturing facility 5,232 (3,096) -- 2,136
------- -------- ------- -------
$ 5,532 $(3,308) $ (88) $ 2,136
======= ======== ======= =======
As of September 26, 1999, the net book value of equipment held for sale
aggregated $0.9 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
remaining surplus equipment.
Also in the second quarter of fiscal 1999, the Company recorded a $131.9 million
asset impairment and other charge which related primarily to an asset impairment
reserve recorded against the manufacturing assets of IDT's eight-inch wafer
fabrication facility in Hillsboro, Oregon. The Company determined that due to
excess industry capacity and low prices for semiconductor products manufactured
in the Hillsboro facility, future undiscounted cash flows related to its wafer
fabrication assets were insufficient to recover the carrying value of the
assets. As a result, the Company wrote down these assets to estimated fair
market value based primarily on appraisals and estimates from independent
parties. Of the $131.9 million, $5.0 million is to settle certain patent claims
against the Company.
Additionally, the Company recorded a charge of $3.3 million relating primarily
to retention costs for manufacturing and research and development staff employed
at the San Jose fabrication facility which were recorded as cost of revenues and
research and development expenses in the Condensed Consolidated Statements of
Operations.
Page 7
<PAGE>
Note 4 - Earnings Per Share
Basic and diluted net income (loss) per share are computed using
weighted-average common shares outstanding in accordance with Statements of
Financial Accounting Standards (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 Six months ended
---------------------- ---------------------
(in thousands except per Sep. 26, Sep. 27, Sep. 26, Sep. 27,
share amounts) 1999 1998 1999 1998
---------------------- ---------------------
Basic:
Net income (loss)(numerator) $ 40,467 $ (239,362) $ 48,945 $(290,307)
====================== =====================
Weighted average shares
outstanding (denominator) 89,536 87,504 88,928 87,124
====================== =====================
Net income (loss) per share $ 0.45 $ (2.74) $ 0.55 $ (3.33)
====================== =====================
Diluted:
Net income (loss)(numerator) $ 40,467 $ (239,362) $ 48,945 $(290,307)
====================== =====================
Weighted average shares
outstanding 89,536 87,504 88,928 87,124
Net effect of dilutive stock
options 8,157 -- 6,183 --
---------------------- ---------------------
Total shares (denominator) 97,693 87,504 95,111 87,124
====================== =====================
Net income (loss) per share $ 0.41 $ (2.74) $ 0.51 $ (3.33)
====================== =====================
Total stock options outstanding, including antidilutive options, were 20.7
million and 20.2 million at September 26, 1999 and September 27, 1998,
respectively. The Company's convertible debt was not dilutive in any of the
periods presented.
Page 8
<PAGE>
Note 5 - Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
Three months ended Six months ended
(in thousands) --------------------- ----------------------
Sep. 26 Sep. 27 Sep. 26 Sep. 27
1999 1998 1999 1998
--------------------- ----------------------
Net income (loss) $ 40,467 $(239,362) $ 48,945 $(290,307)
Currency translation
adjustments 495 128 1,173 (410)
Unrealized gain (loss) on
available-for-sale
investments 251 812 (542) 894
--------------------- ----------------------
Comprehensive income (loss) $ 41,213 $(238,422) $ 49,576 $(289,823)
===================== ======================
The components of accumulated other comprehensive loss (not tax affected) were
as follows:
Sep. 26, Mar. 28,
(in thousands) 1999 1999
----------------------
Cumulative translation adjustments $(2,484) $(3,657)
Unrealized loss on available-for-sale
investments (594) (52)
----------------------
$(3,078) $(3,709)
======================
Note 6 - New Accounting Pronouncements
In July 1999, the Financial Accounting Standards Board (FASB) issued SFAS No.
137, "Deferral of the Effective Date of SFAS No. 133" which defers the effective
date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Company plans to adopt SFAS No. 133 as of the beginning of
fiscal 2002. 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:
Sep. 26, Mar. 28,
(in thousands) 1999 1999
----------------------
Raw materials $ 3,520 $ 5,986
Work-in-process 42,755 36,995
Finished goods 16,961 17,806
----------------------
$ 63,236 $ 60,787
======================
Page 9
<PAGE>
Note 8 - Industry Segments
The Company has three reportable segments: Communications and High-Performance
Logic, SRAMs, 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 segment consists mainly of high-speed SRAMs. The tables below provide
information about these segments for the three- and six-month periods ended
September 26, 1999 and September 27, 1998:
Revenues by Segment
(in thousands)
Three months ended Six months ended
Sep. 26, Sep. 27, Sep. 26, Sep. 27,
1999 1998 1999 1998
---------------------- ------------------
Communications and
High-Performance Logic $119,949 $107,807 $233,123 $227,839
SRAMs 42,469 30,282 79,914 60,029
x86 Microprocessors 2,659 8,642 6,021 11,884
All Other 8,467 -- 8,467 --
--------------------- --------------------
Total consolidated revenues $173,544 $146,731 $327,525 $299,752
===================== ====================
Profit (loss) by Segment
(in thousands)
Three months ended Six months ended
Sep. 26, Sep. 27, Sep. 26, Sep. 27,
1999 1998 1999 1998
---------------------- ------------------
Communications and
High-Performance Logic $ 25,144 $ 21,471 $ 50,823 $ 47,475
SRAMs (5,082) (33,450) (16,551) (60,734)
x86 Microprocessors (723) (2,398) (9,656) (20,734)
All Other 8,467 -- 8,467 --
Restructuring charges, asset
impairment and other -- (178,328) -- (207,244)
Other nonrecurring costs -- (8,646) -- (15,069)
Interest income and other 18,278 1,580 25,581 3,010
Interest expense (3,487) (3,885) (7,143) (7,389)
--------------------- --------------------
Income (loss) before income taxes $ 42,597 $(203,656) $ 51,521 $(260,685)
===================== ====================
Revenues and costs on the "All Other" line of the table above relate primarily
to revenues from broad licensing agreements, which the Company does not allocate
to other segments. The Company expects to cease sales of x86 Microprocessor
products during calendar 2000.
Page 10
<PAGE>
Note 9 - Licensing Agreements and Sales of Assets
In September 1999, the Company completed the sale of x86 intellectual property
and its Centaur x86 microprocessor design subsidiary, located in Austin, Texas,
to VIA Technologies Inc. ("VIA"), a Taiwanese company, and its partners for an
aggregate amount of $31 million. The design subsidiary consisted mainly of x86
related employees and property, plant and equipment. IDT and VIA also entered
into a patent cross license agreement relating to certain non-x86 IDT patents
under which IDT received $20 million.
The Company recorded a pretax gain of $19.6 million, net of transaction costs,
upon closure of the sale transaction. The Company has also deferred $20.0
million in future revenue related to the cross license agreement, which will be
recognized ratably over the average life of the patents, which approximates
seven years.
During the quarter ended September 26, 1999, the Company also entered into an
intellectual property cross license agreement with Intel Corporation for $20.5
million, $8.5 million of which was recognized currently as revenue. The
remaining cross license fee will be recognized ratably over the average
remaining life of the patents, which approximates seven years.
Note 10 - Related Party Transactions
During fiscal 1998, a director of the Company acted as an uncompensated agent on
behalf of a subsidiary of the Company in acquiring parcels of land for future
corporate development. As of March 28, 1999, the Company owed the director $11.5
million, representing the purchase price of the land. In September 1999, that
subsidiary of the Company sold the land at its acquisition price to Acquisition
Technology, Inc., of which the director is president.
Page 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All references are to the Company's fiscal quarters ended September 26, 1999
("Q2 2000"), June 27, 1999 ("Q1 2000"), and September 27, 1998 ("Q2 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 the first six months of fiscal 1999, IDT recorded $207.2 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."
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 costs of such advanced wafer manufacturing technology
and capability are 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.
Page 12
<PAGE>
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 levels 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
expanding the range of its products manufactured at Hillsboro, and, as noted
above, has increased 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, and IDT has since sold some of its x86 related assets). In
fiscal 1999, the pricing of industry standard SRAM and x86 products manufactured
by the Company 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.
In fiscal 1999, 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 from fiscal 1999 levels, in fiscal 1999, the timing and degree of
any such recovery was 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 these 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.
Page 13
<PAGE>
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 Q2 2000 were $173.5 million, an increase of $19.6 million compared
to the $154.0 million recorded in Q1 2000, and an increase of $26.8 million over
revenues of $146.7 reported for Q2 1999. Revenues for the first six months of
fiscal 2000 were $327.5 million, a $27.8 million increase over the comparable
period in fiscal 1999. Included in Q2 2000 revenue is approximately $8.5 million
which represents currently recognized revenue associated with an intellectual
property cross license with Intel Corporation ("Intel"). In Q2 2000, IDT entered
into a cross license with Intel and received as consideration $20.5 million. The
remaining revenue associated with the cross license with Intel is being
recognized over the estimated useful life of the relevant intellectual property.
Revenue associated with the ongoing operations of the Company was $165.1
million.
Excluding the effect of intellectual property licensing revenues, the increase
in quarterly and six- month revenues to $165.1 million and $319.0 million,
respectively, is primarily the result of increased sales of semiconductor
products to IDT's Communications and High Performance Logic and SRAM customers,
partially offset by a decline in sales of x86 Microprocessor products. Sales of
IDT's Communications and High Performance Logic and SRAM products increased in
the quarter and six-month periods ended Q2 2000, primarily because of increased
volumes of products sold. Sales of x86 microprocessor products for the quarter
and six months ended Q2 2000 declined to $2.7 million and $6.0 million,
respectively, and were $8.6 million and $11.9 million in the comparable periods
of fiscal 1999. In calendar 2000, IDT intends to cease selling x86 products,
except where required to do so by contract. IDT does not expect x86 sales
volumes, if any, under existing contracts to be significant. 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, assuming that overall levels of industry demand continue to improve.
Excluding any potential risks and costs to combine QSI manufacturing operations
with IDT's manufacturing operations, the merger of QSI into the Company is
essentially complete and expected to continue 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 Q2 2000 was $84.3 million, compared to gross profit of $68.4
million in Q1 2000 and a loss of $132.8 million in Q2 1999. Gross profit for the
first six months of fiscal 2000 increased by $267.9 million compared to the same
period in the previous fiscal year. Excluding restructuring charges, asset
impairment and other costs, IDT's gross profit as a percentage of revenues
improved in both the quarter and six-month period ended Q2 2000. Gross profit as
a percentage of revenues also improved in Q2 2000 over the comparable percentage
for Q1 2000. As a percentage of revenues, gross profit was 46.3% on an operating
basis in Q2 2000, 44.4% in Q1 2000 and 45.4% for the six-month period ended Q2
2000. In fiscal 1999, the comparable percentages were 31.1% for Q2 1999 and
30.7% for the six-month period ended Q2 1999.
IDT's gross margin has improved in fiscal 2000 over comparable periods in fiscal
1999 because of higher revenues, increased unit sales, and the consolidation of
fabrication production volumes in fiscal 1999, including the closure of one
fabrication facility. Consolidation of production volumes has allowed IDT to
improve utilization of its remaining fabrication facilities, resulting in a
lower overall cost per unit produced. IDT's gross margin has also improved in
fiscal 2000 over fiscal 1999 because a reduction in depreciation expense
resulting from lower carrying values of impaired manufacturing assets.
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). In Q4 1999, the Company reversed
$3 million of the technology licensing costs upon favorable settlement of
certain of these matters. 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 Q2 2000, the net book value of assets held for sale totaled $0.9
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 Q2 2000, the Company also recorded a $131.9 million asset impairment and
other charge which related primarily to an asset impairment reserve recorded
against the manufacturing assets of IDT's eight-inch wafer fabrication facility
in Hillsboro. The Company determined that due to excess industry capacity and
low prices for semiconductor products manufactured in the Hillsboro facility,
future undiscounted cash flows related to its wafer fabrication assets were
insufficient to recover the carrying value of the assets. As a result, the
Company wrote down these assets to estimated fair market value based primarily
on appraisals and estimates from independent parties. Of the $131.9 million,
$5.0 million is to settle certain patent claims against the Company.
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The Company realized 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 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 was reduced by approximately $25
million.
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 increase
revenue or decrease costs per unit sold, the Company's gross profit would be
adversely impacted. Further, if prices on new or existing 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.
RESEARCH AND DEVELOPMENT
For Q2 2000, research and development ("R&D") expenses increased by $1.4 million
from Q1 2000 and decreased by $10.7 million compared to Q2 1999. R&D expenses
decreased by $25.8 million for the first six months of fiscal 2000 compared to
the first six months of fiscal 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. R&D expenses for
Q2 1999 included $.6 million in costs, primarily associated with retention costs
earned by research and development staff during Q2 1999 which are employed at
the San Jose fabrication facility.
R&D expenses in the six month period ended Q2 2000 were lower than the
comparable period in fiscal 1999 primarily because of reduced process R&D
associated with the closure of IDT's San Jose, California wafer fabrication
facility which was closed during the consolidation of IDT's fabrication
facilities discussed above. The allocation of manufacturing costs associated
with process R&D has decreased in fiscal 2000 as a result of fewer fabrication
facilities and continued improved manufacturing facility utilization at the
remaining facilities.
Management expects that in the coming quarters, R&D expense will decrease as a
result of the sale of the Austin x86 microprocessor design center during Q2
2000. 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.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses decreased by $1.4 million
and $3.2 million for Q2 2000 compared to Q1 2000 and Q2 1999, respectively. For
the first six months of fiscal 2000, SG&A expenses decreased by $0.5 million
compared to the first six months of fiscal 1999. The decrease in SG&A in Q2 2000
when compared to Q1 2000 is primarily attributable to the non-recurring nature
of the merger expenses, described below, which were recorded as SG&A in Q1 2000.
The Company expects that in the coming quarters recurring SG&A expenses will
remain relatively constant with Q2 2000 levels, except for costs such as sales
commissions and sales bonuses which will vary in relation to sales volumes. Upon
the completion of management information systems implementation projects,
anticipated to occur within calendar 1999, 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. The
Company incurred no merger-related expenses in Q2 2000.
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 $3.5 million for
Q2 2000 was essentially unchanged compared to Q1 2000 and Q2 1999. Interest
expense for the six months ended September 26, 1999 was also essentially
unchanged compared to the same period one year earlier.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, was $18.3 million in Q2 2000, an increase of
$11.0 million and $16.7 million compared to Q1 2000 and Q2 1999, respectively.
Interest income and other, net for the six months ended September 26, 1999
increased by $22.6 million compared to the same period in fiscal 1999.
The increases in interest income and other, net, in fiscal 2000 compared to
fiscal 1999 were mainly the result of gains of $19.6 million related to the sale
of IDT's Centaur design subsidiary and WinChip processor intellectual property
in Q2 2000. In Q2 2000, partially offsetting gains associated with these asset
sales was a provision for a loan to an investee company. The Company also
recognized a gain of $4.6 million gain on the sale of its closed San Jose
facility in Q1 2000.
TAXES
The Company's effective tax rate for Q1 2000 and Q2 2000 was 5%. Tax expense for
Q2 1999 of $35.7 million was primarily due to a reserve taken against the value
of the Company's net deferred assets. The Company realized no federal tax
benefit in fiscal 1999 as a whole because of IDT's inability to carry back
losses. IDT expects that its effective tax rate in future fiscal years will be
higher than the rate for fiscal 2000. The tax rate in future years will be
dependent on IDT's level of profitability and the ability of the Company to
recognize deferred tax assets.
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LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1999, cash and cash equivalents were $240.6 million, an
increase of $96.0 million from $144.6 million at March 28, 1999. Additionally,
the Company had short-term investments of $79.8 million and $56.5 million at
September 26, 1999 and March 28, 1999, respectively.
The Company generated $114.9 million in cash from operating activities during
the first two quarters of fiscal 2000, up from $26.1 million for the same period
in fiscal 1999. In Q2 2000, the Company received $20.5 million from Intel in
connection with a cross license agreement. Of this amount, $8.5 million was
recorded as revenue in Q2 2000 and the remainder as deferred revenue. Deferred
revenue also includes $20 million received from VIA Technologies in Q2 2000
under another license agreement (see Note 9 of Notes to Condensed Consolidated
Financial Statements).
During Q2 2000, IDT loaned $10 million to an investee company. The loan will
provide the investee with the ability to continue its development activities
while seeking other sources of long term funding.
During the first two quarters of fiscal 2000, the Company's net cash used for
investing activities was $22.0 million, including $38.8 million for capital
expenditures. The Company received $43.7 million in proceeds from sales 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, and assets associated with the
Company's x86 design subsidiary.
Financing activities provided $3.0 million during the first six months of fiscal
2000. Financing activities included the repurchase and retirement of 5.5%
Convertible Subordinated Notes for $3.5 million. The notes had a face value of
$4.5 million. The Company may retire additional portions of the notes from time
to time, as authorized by the Board of Directors.
Cash provided by financing activities was $29.4 million in the first six months
of fiscal 1999, due mainly to several equipment financing transactions during Q1
1999. The Company entered into capital leases under which it sold certain
previously purchased manufacturing equipment to leasing companies which leased
them back to IDT for use at the Hillsboro fabrication facility. These lease
transactions generated $19.0 million in cash proceeds. The Company also entered
into other capital leases for manufacturing equipment in Q1 1999. 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 Hillsboro
facility with a net book value of $11.9 million was sold and leased back for use
at the Hillsboro 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 $50 million during the
second half 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.
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 the remainder of 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.
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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 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
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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'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.
IDT also has wafer fabrication facilities located in Salinas, California and, as
a result of the QSI merger, in eastern Australia. Substantially all of IDT's
revenues are derived from products manufactured at facilities which are exposed
to the risk of natural disasters, including earthquakes. 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
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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
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.
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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 the first six months of fiscal 2000, fiscal 1999, fiscal 1998 and fiscal
1997, non-U.S. sales accounted for 37%, 37%, 39% and 38% of IDT's revenues,
respectively. During these periods, Asia-Pacific sales accounted for 9%, 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 itstability;
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
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
The Company, like many other companies, is subject to the risks associated with
the Year 2000. If IDT's, its suppliers' or its customers' business systems do
not correctly process date information beyond December 31, 1999, there could be
an adverse impact on IDT's business. IDT is taking steps to minimize the risk to
its business.
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
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company could be impacted, from financial to shipping, and even such areas as
elevators and security systems can be affected.
Many companies utilize software programs throughout their 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. 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 subject to this 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 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.
All critical business and manufacturing systems have been inventoried, the Year
2000 impact assessed, remediation plans developed and implemented and the
systems tested. IDT will maintain the systems to ensure continued Year 2000
compliance. IDT has completed the installation of business and planning software
licensed from SAP America, Inc. and i2 Technologies, Inc. IDT believes its
critical business and manufacturing systems, i.e. all systems that are essential
for IDT's continued operations, are now Year 2000 ready.
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IDT Products. IDT has assessed all of its products, including the products
acquired by IDT through its April 1999 acquisition of QSI. No Year 2000 related
issues exist with any of IDT's products. Although IDT's products are not
designed to store or manipulate dates, all other technology and products used in
conjunction with the IDT product must be Year 2000 compliant to ensure proper
exchange of date data.
IDT Business Partners. IDT has made inquiries of its major suppliers and has
received responses to these inquiries from 100 percent of its critical
suppliers. IDT, either individually or with the assistance of third parties, is
auditing its major suppliers regarding their Year 2000 readiness. Follow-up
activities seek to determine whether the supplier is taking all appropriate
steps to fix Year 2000 problems and be prepared to continue functioning
effectively as a supplier in accordance with IDT's standards and requirements.
To the extent possible, IDT has been working with the infrastructure suppliers
for its manufacturing sites and transportation carriers to seek to ensure
continuity of services. Contingency planning regarding major infrastructure
failure generally includes considering increasing inventory levels above normal
reserves and evaluating the need to locate inventory in other geographic
locations.
Unfortunately, it is not possible to identify or avoid all possible scenarios.
However, with its contingency planning, IDT is assessing various scenarios and
attempting to mitigate their impact, should such scenarios occur. Due to the
large number of variables, including those over which IDT has little or no
control, IDT is unable to provide an estimate of the damage that might occur
should one or more of the scenarios take place.
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. Manufacturing systems represent IDT's only significant
non-information technology (IT) systems. Amounts paid to manufacturing equipment
vendors to obtain software upgrades to remediate Year 2000 issues will
approximate $400,000.
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.
Page 24
<PAGE>
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:
On July 26, 1999, the Company filed a Form 8-K to announce, under Item 5, the
appointment of Jerry Taylor as president and as a member of the board of
directors. No financial statements were filed.
Page 25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED DEVICE TECHNOLOGY, INC.
Date: November 9, 1999 /s/ JERRY G. TAYLOR
---------------------------------------
Jerry G. Taylor
President
(duly authorized officer)
Date: November 9, 1999 /s/ ALAN F. KROCK
---------------------------------------
Alan F. Krock
Vice President, Chief Financial Officer
(principal accounting officer)
Page 26
<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 IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-02-2000
<PERIOD-START> MAR-29-1999
<PERIOD-END> SEP-26-1999
<CASH> 240,553
<SECURITIES> 79,790
<RECEIVABLES> 72,855<F1>
<ALLOWANCES> 0
<INVENTORY> 63,236
<CURRENT-ASSETS> 473,730
<PP&E> 253,686<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 785,943
<CURRENT-LIABILITIES> 167,562
<BONDS> 180,221
91
0
<COMMON> 0
<OTHER-SE> 340,922
<TOTAL-LIABILITY-AND-EQUITY> 785,943
<SALES> 327,525
<TOTAL-REVENUES> 327,525
<CGS> 174,858
<TOTAL-COSTS> 174,858
<OTHER-EXPENSES> 55,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,143
<INCOME-PRETAX> 51,521
<INCOME-TAX> 2,576
<INCOME-CONTINUING> 48,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,945
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.51
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCE
<F2>ITEM SHOWN NET OF DEPRECIATION
</FN>
</TABLE>
