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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 December 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 January 21, 2000, was approximately 93,534,200.
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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 Nine months ended
------------------- --------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1999 1998 1999 1998
-------------------- --------------------
Revenues $ 176,698 $ 149,705 $ 504,223 $ 449,457
Cost of revenues 91,488 95,198 266,346 302,975
Restructuring charges, asset
impairment and other (3,783) -- (3,783) 207,244
--------- --------- -------- ----------
Gross profit 88,993 54,507 241,660 (60,762)
--------- --------- -------- ----------
Operating expenses:
Research and development 26,397 31,990 81,879 113,291
Selling, general and
administrative 28,702 29,015 87,964 88,751
Merger expenses -- -- 4,840 --
--------- --------- -------- ----------
Total operating expenses 55,099 61,005 174,683 202,042
--------- --------- -------- ----------
Operating income (loss) 33,894 (6,498) 66,977 (262,804)
Interest expense (3,424) (3,893) (10,567) (11,282)
Interest income and other, net 2,405 561 27,986 3,571
--------- --------- -------- ----------
Income (loss) before income
taxes 32,875 (9,830) 84,396 (270,515)
Provision for income taxes 1,644 155 4,220 29,777
--------- --------- -------- ----------
Net income (loss) $ 31,231 $ (9,985) $ 80,176 $(300,292)
========= ========= ======== ==========
Basic net income (loss)
per share $ 0.34 $ (0.11) $ 0.89 $ (3.44)
Diluted net income (loss)
per share $ 0.31 $ (0.11) $ 0.83 $ (3.44)
Weighted average shares:
Basic 91,571 87,468 89,809 87,239
Diluted 99,630 87,468 97,100 87,239
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)
Dec. 26, Mar. 28,
1999 1999
-------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 153,668 $ 144,598
Short-term investments 193,051 56,516
Accounts receivable, net 86,763 58,899
Inventories, net 68,259 60,787
Prepayments and other current assets 15,961 42,015
--------- ---------
Total current assets 517,702 362,815
Property, plant and equipment, net 266,256 299,235
Other assets 55,614 59,155
--------- ---------
TOTAL ASSETS $ 839,572 $ 721,205
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,027 $ 37,076
Accrued compensation and related expenses 22,742 16,736
Deferred income on shipments to
distributors 59,450 41,759
Other accrued liabilities 47,010 63,100
--------- ---------
Total current liabilities 174,229 158,671
Convertible subordinated notes, net 180,367 184,354
Other liabilities 99,372 78,854
--------- ---------
Total liabilities 453,968 421,879
Stockholders' equity:
Preferred stock -- --
Common stock and additional paid-in capital 400,245 372,988
Treasury stock -- (1,638)
Accumulated deficit (10,787) (68,315)
Accumulated other comprehensive loss (3,854) (3,709)
--------- ---------
Total stockholders' equity 385,604 299,326
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 839,572 $ 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)
Nine Months Ended
-----------------------
Dec. 26, Dec. 27,
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 80,176 $(300,292)
Adjustments:
Depreciation and amortization 66,610 90,633
(Gain) loss on sale of property, plant and
equipment (11,815) 835
Deferred tax assets -- 28,813
Restructuring, asset impairment and other -- 179,428
Changes in assets and liabilities:
Accounts receivable (28,667) 18,477
Inventories (10,611) 12,030
Prepayments and other assets 10,751 14,941
Accounts payable 8,675 (27,336)
Accrued compensation and related expenses 6,246 (2,503)
Deferred income on shipments to distributors 17,690 (17,966)
Deferred revenue 32,033 --
Other accrued liabilities (13,232) 28,479
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 157,856 25,539
--------- ---------
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 (65,117) (98,123)
Proceeds from sales of property, plant and
equipment 43,869 1,558
Purchases of short-term investments (159,614) (86,453)
Proceeds from sales of short-term investments 19,849 70,211
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (162,159) (112,807)
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock, net 28,689 6,651
Repurchase of common stock -- (4,786)
Proceeds from secured equipment financing -- 31,993
Payments on capital leases and other debt (15,316) (14,115)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,373 19,743
--------- ---------
Net increase (decrease) in cash and cash
equivalents 9,070 (67,525)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 144,598 155,517
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 153,668 $ 87,992
========= =========
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 nine-month period ended December 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 differed, 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 nine-month
periods ended December 27, 1998 have been combined with the results of
operations of QSI for the three- and nine-month periods ended June 30, 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.
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Three months ended December 27, 1998
(In thousands)
IDT QSI Total
--------- --------- ---------
Total revenue $ 135,690 $ 14,015 $ 149,705
Net loss $ (4,578) $ (5,407) $ (9,985)
Nine months ended December 27, 1998
(In thousands)
IDT QSI Total
--------- --------- ---------
Total revenue $ 400,812 $ 48,645 $ 449,457
Net loss $(291,619) $ (8,673) $(300,292)
Through December 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 settlement of certain of those matters. In the
third quarter of fiscal 2000, the Company reversed an additional $3.8 million in
charges, due to the settlement of certain technology licensing and other
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 comprised 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.
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The following table sets forth the Company's restructuring activities through
December 26, 1999:
Balance Balance
Mar. 28, Dec. 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) $ (2,224) $ --
======= ======== ======== =======
The Company has completed its exit plan for the San Jose facility. Adjustments
include a $0.8 million reversal related to the settlement of a dispute, which is
included in pretax income for the period ended December 26, 1999. The Company
has also reclassified a portion of the closure-costs reserve to cover long-term
environmental indemnification for the San Jose plant.
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 was to settle certain patent claims
against the Company.
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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 Statements of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Diluted net
income per share also considers 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 Nine months ended
-------------------- --------------------
(in thousands except per Dec. 26, Dec. 27, Dec. 26, Dec. 27,
share amounts) 1999 1998 1999 1998
-------------------- --------------------
Basic:
Net income (loss)(numerator) $ 31,231 $ (9,985) $ 80,176 $(300,292)
========= ========= ========= =========
Weighted average shares
outstanding (denominator) 91,571 87,468 89,809 87,239
========= ========= ========= =========
Net income (loss) per share $ 0.34 $ (0.11) $ 0.89 $ (3.44)
========= ========= ========= =========
Diluted:
Net income (loss)(numerator) $ 31,231 $ (9,985) $ 80,176 $(300,292)
========= ========= ========= =========
Weighted average shares
outstanding 91,571 87,468 89,809 87,239
Net effect of dilutive stock
options 8,059 -- 7,291 --
--------- --------- --------- ---------
Total shares (denominator) 99,630 87,468 97,100 87,239
========= ========= ========= =========
Net income (loss) per share $ 0.31 $ (0.11) $ 0.83 $ (3.44)
========= ========= ========= =========
Total stock options outstanding, including antidilutive options, were 17.5
million and 18.8 million at December 26, 1999 and December 27, 1998,
respectively. The Company's convertible debt was not dilutive in any of the
periods presented.
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Note 5 - Comprehensive Income (Loss)
The components of comprehensive income (loss) were as follows:
Three months ended Nine months ended
(in thousands) -------------------- ---------------------
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1999 1998 1999 1998
-------------------- ---------------------
Net income (loss) $ 31,231 $ (9,985) $ 80,176 $(300,292)
Currency translation adjustments 12 (1,297) 1,185 (1,707)
Unrealized gain (loss) on
available-for-sale investments (788) (806) (1,330) 88
--------- --------- --------- ---------
Comprehensive income (loss) $ 30,455 $ (12,088) $ 80,031 $(301,911)
========= ========= ========= =========
The components of accumulated other comprehensive loss (not tax affected) were
as follows:
Dec. 26, Mar. 28,
(in thousands) 1999 1999
--------- --------
Cumulative translation adjustments $ (2,472) $ (3,657)
Unrealized loss on available-for-sale
investments (1,382) (52)
--------- --------
$ (3,854) $ (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
evaluating the impact of SFAS No. 133 but currently does not expect any material
effects on its financial position or results of operations.
Note 7 - Inventories, Net
Inventories, net, consisted of the following:
Dec. 26, Mar. 28,
(in thousands) 1999 1999
--------- --------
Raw materials $ 5,311 $ 5,986
Work-in-process 38,312 36,995
Finished goods 24,636 17,806
--------- --------
$ 68,259 $ 60,787
========= ========
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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-
and nine-month periods ended December 26, 1999 and December 27, 1998:
Revenues by Segment
(in thousands)
Three months ended Nine months ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1999 1998 1999 1998
-------- -------- -------- ---------
Communications and
High-Performance Logic $123,855 $106,339 $356,978 $ 334,178
SRAMs and Other 49,524 31,534 137,905 91,563
x86 Microprocessors 3,319 11,832 9,340 23,716
-------- -------- -------- ---------
Total consolidated revenues $176,698 $149,705 $504,223 $ 449,457
======== ======== ======== =========
Profit (loss) by Segment
(in thousands)
Three months ended Nine months ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1999 1998 1999 1998
-------- --------- -------- --------
Communications and
High-Performance Logic $ 32,872 $ 19,753 $ 83,695 $ 67,228
SRAMs and Other (2,322) (23,422) (10,406) (84,156)
x86 Microprocessors (439) 1,784 (10,095) (18,950)
Restructuring charges, asset
impairment and other 3,783 -- 3,783 (207,244)
Other nonrecurring costs -- (4,613) -- (19,682)
Interest income and other 2,405 561 27,986 3,571
Interest expense (3,424) (3,893) (10,567) (11,282)
-------- -------- -------- ---------
Income (loss) before income taxes $ 32,875 $ (9,830) $ 84,396 $(270,515)
======== ======== ======== =========
The Company expects future sales of x86 Microprocessor products to be
insignificant.
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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 also deferred $20.0 million in
future revenue related to the cross license agreement, which is being recognized
ratably over the remaining average life of the patents, which approximates seven
years.
In August 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 as revenue during the quarter ended September 26, 1999. The
remaining cross license fee is being 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. At 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.
Note 11 - Litigation
In November 1998, the Company, along with 25 other companies, was sued in the
U.S. District Court for the District of Arizona by the Lemelson Foundation
("Lemelson") for alleged patent infringement. Lemelson made similar allegations
against the Company's subsidiary, Quality Semiconductor, Inc., and 87 other
defendants in a lawsuit filed in February 1999. In November 1999, the Company
entered into an agreement with Lemelson that settled all outstanding claims and
granted the Company a license to use the Lemelson patents asserted against the
Company and its subsidiary. In Q3 2000, the Company reversed the excess portion
of reserves previously provided for this matter.
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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 December 26, 1999 ("Q3
2000") September 26, 1999 ("Q2 2000"), and December 27, 1998 ("Q3 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.
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
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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 had 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 its manufacturing operations. This operational
decision, which included closure of the Company's wafer fabrication facility
located in San Jose, California in late calendar 1998, 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 has increased
the level of manufacturing facility utilization. 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
have improved 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.
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 Q3 2000 were $176.7 million, an increase of $3.2 million compared
to the $173.5 million recorded in Q2 2000, and an increase of $27.0 million over
revenues of $149.7 recorded for Q3 1999. Revenues for the nine months of fiscal
2000 were $504.2 million, an increase of $54.8 million over the comparable
period in fiscal 1999. As described below, Q2 2000 revenues included $8.5
million associated with a cross license with Intel Corporation ("Intel").
Revenue associated with the ongoing operations of the Company in Q2 2000 was
$165.1 million.
The increase in quarterly and nine- month revenues to $176.7 million and $504.2
million, respectively, is primarily the result of increased sales of IDT's
Communications and High Performance Logic and SRAM and Other products, partially
offset by a decline in sales of x86 Microprocessor products. Revenues from
products in IDT's Communications and High Performance Logic and SRAM and Other
segments increased in the quarter and nine-month periods ended Q3 2000,
primarily because of increased volumes of products sold. Sales of x86
microprocessor products for the quarter and nine months ended Q3 2000 declined
to $3.3 million and $9.3 million, respectively, and were $11.8 million and $23.7
million in the comparable periods of fiscal 1999. IDT does not expect future x86
sales volumes, if any, to be significant. The
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Company believes revenues and costs associated with existing and new products in
the Communications and High-Performance Logic and SRAMs and Other segments will
increase in future quarters as the Company continues to execute new product
introduction strategies and assuming that overall levels of industry demand
continue to improve. Excluding any potential risks and costs to complete the
combination of QSI manufacturing operations with IDT's manufacturing operations,
the merger of QSI into the Company was essentially completed in calendar 1999.
In Q2 2000, IDT entered into a cross license with Intel and received as
consideration $20.5 million. As described above, $8.5 million in revenues
associated with the intellectual property cross license with Intel was
recognized in Q2 2000. The remaining revenue associated with the cross license
with Intel is being recognized over seven years, the estimated useful life of
the relevant intellectual property.
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.
GROSS PROFIT
Gross profit for Q3 2000 was $89.0 million, compared to gross profit of $84.3
million and $54.5 million in Q2 2000 and Q3 1999, respectively. Gross profit for
the first nine months of fiscal 2000 increased by $302.4 million compared to the
same period in the previous fiscal year.
Excluding the benefit in Q3 2000 associated with restructuring charges, asset
impairment and other costs, IDT's gross profit as a percentage of revenues was
essentially flat in Q3 2000 compared to Q2 2000. Gross margin in Q2 2000
benefited from the $8.5 million in Intel licensing revenue, as discussed above,
that carried little related costs. On an operating basis, excluding the Q3 2000
benefit referred to above and revenue recognized in Q2 2000 associated with the
Intel cross license, IDT's gross profit percentage improved to 48.4% in Q3 2000,
compared with 46.3% in Q2 2000.
On an operating basis, gross profit has shown sequential quarterly improvement
throughout fiscal 2000 and was 48.4% in Q3 2000, 46.3% in Q2 2000, 44.4% in Q1
2000 and 46.5% for the nine-month period ended Q3 2000. In fiscal 1999, the
comparable percentages were 36.4% for Q3 1999 and 32.6% for the nine-month
period ended Q3 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 of 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, of which $3 million was reversed in
Q4 1999 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
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<PAGE>
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, in Q1 1999, 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.
In Q2 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. 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 was to settle certain patent claims against the Company.
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.
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<PAGE>
RESEARCH AND DEVELOPMENT
For Q3 2000, research and development ("R&D") expenses decreased by $2.0 million
and $5.6 million from Q2 2000 and Q3 1999, respectively. R&D expenses decreased
by $31.4 million for the first nine months of fiscal 2000 compared to the same
period in 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. Also, expenses to
develop x86 microprocessor products have decreased in Q3 2000, as the Company
completed the sale of its Austin x86 microprocessor design center during Q2
2000.
R&D expenses in the nine month period ended Q3 2000 were lower than the
comparable period in fiscal 1999 for two primary reasons. First, expenses
related to developing process technology have been reduced in the fiscal 2000
period because of the closure of IDT's San Jose, California wafer fabrication
facility, which was closed during the consolidation of IDT's manufacturing
facilities as 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. Second, as noted above, the Company sold its x86 products
design center in Q2 2000.
Management expects that in the coming quarters, R&D expense will increase from
the Q3 2000 level as the company invests in new products and attempts to support
growing revenues into its target networking and telecommunications customer
markets. As a percentage of revenue, management expects R&D expense to remain
relatively constant, assuming that business conditions and overall industry
demand continue to improve. 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; developing an
advanced SRAM architecture that significantly improves performance of
communications applications requiring frequent switches between data reads and
writes; and implementing advanced process technologies, including 0.18 micron
semiconductor fabrication techniques, designed to produce performance and/or
cost advantages for IDT's communications products.
- ---------
(TM) RISController is a trademark of Integrated Device Technology, Inc. All
other brand names and products names are trademarks, registered trademarks or
trade names of their respective holders.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased by $0.7 million
for Q3 2000 compared to Q2 2000, but were essentially flat as a percentage of
revenue. Comparing the third quarter and first nine months of fiscal 2000
against the same periods in fiscal 1999, SG&A expenses decreased by $0.3 million
and $0.8 million, respectively. 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.
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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 either Q2 2000 or Q3 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 $3.4 million for
Q3 2000 represented a slight decrease compared to Q2 2000. Excluding historical
amounts related to QSI, interest expense for the three- and nine-month periods
ended December 26, 1999 was essentially unchanged compared to the same periods
in fiscal 1999.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, was $2.4 million in Q3 2000, a decrease of $15.9
million compared to Q2 2000. The decrease is primarily the result of net gains
of approximately $19.6 million in Q2 2000 primarily related to the sale of IDT's
Centaur design subsidiary and x86 processor intellectual property. Interest and
other income, net for the nine-month period ended December 26, 1999 increased by
$24.4 million compared to the same period in fiscal 1999, mainly due to the Q2
2000 Centaur-related gains and to a gain of $4.6 million on IDT'S sale of its
closed San Jose facility in Q1 2000. Interest income also increased in fiscal
2000 as a result of higher cash and investment balances. Interest income and
other for Q3 2000 includes an approximate $3 million loss associated with the
operating results of an investee company. IDT expects that in its fourth fiscal
quarter ending March 2000, its investment in this company will become fully
amortized and that beyond fiscal 2000, IDT will not record any further losses
associated with this investee.
TAXES
The Company's effective tax rate for Q3 2000, Q2 2000 and the first nine months
of fiscal 2000 was 5%. Tax expense for the first nine months of fiscal 1999
included a $35 million reserve taken against the value of the Company's net
deferred tax 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.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents and short-term investments increased by $145.6
million from March 28, 1999 to December 26, 1999. At December 26, 1999, cash and
cash equivalents were $153.7 million, an increase of $9.1 million from $144.6
million at March 28, 1999. Additionally the Company had short-term investments
of $193.1 million and $56.5 million at December 26, 1999 and March 28, 1999,
respectively.
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The Company generated $157.9 million in cash from operating activities during
the first three quarters of fiscal 2000, up from $25.5 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. The
Company also received $20 million from VIA Technologies in Q2 2000 under another
license agreement (see Note 9 of Notes to Condensed Consolidated Financial
Statements) which was recorded as deferred revenue.
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 three quarters of fiscal 2000, the Company's net cash used for
investing activities was $162.2 million, including $139.8 million, net, related
to purchases and sales of short-term investments and $65.1 million for capital
expenditures. The Company received $43.9 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 $13.4 million during the first nine months of
fiscal 2000. Financing activities in the first nine months of fiscal 2000
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.
IDT anticipates capital expenditures of approximately $25 million during the
fourth quarter 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
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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 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 has wafer fabrication facilities located in Hillsboro, Oregon; 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 in the past have not been fully offset when
revenues declined. 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
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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.
In recent years, the Company has implemented 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 maintain IDT's
profitability during cyclical downturns in the semiconductor industry.
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 third parties and is currently involved in several
license negotiations. Additional claims alleging infringement of intellectual
property rights could be asserted in the future. The intellectual
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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 the first nine 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 10%, 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
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 companies in the markets served by IDT.
Announcements by IDT or its competitors regarding new product introductions may
also lead to volatility. In addition, IDT's 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
As of the end of January 2000, the Company has completed the transition from
calendar year 1999 to 2000 and conducted internal tests for year 2000 issues. No
significant impact to the Company's operations or its business and manufacturing
systems has been reported. The Company will continue to evaluate year 2000
related exposures at its suppliers, vendors, customers and other third parties
over the next several weeks. The Company will also continue to monitor its
systems, facilities and products over the next few months to ensure that latent
defects do not manifest themselves. Such follow-up will be encompassed into the
normal monitoring of Company systems and operations.
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Amounts paid to manufacturing equipment vendors to obtain software upgrades to
remediate Year 2000 issues will approximate $400,000. IDT has also paid Keane,
Inc., a software services firm, approximately $165,000 in consulting. Residual
year 2000 and monitoring costs after January 1, 2000 are not expected to be
significant.
Requirements Associated with the Introduction of the Euro
IDT is continuing to monitor and evaluate the impact of the introduction of the
Single European Currency (Euro). During the transition period ending December
31, 2001, public and private parties may pay for goods and services using either
the Euro common currency or the legacy currency of the participating country.
Beginning January 1, 2002, Euro denominated bills and coins will be issued, with
the legacy currencies being completely withdrawn from circulation on June 30,
2002.
Based on its ongoing evaluation, IDT does not currently expect the cost of any
Euro-related system modifications to be material and does not expect that the
Euro will have a material adverse impact on IDT's business activities, financial
condition or overall trends in results of operations.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit filed by Lemelson Medical Education & Research Foundation, Limited
Partnership ("plaintiff") against the Company and twenty-five other corporate
defendants was served upon the Company in November 1998. The lawsuit, which
alleged that the defendants' manufacturing equipment infringes upon 16 patents
issued to the plaintiff, was filed in the United States District Court for the
District of Arizona, case number 98-1413. The plaintiff has also made similar
allegations against the Company's wholly owned subsidiary, Quality
Semiconductor, Inc., and eighty-seven other corporate defendants in a lawsuit
filed in the U.S. District Court for the District of Arizona, case number
99-CV-377, in February 1999. The lawsuits were settled in November 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 14, 1999, the Company held its 1999 Annual Meeting of Stockholders.
On the record date of October 22, 1999, 91,057,296 shares of the Company's
Common Stock were issued, outstanding and entitled to vote. Tabulated proxies at
the meeting represented 81,040,417, or 89.0%, of the total eligible shares.
Voting results of the proposals presented were as follows:
(1) Proposal I - To elect one Class II director for a term to expire at the 2002
Annual Meeting of Stockholders:
Name Votes For Authority Withheld
------------------------------------------------------------------
Carl Berg 79,031,424 2,008,993
(2) Proposal II - To approve an amendment to the Company's 1984 Employee Stock
Purchase Plan to increase the number of shares reserved for issuance thereunder
from 7,000,000 to 8,500,000:
Votes For Votes Against Votes Abstained
------------------------------------------------------------------
78,306,584 2,497,785 236,048
(3) Proposal III - To ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for fiscal 2000:
Votes For Votes Against Votes Abstained
------------------------------------------------------------------
80,790,509 106,020 143,888
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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: February 8, 2000 /s/ JERRY G. TAYLOR
---------------------------------------
Jerry G. Taylor
President and Chief Executive Officer
(duly authorized officer)
Date: February 8, 2000 /s/ ALAN F. KROCK
---------------------------------------
Alan F. Krock
Vice President, Chief Financial Officer
(principal accounting officer)
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<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> 9-MOS
<FISCAL-YEAR-END> APR-02-2000
<PERIOD-START> MAR-29-1999
<PERIOD-END> DEC-26-1999
<CASH> 153,668
<SECURITIES> 193,051
<RECEIVABLES> 86,763<F1>
<ALLOWANCES> 0
<INVENTORY> 68,259
<CURRENT-ASSETS> 517,702
<PP&E> 266,256<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 839,572
<CURRENT-LIABILITIES> 174,229
<BONDS> 180,367
0
0
<COMMON> 93
<OTHER-SE> 385,511
<TOTAL-LIABILITY-AND-EQUITY> 839,572
<SALES> 504,223
<TOTAL-REVENUES> 504,223
<CGS> 262,563
<TOTAL-COSTS> 262,563
<OTHER-EXPENSES> 81,879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,567
<INCOME-PRETAX> 84,396
<INCOME-TAX> 4,220
<INCOME-CONTINUING> 80,176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,176
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.83
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCE
<F2>ITEM SHOWN NET OF DEPRECIATION
</FN>
</TABLE>
