i10q.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
/x/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended January 2, 2011
 
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
(State or Other Jurisdiction of
Incorporation or Organization)
 
94-2669985
(I.R.S. Employer
Identification No.)
 
6024 SILVER CREEK VALLEY ROAD, SAN JOSE, CALIFORNIA
(Address of Principal Executive Offices)
 
 
95138
(Zip Code)
 
 
Registrant's Telephone Number, Including Area Code: (408) 284-8200
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
     
Common stock, $.001 par value
 
The NASDAQ Stock Market LLC
 
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 ¨  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
x Large accelerated filer                         o Accelerated filer                            ¨  Non-accelerated filer             o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
 
The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of January 30, 2011, was approximately 150,894,877.



INTEGRATED DEVICE TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED January 2, 2011
TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
 
Item 1.
     
      4  
      5  
      6  
      7  
Item 2.
    30  
Item 3.
    39  
Item 4.
    39  
           
PART II—OTHER INFORMATION
 
           
Item 1.
    40  
Item 1A.
    40  
Item 2.
    50  
Item 3.
    50  
Item 4.
    50  
Item 5.
    50  
Item 6.
    51  
    51  

 

PART I    FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in thousands, except per share data)

   
Jan. 2,
2011
   
Mar. 28,
2010
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 93,358     $ 120,526  
Short-term investments
    214,849       222,663  
Accounts receivable, net
    69,080       68,957  
Inventories
    61,406       50,676  
Prepayments and other current assets
    22,959       25,086  
Total current assets
    461,652       487,908  
                 
Property, plant and equipment, net
    67,379       67,988  
Goodwill
    104,020       103,074  
Acquisition-related intangible assets, net
    56,037       65,242  
Other assets
    29,913       26,733  
Total assets
  $ 719,001     $ 750,945  
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Accounts payable
  $ 33,766     $ 34,717  
Accrued compensation and related expenses
    26,388       20,738  
Deferred income on shipments to distributors
    15,472       18,761  
Income taxes payable
    1,386       513  
Other accrued liabilities
    35,443       31,972  
Total current liabilities
    112,455       106,701  
                 
Deferred tax liabilities
    1,584       1,573  
Long-term income tax payable
    21,254       21,098  
Other long-term obligations
    16,666       21,833  
Total liabilities
    151,959       151,205  
                 
Commitments and contingencies (Notes 15)
               
Stockholders' equity:
               
Preferred stock; $.001 par value: 10,000 shares authorized; no shares issued
    --       --  
Common stock; $.001 par value: 350,000 shares authorized; 148,922 and 162,878 shares outstanding at January 2, 2011 and March 28, 2010, respectively
    149       163  
Additional paid-in capital
    2,333,211       2,310,450  
Treasury stock; at cost:  78,470 shares and 61,917 shares at January 2, 2011 and March 28, 2010, respectively
    (899,137 )     (802,217 )
Accumulated other comprehensive income
    1,287       1,046  
Accumulated deficit
    (868,468 )     (909,702
Total stockholders' equity
    567,042       599,740  
                 
Total liabilities and stockholders' equity
  $ 719,001     $ 750,945  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share data)

   
Three months ended
   
Nine months ended
 
   
Jan. 2,
 2011
   
Dec. 27,
 2009
   
Jan. 2,
 2011
   
Dec. 27,
 2009
 
Revenues
  $ 153,230     $ 142,480     $ 478,410     $ 397,938  
Cost of revenues
    70,755       82,751       223,475       239,913  
Gross profit
    82,475       59,729       254,935       158,025  
                                 
Operating expenses:
                               
Research and development
    46,143       38,316       133,865       116,086  
Selling, general and administrative
    27,056       24,754       81,255       80,851  
Total operating expenses
    73,199       63,070       215,120       196,937  
                                 
Operating income (loss)
    9,276       (3,341 )     39,815       (38,912 )
                                 
Gain (loss) on divestitures
    --       (4,461 )     --       78,286  
Interest income and other, net
    1,352       582       2,793       3,176  
Income (loss) before income taxes
    10,628       (7,220 )     42,608       42,550  
Provision for income taxes
    31       147       1,374       3,498  
                                 
Net income (loss)
  $ 10,597     $ (7,367 )   $ 41,234     $ 39,052  
                                 
Basic net income (loss) per share
  $ 0.07     $ (0.04 )   $ 0.27     $ 0.24  
Diluted net income (loss) per share
  $ 0.07     $ (0.04 )   $ 0.27     $ 0.24  
                                 
Weighted average shares:
                               
Basic
    151,421       165,954       154,487       165,658  
Diluted
    152,975       165,954       155,525       166,114  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)

   
Nine months ended
 
   
Jan. 2,
2011
   
Dec. 27,
2009
 
Cash flows provided by operating activities:
           
Net income
  $ 41,234     $ 39,052  
Adjustments:
               
Depreciation
    13,566       17,348  
Amortization of intangible assets
    14,916       16,130  
Gain from divestitures
    --       (78,286 )
Stock-based compensation expense
    13,207       12,341  
Assets impairment
    --       1,853  
Deferred tax provision
    74       247  
Changes in assets and liabilities (net of effects of acquisitions and divestitures):
               
Accounts receivable, net
    713       (5,934 )
Inventories
    (9,600 )     27,560  
Prepayments and other assets
    1,445       4,447  
Accounts payable
    (1,900 )     6,178  
Accrued compensation and related expenses
    5,558       (4,260 )
Deferred income on shipments to distributors
    (3,289 )     621  
Income taxes payable and receivable
    1,163       3,073  
Other accrued liabilities and long term liabilities
    (5,228 )     4,792  
Net cash provided by operating activities
    71,859       45,162  
                 
Cash flows provided by (used for) investing activities
               
Acquisitions, net of cash acquired
    (6,247 )     (64,482 )
Proceeds from divestitures
    --       109,434  
Cash in escrow related to acquisitions
    (1,160 )     --  
Purchases of property, plant and equipment and other, net
    (7,579 )     (9,885 )
Purchase of non-marketable equity securities
    (2,500 )     --  
Purchases of short-term investments
    (349,701 )     (208,836 )
Proceeds from sales of short-term investments
    36,765       130,254  
Proceeds from maturities of short-term investments
    318,318       48,595  
Net cash provided by (used for) investing activities
    (12,104 )     5,080  
                 
Cash flows provided by (used for) financing activities
               
Proceeds from issuance of common stock
    9,775       4,858  
Repurchases of common stock
    (96,920 )     (3,343 )
Excess tax benefit from share based payment arrangements
    (228 )     --  
Net cash provided by (used for) financing activities
    (87,373 )     1,515  
                 
Effect of exchange rates on cash and cash equivalents 
    450       922  
Net increase (decrease) in cash and cash equivalents
    (27,168 )     52,679  
Cash and cash equivalents at beginning of period
    120,526       136,036  
Cash and cash equivalents at end of period
  $ 93,358     $ 188,715  
                 
Supplemental disclosure of non-cash investing and financing activities
               
Common stock options assumed in connection with Tundra acquisition
  $ --     $ 721  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Integrated Device Technology, Inc. (“IDT” or the “Company”) contain all adjustments that are, in the opinion of management, necessary to state fairly the interim financial information included therein. Certain prior period balances have been reclassified to conform to the current period presentation. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The Company’s fiscal year is the 52- or 53-week period ending on the Sunday closest to March 31.  In a 52-week year, each fiscal quarter consists of 13 weeks.  In a 53-week year, the additional week is usually added to the third quarter, making such quarter consist of 14 weeks.  The third quarter of fiscal 2011 was a fourteen week period, while the third quarter of fiscal 2010 was a thirteen week period.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the Company’s financial statements and the accompanying notes. Actual results could differ from those estimates.

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 fiscal year ended March 28, 2010.  Operating results for the three and nine months ended January 2, 2011 are not necessarily indicative of operating results for an entire fiscal year.

Note 2
Significant Accounting Policies

Investments:

Available-for-Sale Investments.  Investments designated as available-for-sale include marketable debt and equity securities.  Available-for-sale investments are classified as short-term, as these investments generally consist of highly marketable securities that are intended to be available to meet near-term cash requirements.  Marketable securities classified as available-for-sale are reported at market value, with net unrealized gains or losses recorded in accumulated other comprehensive income, a separate component of stockholders' equity, until realized.  Realized gains and losses on investments are computed based upon specific identification and are included in interest income and other, net.

Non-Marketable Equity Securities.  Non-marketable equity securities are accounted for at historical cost or, if the Company has significant influence over the investee, using the equity method of accounting.

Other-Than-Temporary Impairment.  All of the Company’s available-for-sale investments and non-marketable equity securities are subject to a periodic impairment review.  Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary.  This determination requires significant judgment.  For publicly traded investments, impairment is determined based upon the specific facts and circumstances present at the time, including a review of the closing price over the previous six months, general market conditions and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for recovery.  For non-marketable equity securities, the impairment analysis requires the identification of events or circumstances that would likely have a significant adverse effect on the fair value of the investment, including revenue and earnings trends, overall business prospects and general market conditions in the investees’ industry or geographic area.  Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.


Concentrations of credit Risk.    Financial instruments that potentially subject the Company to a significant concentration of credit risk consist of cash, cash equivalents, short term investments, and trade accounts receivable.  The Company invests its excess funds primarily in money market funds, United States government treasuries and agency securities, corporate bonds and corporate commercial paper with reputable major financial institutions.

The Company sells integrated circuits primarily in the U.S., Europe and Asia. The Company monitors the financial condition of its major customers, including performing credit evaluations of those accounts which management considers high risk, and generally does not require collateral from its customers. When deemed necessary, the Company may limit the credit extended to certain customers. The Company’s relationship with the customer, and the customer’s past and current payment experience, are also factored into the evaluation in instances where limited financial information is available. The Company maintains and reviews its allowance for doubtful accounts by considering factors such as historical bad debts, age of the account receivable balances, customer credit-worthiness and current economic conditions that may affect customer’s ability to pay.

The Company utilizes global and regional distributors around the world, who buy product directly from the Company on behalf of their customers.  One family of distributors, Maxtek and its affiliates represented approximately 15% and 18% of the Company’s revenues for the three and nine months ended January 2, 2011 and 20% and 21% of the Company’s revenues for the three and nine months ended December 27, 2009, respectively. At January 2, 2011 and March 28, 2010, Maxtek and its affiliates, represented approximately 20% and 23% of the Company’s gross accounts receivable, respectively.

Inventories.   Inventories are recorded at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market value.  Inventory held at consignment locations is included in finished goods inventory as the Company retains full title and rights to the product.  Inventory valuation includes provisions for obsolete and excess inventory based on management’s forecasts of demand over specific future time horizons and reserves to value the Company’s inventory at the lower of cost or market which rely on forecasts of average selling prices (ASPs) in future periods.

Revenue Recognition.  The Company’s revenue results from semiconductors sold through three channels: direct sales to original equipment manufacturers (“OEMs”) and electronic manufacturing service providers (“EMSs”), consignment sales to OEMs and EMSs, and sales through distributors. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and its ability to collect is reasonably assured.

For distributors in North America and Europe regions, who have stock rotation, price protection and ship from stock pricing adjustment rights, the Company defers revenue and related cost of revenues on sales to these distributors until the product is sold through by the distributor to an end-customer.  Subsequent to shipment to the distributor, the Company may reduce product pricing through price protection based on market conditions, competitive considerations and other factors.  Price protection is granted to distributors on the inventory that they have on hand at the date the price protection is offered.  The Company also grants certain credits to its distributors on specifically identified portions of the distributors’ business to allow them to earn a competitive gross margin on the sale of the Company’s products to their end customers.  As a result of its inability to estimate these credits, the Company has determined that the sales price to these distributors is not fixed or determinable until the final sale to the end-customer.

In the Asia Pacific (“APAC”) and Japan regions, the Company has distributors for which revenue is recognized upon shipment, with reserves recorded for the estimated return and pricing adjustment exposures.   The determination of the amount of reserves to be recorded for stock rotation rights requires the Company to make estimates as to the amount of product which will be returned by customers within their limited contractual rights.  The Company utilizes historical return rates to estimate the future returns. In addition, from time-to-time, the Company can offer pricing adjustments to distributors for product purchased in a given quarter that remains in their inventory.  These amounts are estimated by management based on discussions with customers, assessment of market trends, as well as historical practice.  



Based on the terms in the agreements with its distributors and the application of this policy, the Company recognizes revenue once the distributor sells our products to an end-customer for North American and European distributors and recognizes revenue upon shipment to Japanese and other Asian Pacific distributors.

Stock-based Compensation. The fair value of employee restricted stock units is equal to the market value of the Company’s common stock on the date the award is granted.  The Company estimates the fair value of employee stock options and the right to purchase shares under the employee stock purchase plan using the Black-Scholes valuation model, consistent with FASB’s authoritative guidance for share-based payments.  Option-pricing models require the input of highly subjective assumptions, including the expected term of options and the expected price volatility of the stock underlying such options.  In addition, the Company is required to estimate the number of stock-based awards that will be forfeited due to employee turnover.  The Company attributes the value of stock-based compensation to expense on an accelerated method.  Finally, the Company capitalizes into inventory a portion of the periodic stock-based compensation expense that relates to employees working in manufacturing activities.

The Company updates the expected term of stock option grants annually based on its analysis of the stock option exercise behavior over a period of time.  The interest rate is based on the average U.S. Treasury interest rate over the expected term during the applicable quarter.  The Company believes that the implied volatility of its common stock is an important consideration of overall market conditions and a good indicator of the expected volatility of its common stock.  However, due to the limited volume of options freely traded over the counter, the Company believes that implied volatility, by itself, is not representative of the expected volatility of its common stock.  Therefore, the Company uses a volatility factor that reflects a blend of historical volatility of its common stock and implied volatility of call options and dealer quotes on call options, generally having a term of less than twelve months.  The Company has not paid, nor does it have current plans to pay dividends on its common stock in the foreseeable future.

Income Taxes.  The Company accounts for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities be recognized as deferred tax assets and liabilities. Generally accepted accounting principles require the Company to evaluate the ability to realize the value of its net deferred tax assets on an ongoing basis. A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. Accordingly, the Company considers various tax planning strategies, forecasts of future taxable income and its most recent operating results in assessing the need for a valuation allowance. In consideration of the ability to realize the value of net deferred tax assets, recent results must be given substantially more weight than any projections of future profitability. Since the fourth quarter of fiscal 2003, the Company has determined that, under applicable accounting principles, it could not conclude that it was more likely than not that the Company would realize the value of its net deferred tax assets. The Company’s assumptions regarding the ultimate realization of these assets remained unchanged in the third quarter of fiscal 2011 and accordingly, the Company continues to record a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.

The Company recognizes the tax liability for uncertain income tax positions on the income tax return based on the two-step process. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires the Company to determine the probability of various possible outcomes. The Company evaluates these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit, and new exposures. If the Company later determines that the exposure is lower or that the liability is not sufficient to cover its revised expectations, the Company adjusts the liability and effects a related change in its tax provision during the period in which the Company makes such determination.



Note 3
Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (the “FASB”) issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements. The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements or related footnotes.

In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop an estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance was adopted by the Company in the first quarter of fiscal 2011.  However, as the Company does not generally enter into multiple element arrangements, the adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements or related footnotes.
 

Note 4
Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period.  Diluted net income (loss) per share is computed using the weighted-average number of common and dilutive potential common shares outstanding during the period. Potential common shares include employee stock options and restricted stock units.

   
Three months ended
   
Nine months ended
 
(in thousands, except per share amounts)
 
 
Jan. 2,
2011
   
Dec. 27,
2009
   
Jan. 2,
2011
   
Dec. 27,
2009
 
Net income (loss)
  $ 10,597     $ (7,367 )   $ 41,234     $ 39,052  
                                 
Weighted average common shares outstanding
    151,421       165,954       154,487       165,658  
Dilutive effect of employee stock options and restricted stock units
    1,554       --       1,038       456  
Weighted average common shares outstanding, assuming dilution
    152,975       165,954       155,525       166,114  
Basic net income (loss) per share
  $ 0.07     $ (0.04 )   $ 0.27     $ 0.24  
Diluted net income (loss) per share
  $ 0.07     $ (0.04 )   $ 0.27     $ 0.24  

Stock options to purchase 12.9 million shares and 16.9 million shares for the three and nine months ended January 2, 2011, respectively, and 24.9 million shares and 28.3 million shares for the three and nine months ended December 27, 2009, respectively, were outstanding, but were excluded from the calculation of diluted earnings per share because the exercise price of the stock options was greater than the average share


price of the common shares and therefore, the effect would have been anti-dilutive. In addition, unvested restricted stock units of less than 0.1 million for the three and nine months ended January 2, 2011, respectively, and less than 0.1 million for the three and nine months ended December 27, 2009, respectively, were excluded from the calculation because they were anti-dilutive after considering unrecognized stock-based compensation expense.

Note 5
Business Combinations

Acquisition of certain assets of IKOR Acquisition Corporation (“IKOR”)

On April 16, 2010, the Company completed its acquisition of certain assets of IKOR, a former subsidiary of iWatt Corporation.  IKOR designed and manufactured power voltage regulator module (VRM) solutions for high-performance computing. The total purchase price was $7.7 million, including a fair value of contingent consideration of $1.5 million payable upon the achievement of certain business performance metrics during the twelve months after the closing date. The fair value of the contingent consideration was estimated using probability-based forecasted revenue for the business as of the acquisition date.  The maximum payment for this contingent considersation is $2.8 million.  Pursuant to the agreement, $1.8 million in cash was held in escrow and will be utilized to fund the contingent consideration payment. During the third quarter of fiscal 2011, the fair value of the contingent consideration was remeasured based on the revised revenue forecast for the business.  As a result, the fair value of the contingent consideration increased $0.3 million to $1.8 million.  The change in the fair value of the contingent consideration was recorded in selling and administrative expenses in the third quarter of fiscal 2011.

Pursuant to the agreement, the Company acquired IKOR- patented coupled inductor (“CL”) technology and related assets and hired members of IKOR’ engineering team.

The Company allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over those fair values was recorded as goodwill. The acquired CL technology complements the Company’s growing power management initiative, allowing it to achieve higher levels of performance and integration.  The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management estimates and assumptions.  The amount of goodwill expected to be deductible for tax purposes is $0.9 million.

The Company incurred approximately $0.3 million of acquisition-related costs, which were included in selling, general and administrative (“SG&A”) expenses on the Condensed Consolidated Statements of Operations for the first nine months of fiscal 2011.

The aggregate purchase price has been allocated as follows:

(in thousands)
     
Accounts receivable
    836  
Inventories
    1,136  
Prepayments and other current assets
    63  
Property, plant and equipment, net
    277  
Accounts payable and accrued expenses
    (1,226 )
Amortizable intangible assets
    5,711  
Goodwill
    946  
Total purchase price
  $ 7,743  




A summary of the allocation of amortizable intangible assets is as follows:

(in thousands)
     
Amortizable intangible assets:
     
    Developed Technologies
  $ 5,224  
    Customer Relationships
    443  
    Backlog
    44  
Total
  $ 5,711  
 
Identifiable Tangible Assets

IKOR’s assets and liabilities were reviewed and adjusted, if required, to their estimated fair value.
 
Inventories – The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less reasonable selling margin.

Amortizable Intangible Assets

Developed technologies consist of products that have reached technological feasibility. The Company valued the existing technologies utilizing a discounted cash flow (“DCF”) model, which uses forecasts of future revenues and expenses related to the intangible assets. The Company utilized discount factors of 35% - 36% for the existing technologies and is amortizing the intangible assets over 7 years on a straight-line basis.

Customer relationship values have been estimated utilizing a DCF model, which uses forecasts of future revenues and expenses related to the intangible asset. The Company utilized discount factor of 35% for this intangible asset and is amortizing this intangible asset over 5 years on a straight-line basis.

Backlog represents the value of the standing orders for IKOR products as of the closing date of the acquisition.  Backlog was valued utilizing a DCF model and a discount factor of 15%.  The value was amortized over five month period.

IKOR acquisition related financial results have been included in the Company’s Consolidated Statements of Operations from the closing date of the acquisition on April 16, 2010.  Pro forma earnings information has not been presented because the effect of the acquisition is not material to the Company’s historical financial statements.

Acquisition of Mobius Microsystems, Inc. (“Mobius”)

On January 14, 2010, the Company completed its acquisition of Mobius, a privately-held, fabless semiconductor company based in Sunnyvale, California, acquiring all of Mobius’ outstanding shares of common stock for approximately $21 million in cash.  Pursuant to the agreement and upon closing the transaction, the Company acquired Mobius’ patented all-silicon oscillator technology and related assets along with members of Mobius’ engineering team.

A summary of the total purchase price was as follows:

(in thousands)
     
Cash paid
  $ 20,188  
Acquisition-related costs assumed by the Company
    500  
Total purchase price
  $ 20,688  

The Company allocated the purchase price to the tangible and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess purchase


price over those fair values was recorded as goodwill. The acquisition has extended the Company’s leadership into high accuracy, crystal oscillator replacements. The all-silicon timing technology has provided the Company with power, size and time-to-market advantages. The fair values assigned to tangible and intangible assets acquired are based on management estimates and assumptions.  The goodwill as a result of this acquisition is not expected to be deductible for tax purpose.

The Company incurred approximately $0.3 million of acquisition-related costs, which were included in selling, general and administrative (“SG&A”) expenses on the Consolidated Statements of Operations for fiscal 2010.

The purchase price has been allocated as follows:

(in thousands)
     
Cash
  $ 170  
Property, plant and equipment, net
    237  
Other assets
    44  
Developed technology
    15,768  
In-process research and development
    3,536  
Goodwill
    2,105  
Liabilities assumed
    (1,172 )
Total purchase price
  $ 20,688  

Net tangible assets were reviewed and adjusted, if necessary, to their estimated fair value.

Developed technology consists of products that have reached technological feasibility.  The Company used a DCF model with a discount rate of 30% to determine the fair value of the developed technology and is amortizing it on a straight-line basis over 7 years.

Projects that qualify as IPR&D represent those at the development stage and require further research and development to determine technical feasibility and commercial viability. Technological feasibility is established when an enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design specifications, including functions, features, and technical performance requirements. The value of IPR&D was determined by considering the importance of each project to the Company’s overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value based on the percentage of completion of the IPR&D projects. The Company utilized the DCF method to value the IPR&D, using a discount factor of 33% and will amortize this intangible asset once the projects are complete. There were two IPR&D projects underway at Mobius at the acquisition date and the fair value assigned to each project was $2.4 million and $1.1 million, respectively. As of January 2, 2011, one project was 100% complete in the third quarter of fiscal 2011and approximately $5.2 million costs were incurred. The Company is amortizing this intangible asset over 7 years on a straight-line basis. Another project was 70% complete and approximately $2.3 million costs have been incurred.  The Company estimates that an additional investment of $1.9 million will be required to complete the project with an estimated completion date during the first quarter of fiscal 2012.  Pro forma earnings information has not been presented because the effect of the acquisition is not material to the Company’s historical financial statements.

Acquisition of Tundra Semiconductor Corporation (“Tundra”)

On June 29, 2009, the Company completed its acquisition of Tundra, a Canadian corporation, pursuant to which the Company acquired 100% of the voting common stock of Tundra at a price of CAD$6.25 per share, or an aggregate purchase price of approximately CAD$120.8 million.  The Company paid approximately $104.3 million in cash. In addition, as part of the consideration in the acquisition, the Company assumed options to purchase up to 0.8 million shares of its common stock. As a result, the acquisition resulted in the issuance of approximately 0.8 million stock options with a fair value of $0.7 million.  The total consideration was approximately $105.0 million.  The options were valued using the


Black-Scholes option pricing model. Approximately $3.4 million of acquisition-related costs were included SG&A expenses on the Consolidated Statements of Operations for fiscal 2010. A summary of the total purchase price is as follows:

(in thousands)
     
Cash paid
  $ 104,316  
Assumed stock options
    721  
Total purchase price
  $ 105,037  

The Company allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over those fair values was recorded as goodwill. Tundra’s technology and development capabilities are complementary to the Company’s existing product portfolios for RapidI/O and PCI Express.  This strategic combination has provided customers with a broader product offering, as well as improved service, support and a future roadmap for serial connectivity.  These are the significant contributing factors to the establishment of the purchase price, resulting in the recognition of goodwill.  The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions.  The amount of goodwill expected to be deductible for tax purposes is $12.8 million.

The aggregate purchase price has been allocated as follows:

(in thousands)
     
Cash and cash equivalents
  $ 46,085  
Accounts receivable
    1,260  
Inventories
    19,881  
Prepayments and other current assets
    6,119  
Property, plant and equipment, net
    7,692  
Other assets
    4,025  
Accounts payable and accruals
    (11,877 )
Other long-term obligations
    (3,549 )
Amortizable intangible assets
    19,979  
Goodwill
    15,422  
Total purchase price
  $ 105,037  

A summary of the allocation of amortizable intangible assets is as follows:

(in thousands)
     
Amortizable intangible assets:
     
    Developed Technology
  $ 8,476  
    Customer Relationships
    7,973  
    Trade name
    2,911  
    In-process research and development
    619  
Total
  $ 19,979  

Identifiable Tangible Assets

Tundra’s assets and liabilities were reviewed and adjusted, if required, to their estimated fair value.
 
Inventories – The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less a reasonable selling margin.
 
Property, plant and equipment – The fair value was determined under the continued use premise as the assets were valued as part of a going concern.  This premise assumes that the assets will remain “as-is, where is” and continue to be used at their present location for the continuation of business operations.  Value in use includes all direct and indirect costs necessary to acquire, install, fabricated and make the assets operational.  The fair value was estimated using a cost approach methodology.


 

Amortizable Intangible Assets

Developed technology consists of products that have reached technological feasibility. The Company valued the developed technology utilizing a DCF model, which uses forecasts of future revenues and expenses related to the intangible asset.  The Company utilized discount factors of 20% - 22% for the developed technology and is amortizing the intangible assets over 5 years on a straight-line basis.

Customer relationship values were estimated utilizing a DCF model, which uses forecasts of future revenues and expenses related to the intangible asset.   The Company utilized discount factors of 20%-22% for each of these intangible assets and is amortizing the intangible assets over 5 years on a straight-line basis.

The Tundra trade name was determined using the relief from royalty method, which represents the benefit of owning this intangible asset rather than paying royalties for its use.  The Company utilized a discount rate of 20% for the trade name and is amortizing this intangible asset over 7 years on a straight-line basis.

The Company utilized the DCF method to value the IPR&D, using a discount factor of 22%-24%. There were two IPR&D projects underway at Tundra at the acquisition date. Both projects were completed in the fourth quarter of fiscal 2010.  The Company is amortizing these intangible assets over 5 years on a straight-line basis.

Note 6
Fair Value Measurement

Fair value measurement is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing assets or liabilities.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact.

Fair Value Hierarchy

The three levels of inputs that may be used to measure fair value are as follows:

Level 1: Quoted market prices for identical assets or liabilities in active markets at the measure date.

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the instrument’s valuation.



The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of January 2, 2011:

   
Fair Value at Reporting Date Using:
 
(in thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Balance
 
Cash Equivalents and Short-Term Investments:
                       
   US government agencies securities
  $ 91,686     $ --     $ --     $ 91,686  
   Money market funds
    41,243       --       --       41,243  
   U.S. government treasuries
    8,918       --       --       8,918  
   Corporate bonds
    --       83,285       --       83,285  
   Corporate commercial paper
    --       43,051       --       43,051  
   Bank deposits
    --       16,411       --       16,411  
   Municipal bonds
    --       371       --       371  
Total assets measured at fair value
  $ 141,847     $ 143,118     $ --     $ 284,965  
Liabilities:
                               
    Fair value of contingent consideration
    --       --       1,800       1,800  
Total liabilities measured at fair value
  $ --     $ --     $ 1,800     $ 1,800  

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 28, 2010:

   
Fair Value at Reporting Date Using:
 
(in thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Balance
 
Cash Equivalents and Short-Term Investments:
                       
   US government agencies securities
  $ 110,173     $ --     $ --     $ 110,173  
   U.S. government treasuries
    34,983       --       --       34,983  
   Money market funds
    43,476       --       --       43,476  
   Corporate bonds
    --       82,678       --       82,678  
   Corporate commercial paper
    --       46,339       --       46,339  
   Bank deposits
    --       3,685       --       3,685  
Total assets measured at fair value
  $ 188,632     $ 132,702     $ --     $ 321,334  

U.S. treasuries and U.S. government agency securities as of January 2, 2011 and March 28, 2010 do not include any U.S. government guaranteed bank issued paper. Corporate bonds include bank-issued securities that are guaranteed by the Federal Deposit Insurance Corporation (FDIC).

The securities in Level 1 are highly liquid and actively traded in exchange markets or over-the-counter markets. Level 2 fixed income securities are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data.


In connection with the acquisition of IKOR (see Note 5), a liability was recognized for the Company’s estimate of the fair value of contingent consideration on the acquisition date based on probability-based forecasted revenue.  This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. This fair value measurement is valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions concerning future revenue of the acquired business in measuring fair value.

The following table summarizes the change in the fair value of the contingent consideration measured using significant unobservable inputs (Level 3) for the nine months ended January 2, 2011:

(in thousands)
 
Estimated Fair Value
 
Balance as of March 28, 2010
  $ --  
Additions
    --  
Balance as of June 27, 2010
  $ --  
Additions
    1,503  
Balance as of September 26, 2010
  $ 1,503  
Additions
    297  
Balance as of January 2, 2011
  $ 1,800  

Cash equivalents are highly liquid investments with original maturities of three months or less at the time of purchase. The Company maintains its cash and cash equivalents with reputable major financial institutions.  Deposits with these banks may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits or similar limits in foreign jurisdictions. These deposits typically may be redeemed upon demand and, therefore, bear minimal risk.  While the Company monitors daily the cash balances in its operating accounts and adjusts the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which the Company deposits fails or is subject to other adverse conditions in the financial markets.  As of January 2, 2011, the Company has not experienced any losses in its operating accounts.

All of the Company’s available-for-sale investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. This determination requires significant judgment. For publicly traded investments, impairment is determined based upon the specific facts and circumstances present at the time, including a review of the closing price over the length of time, general market conditions and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for recovery. Although the Company believes its portfolio continues to be comprised of sound investments due to high credit ratings and government guarantees of the underlying investments, a further decline in the capital and financial markets would adversely impact the market values of its investments and their liquidity. The Company continually monitors the credit risk in its portfolio and future developments in the credit markets and makes appropriate changes to its investment policy as deemed necessary.  The Company did not record any impairment loss related to its short-term investments in the three and nine months ended January 2, 2011 and December 27, 2009.



Note 7
Investments

Available-for-Sale Securities

Available-for-sale investments at January 2, 2011 were as follows:

 
(in thousands)
 
Cost
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
 Losses
   
Estimated Fair
 Value
 
U.S. government treasuries and agency securities
  $ 100,584     $ 26     $ (6 )   $ 100,604  
Corporate bonds
    83,187       122       (24 )     83,285  
Corporate commercial paper
    43,051       --       --       43,051  
Money market funds
    41,243       --       --       41,243  
Bank deposits
    16,411       --       --       16,411  
Municipal bonds
    370       1       --       371  
Total available-for-sale investments
    284,846       149       (30 )     284,965  
Less amounts classified as cash equivalents
    (70,116 )     --       --       (70,116 )
Short-term investments
  $ 214,730     $ 149     $ (30 )   $ 214,849  


Available-for-sale investments at March 28, 2010 were as follows:

 
(in thousands)
 
Cost
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
 Losses
   
Estimated Fair
 Value
 
U.S. government treasuries and agency securities
  $ 145,074     $ 84     $ (2 )   $ 145,156  
Corporate bonds
    82,447       266       (35 )     82,678  
Corporate commercial paper
    46,339       --       --       46,339  
Money market funds
    43,476       --       --       43,476  
Bank deposits
    3,685       --       --       3,685  
Total available-for-sale investments
    321,021       350       (37 )     321,334  
Less amounts classified as cash equivalents
    (98,671 )     --       --       (98,671 )
Short-term investments
  $ 222,350     $ 350     $ (37 )   $ 222,663  

The amortized cost and estimated fair value of available-for-sale debt securities at January 2, 2011, by contractual maturity, were as follows:

(in thousands)
 
Amortized Cost
   
Estimated Fair Value
 
Due in 1 year or less
  $ 259,609     $ 259,678  
Due in 1-2 years
    21,635       21,676  
Due in 2-5 years
    3,602       3,611  
Total investments in available-for-sale debt securities
  $ 284,846     $ 284,965  



The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of January 2, 2011, aggregated by length of time that individual securities have been in a continuous loss position.

   
Less than 12 months
   
12 months or Greater
   
Total
 
(in thousands)
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
Corporate bonds
  $ 37,648     $ (24 )   $ --     $ --     $ 37,648     $ (24 )
U.S. government agency securities
    11,840       (6 )     --       --       11,840       (6 )
Bank deposits
    1,999       --       --       --       1,999       --  
Commercial paper
    801       --       --       --       801       --  
Total
  $ 52,288     $ (30 )   $ --     $ --     $ 52,288     $ (30 )

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of March 28, 2010, aggregated by length of time that individual securities have been in a continuous loss position.

   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
(in thousands)
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
Corporate bonds
  $ 39,680     $ (35 )   $ --     $ --     $ 39,680     $ (35 )
U.S. government agency securities
    6,099       (2 )     --       --       6,099       (2 )
Total
  $ 45,779     $ (37 )   $ --     $ --     $ 45,779     $ (37 )

Currently, a significant portion of its available-for-sale investments that the Company holds are all high grade instruments.  As of January 2, 2011, the unrealized losses on the Company’s available-for-sale investments represented an insignificant amount in relation to its total available-for-sale portfolio. Because the Company has the ability to hold these investments until a recovery of fair value, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at January 2, 2011 and March 28, 2010.

Non-Marketable Equity Securities

The Company accounts for its equity investments in privately held companies under the cost method.  These investments are subject to periodic impairment review and measured and recorded at fair value when they are deemed to be other-than-temporarily impaired. In determining whether a decline in value of its investment has occurred and is other than temporary, an assessment was made by considering available evidence, including the general market conditions, the investee’s financial condition, near-term prospects, market comparables and subsequent rounds of financing.   The valuation also takes into account the investee’s capital structure, liquidation preferences for its capital and other economic variables. The valuation methodology for determining the decline in value of non-marketable equity securities is based on inputs that require management judgment. The aggregate carrying value of the Company’s non-marketable equity securities was approximately $5.5 million and $3.0 million, and was classified within other assets on the Company’s Condensed Consolidated Balance Sheets as of January 2, 2011 and March 28, 2010.  The Company did not recognize any impairment loss during the three and nine months ended January 2, 2011 and December 27, 2009.

Note 8
Derivative Financial Instruments

As a result of its international operations, sales and purchase transactions, the Company is subject to risks associated with fluctuating currency exchange rates. The Company may use derivative financial instruments to hedge these risks when instruments are available and cost effective in an attempt to minimize the impact of currency exchange rate movements on its operating results and on the cost of capital equipment purchases.  The Company may enter into hedges of forecasted transactions when the


underlying transaction is highly probable and reasonably certain to occur within the subsequent twelve months. Examples of these exposures would include forecasted expenses of a foreign manufacturing plant, design center or sales office. The Company may additionally enter into a derivative to hedge the foreign currency risk of a capital equipment purchase if the capital equipment purchase order is executed and designated as a firm commitment.

The Company may also utilize currency forward contracts to hedge currency exchange rate fluctuations related to certain short term foreign currency assets and liabilities. As of January 2, 2011 and March 28, 2010, the Company did not have any outstanding foreign currency contracts that were designated as hedges of forecasted cash flows or capital equipment purchases.  The Company does not enter into derivative financial instruments for speculative or trading purposes.

Gains and losses on these undesignated derivatives substantially offset gains and losses on the assets and liabilities being hedged and the net amount is included in interest income and other (expense), net in the Condensed Consolidated Statements of Operations. The Company did not have any outstanding foreign currency contracts that were designated as hedges of certain short term foreign currency assets and liabilities at the end of the third quarter of fiscal 2011.  An immaterial amount of net gains and losses were included in interest income and other, net during the first nine months of fiscal 2011 and 2010.

Besides foreign exchange rate exposure, the Company’s cash and investment portfolios are subject to risks associated with fluctuations in interest rates.  While the Company’s policies allow for the use of derivative financial instruments to hedge the fair values of such investments, the Company has yet to enter into this type of hedging arrangement.

Note 9
Stock-Based Compensation

Compensation Expense

The following table summarizes stock-based compensation expense by line items appearing in the Company’s Condensed Consolidated Statements of Operations:

   
Three months ended
   
Nine months ended
 
 (in thousands)
 
Jan. 2,
2011
   
Dec. 27,
2009
   
Jan. 2,
2011
   
Dec. 27,
2009
 
Cost of revenue
  $ 370     $ 630     $ 1,260     $ 2,250  
Research and development
    2,836       2,246       7,985       7,921  
Selling, general and administrative
    1,307       1,287       3,962       2,170  
Total stock-based compensation expense
  $ 4,513     $ 4,163     $ 13,207     $ 12,341  

Stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations is based on awards ultimately expected to vest.  The authoritative guidance for stock-based compensation requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company attributes the value of stock-based compensation to expense on an accelerated method.



Valuation Assumptions

Assumptions used in the Black-Scholes valuation model and resulting weighted average grant-date fair values were as follows:

   
Three months ended
   
Nine months ended
 
   
Jan. 2,
2011
   
Dec. 27,
2009
   
Jan. 2,
2011
   
Dec. 27,
2009
 
Stock option plans:
                       
     Expected Term
 
4.58 years
   
4.58 years
   
4.58 years
   
4.66 years
 
     Risk-free interest rate
    1.49 %     2.17 %     1.95 %     2.13 %
     Volatility
    39.2 %     42.5 %     41.5 %     45.4 %
     Dividend Yield
    0.0 %     0.0 %     0.0 %     0.0 %
     Weighted average grant-date fair value
  $ 2.17     $ 2.30     $ 2.16     $ 2.17  
ESPP:
                               
     Expected Term
 
0.25 years
   
0.25 years
   
0.25 years
   
0.25 years
 
     Risk-free interest rate
    0.2 %     0.1 %     0.2 %     0.2 %
     Volatility
    32.1 %     35.4 %     40.9 %     48.5 %
     Dividend Yield
    0.0 %     0.0 %     0.0 %     0.0 %
     Weighted average fair value
  $ 1.23     $ 1.46     $ 1.33     $ 1.55  

Equity Incentive Programs

The Company currently issues awards under two equity-based plans in order to provide additional incentive and retention to directors and employees who are considered to be essential to the long-range success of the Company.  These plans are further described below.

2004 Equity Plan (2004 Plan)

In September 2004, the Company’s stockholders approved the 2004 Plan.  On July 21, 2010, the Board of Directors of the Company approved an amendment to the Company’s 2004 Plan to increase the number of shares of common stock reserved for issuance thereunder from 28,500,000 shares to 36,800,000 shares (an increase of 8,300,000 shares), provided, however, that the aggregate number of common shares available for issuance under the 2004 Plan is reduced by 1.74 shares for each common share delivered in settlement of any full value award, which are awards other than stock options and stock appreciation rights, that are granted under the 2004 Plan on or after September 23, 2010.  On September 23, 2010, the stockholders of the Company approved the proposed amendment described above, which also includes certain other changes to the 2004 Plan, including an extension of the term of the 2004 Plan. Options granted by the Company under the 2004 Plan generally expire seven years from the date of grant and generally vest over a four-year period from the date of grant, with one-quarter of the shares of common stock vesting on the one-year anniversary of the grant date and the remaining shares vesting monthly for the 36 months thereafter.  The exercise price of the options granted by the Company under the 2004 Plan shall not be less than 100% of the fair market value for a common share subject to such option on the date the option is granted.  Full value awards made under the 2004 Plan shall become vested over a period of not less than three years (or, if vesting is performance-based, over a period of not less than one year) following the date such award is made; provided, however, that full value awards that result in the issuance of an aggregate of up to 5% of common stock available under the 2004 Plan may be granted to any one or more participants without respect to such minimum vesting provisions.  Restricted stock units available for grant by the Company under the 2004 Plan generally vest over a 48-month period from the grant date.  Prior to vesting,


participants holding restricted stock units do not have shareholder rights.  Shares are issued on or as soon as administratively practicable following the vesting date of the restricted stock units and upon issuance, recordation and delivery, the participant will have all the rights of a shareholder of the Company with respect to voting such stock and receipt of dividends and distributions on such stock.  As of January 2, 2011, there were 15.8 million shares available for future grant under the 2004 Plan.

The following table summarizes the Company’s stock option activities for the nine months ended January 2, 2011:

(in thousands, except per share data)
 
 
Shares
   
Weighted Average Exercise Price
 
Options outstanding as of March 28, 2010
    22,289     $ 9.72  
Granted
    2,983       5.82  
Exercised
    (243 )     5.20  
Canceled, forfeited or expired
    (6,453 )     11.86  
Options outstanding as of January 2, 2011
    18,576     $ 8.40  
Options exercisable at January 2, 2011
    10,606     $ 10.22  

The following table summarizes the Company’s restricted stock unit activities for the nine months ended January 2, 2011:

(in thousands, except per share data)
 
Shares
   
Weighted Average Grant Date Fair Value
 
RSU’s outstanding as of March 28, 2010
    1,874     $ 8.04  
Granted
    1,324       5.80  
Released
    (524 )     9.05  
Forfeited
    (222 )     7.39  
Outstanding at January 2, 2011
    2,452     $ 6.67  

2009 ESPP

On June 18, 2009, the Board approved implementation of the 2009 Employee Stock Purchase Plan (“2009 ESPP”) and authorized the reservation and issuance of up to 9,000,000 shares of the Company’s common stock, subject to stockholder approval. On September 17, 2009, the Company’s stockholders approved the plan at the 2009 Annual Meeting of Stockholders.  The 2009 ESPP is intended to be implemented in successive quarterly purchase periods commencing on the first day of each fiscal quarter of the Company.  In order to maintain its qualified status under Section 423 of the Internal Revenue Code, the 2009 ESPP imposes certain restrictions, including the limitation that no employee is permitted to participate in the 2009 ESPP if the rights of such employee to purchase common stock of the Company under the 2009 ESPP and all similar purchase plans of the Company or its subsidiaries would accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time the right is granted) for each calendar year.  During the nine months ended January 2, 2011, the Company issued 1.8 million shares of common stock with a weighted-average purchase price of $4.65 per share.



Note 10
Balance Sheet Detail

(in thousands)
 
Jan. 2,
2011
   
Mar. 28,
2010
 
Inventories
           
Raw materials
  $ 4,391     $ 3,903  
Work-in-process
    38,155       28,715  
Finished goods
    18,860       18,058  
   Total inventories
  $ 61,406     $ 50,676  

Note 11
Deferred Income on Shipments to Distributors

Included in the caption “Deferred income on shipments to distributors” on the Condensed Consolidated Balance Sheets are amounts related to shipments to certain distributors for which revenue is not recognized until the Company’s product has been sold by the distributor to an end customer. The components at January 2, 2011 and March 28, 2010 were as follows:
 
(in thousands)
 
Jan. 2,
2011
   
Mar. 28,
2010
 
Gross deferred revenue   $ 18,457     $ 22,008  
Gross deferred costs
    (2,985     (3,247
Deferred income on shipments to distributors
  $ 15,472       18,761  

The gross deferred revenue represents the gross value of shipments to distributors at the list price billed to the distributor less any price protection credits provided to them in connection with reductions in list price while the products remain in their inventory.  The amount ultimately recognized as revenue will be lower than this amount as a result of future price protection and ship from stock pricing credits which are issued in connection with the sell through of the Company’s products to end customers. Historically this amount has represented an average of approximately 25% of the list price billed to the customer. The gross deferred costs represent the standard costs, which approximate actual costs of products, the Company sells to the distributors.  Although the Company monitors the levels and quality of inventory in the distribution channel, the experience is that products returned from these distributors are able to be sold to a different distributor or in a different region of the world.  As such, inventory write-downs for product in the distribution channel have not been significant.



Note 12
Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by segment for the three and nine months ended January 2, 2011 were as follows:

 
(in thousands)
 
Communications
   
Computing and Consumer
   
Total
 
Balance as of March 28, 2010
  $ 74,673     $ 28,401     $ 103,074  
Additions (1)
    --       946       946  
Balance as of June 27, 2010
  $ 74,673     $ 29,347     $ 104,020  
Additions
    --       --       --  
Balance as of September 26, 2010
  $ 74,673     $ 29,347     $ 104,020  
Additions
    --       --       --  
Balance as of January 2, 2011
  $ 74,673     $ 29,347     $ 104,020  
(1)  
the IKOR acquisition.

Intangible asset balances are summarized as follows:

   
Jan. 2, 2011
 
 
(in thousands)
 
Gross assets
   
Accumulated amortization
   
Net assets
 
Purchased intangible assets:
                 
Developed technology
  $ 219,700     $ (178,147 )   $ 41,553  
Trademarks
    3,421       (782 )     2,639  
Customer relationships
    127,379       (118,245 )     9,134  
Total amortizable purchased intangible assets
    350,500       (297,174 )     53,326  
IPR&D*
    2,711       --       2,711  
Total purchased intangible assets
  $ 353,211     $ (297,174 )   $ 56,037  

   
Mar. 28, 2010
 
(in thousands)
 
Gross Assets
   
Accumulated
Amortization
   
Net Assets
 
Purchased intangible assets:
                 
Developed technology
  $ 258,336     $ (212,554 )   $ 45,782  
Trademarks
    12,271       (9,262 )     3,009  
Customer relationships
    145,485       (132,848 )     12,637  
Total amortizable purchased intangible assets
    416,092       (354,664 )     61,428  
IPR&D*
    3,814       --       3,814  
Total purchased intangible assets
  $ 419,906     $ (354,664 )   $ 65,242  

* IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, the Company will record a charge for the value of the related intangible asset to its Consolidated Statements of Operations in the period it is abandoned.



Amortization expense for purchased intangible assets is summarized below:

   
Three months ended
   
Nine months ended
 
(in thousands)
 
Jan. 2,
2011
   
Dec. 27,
2009
   
Jan. 2,
2011
   
Dec. 27,
2009
 
Developed technology
  $ 3,548     $ 2,996     $ 10,555     $ 11,176  
Trademarks
    122       122       366       262  
Customer relationships
    1,319       1,684       3,951       4,688  
Foundry & assembler relationships
    --       1       --       4  
Other
    --       --       44       --  
Total
  $ 4,989     $ 4,803     $ 14,916     $ 16,130  

Based on the purchased intangible assets recorded at January 2, 2011, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated amortization expense is expected to be as follows: (in thousands):

Fiscal year
 
Amount
 
Remainder of FY 2011
  $ 5,015  
2012
    15,741  
2013
    10,844  
2014
    8,394  
2015
    5,731  
Thereafter
    7,601  
Total
  $ 53,326  

Note 13
Comprehensive Income (Loss)

The components of comprehensive income were as follows:

   
Three months ended
   
Nine months ended
 
(in thousands)
 
Jan. 2,
2011
   
Dec. 27,
2009
   
Jan. 2,
2011
   
Dec. 27,
2009
 
Net income (loss)
  $ 10,597     $ (7,367 )   $ 41,234     $ 39,052  
Currency translation adjustments
    113       (180 )     435       806  
Change in net unrealized gain (loss) on investment
    (177 )     (77 )     (194 )     48  
Comprehensive income (loss)
  $ 10,533     $ (7,624 )   $ 41,475     $ 39,906  

The components of accumulated other comprehensive income, net of tax, were as follows:

 
(in thousands)
 
Jan. 2,
2011
   
March 28,
2010
 
Cumulative translation adjustments
  $ 1,168     $ 733  
Unrealized gain on available-for-sale investments
    119       313  
Total accumulated other comprehensive income
  $ 1,287     $ 1,046  



Note 14
Industry Segments
 
The Company’s reportable segments include the following:
 
·  
Communications segment: includes high-performance timing products, Rapid I/O switching solutions, flow-control management devices, FIFOs, integrated communications processors, high-speed SRAM, military application (divested in the third quarter of fiscal 2010), digital logic, telecommunications and network search engines (divested in the second quarter of fiscal 2010).
·  
Computing and Consumer segment: includes timing products, PCI Express switching and bridging solutions, high-performance server memory interfaces, multi-port products, touch controller, signal integrity products, PC audio and video products.

The tables below provide information about these segments:

Revenues by segment

(in thousands)
 
Three months ended
   
Nine months ended
 
   
Jan. 2, 2011
 
Dec. 27, 2009
   
Jan. 2, 2011
 
Dec. 27, 2009
 
Communications
  $ 72,775     $ 61,689     $ 220,159     $ 179,663  
Computing and Consumer
    80,455       80,791       258,251       218,275  
    Total
  $ 153,230     $ 142,480     $ 478,410     $ 397,938  

Income (loss) by segment

   
Three months ended
   
Nine months ended
 
(in thousands)
 
Jan. 2, 2011
   
Dec. 27, 2009
   
Jan. 2, 2011
   
Dec. 27, 2009
 
Communications
  $ 32,868     $ 21,972     $ 96,512     $ 58,545  
Computing and Consumer
    (9,351 )     (4,772 )     (18,235 )     (25,971 )
     Amortization of intangible assets
    (4,990 )     (4,803 )     (14,917 )     (16,130 )
     Acquisition related costs and other
    (694 )     254       (1,834 )     (3,692 )
     Gain (loss) on divestitures
    --       (4,461 )     --       78,286  
     Fair market value adjustment to acquired inventory sold
    --       (8,421 )     (379 )     (16,055 )
     Severance and retention related costs
    (1,697 )     (2,320 )     (3,354 )     (17,855 )
     Fabrication product transfer costs
    (1,639 )     (783 )     (3,851 )     (1,105 )
     Compensation expense - deferred compensation plan
    (815 )     (521 )     (1,305 )     (2,522 )
     Assets impairment
    107       216       384       (1,786 )
     Stock-based compensation expense
    (4,513 )     (4,163 )     (13,207 )     (12,341 )
     Interest income and other, net
    1,352       582       2,794       3,176  
Income (loss) before income taxes
  $ 10,628     $ (7,220 )   $ 42,608     $ 42,550  

The Company does not allocate amortization of intangible assets, severance and retention costs, acquisition-related costs, stock-based compensation, interest income and other (expense), net, and interest expense to its segments.  In addition, the Company does not allocate assets to its segments. The Company excludes these items consistent with the manner in which it internally evaluates its results of operations.



The Company’s significant operations outside of the United States include manufacturing facility in Malaysia, design centers in Canada and China, and sales subsidiaries in Japan, Asia Pacific and Europe. Revenues from unaffiliated customers by geographic area, based on the customers' shipment locations, were as follows:

(in thousands)
 
Three months ended
   
Nine months ended
 
   
Jan. 2, 2011
   
Dec. 27, 2009
   
Jan. 2, 2011
   
Dec. 27, 2009
 
Asia Pacific
  $ 94,179     $ 92,205     $ 309,338     $ 261,915  
Americas
    25,492       23,071       73,554       69,453  
Japan
    19,643       16,374       52,767       37,978  
Europe
    13,916       10,830       42,751       28,592  
Total consolidated revenues
  $ 153,230     $ 142,480     $ 478,410     $ 397,938  

The Company's property, plant and equipment are summarized below by geographic area:

(in thousands)
 
Jan. 2,
 2011
   
Mar. 28,
 2010
 
United States
  $ 51,290     $ 52,979  
Canada
    5,784       6,437  
Malaysia
    8,628       6,446  
Singapore
    --       1,233  
All other countries
    1,677       893  
Total property, plant and equipment, net
  $ 67,379     $ 67,988  


On February 1, 2010, the Company announced a plan to discontinue manufacturing operations in our Singapore facility and consolidate with our manufacturing operations in Malaysia. As a result, in the first quarter of fiscal 2011, the Company completed the transfer of all property, plant and equipment located in Singapore to Malaysia.

Note 15
Commitments and Contingencies

Guarantees

As of January 2, 2011, the Company’s financial guarantees consisted of guarantees and standby letters of credit, which are primarily related to the Company’s electrical utilities in Malaysia, utilization of non-country nationals in Malaysia and Singapore, consumption tax in Japan and value-added tax obligations in Singapore and Holland, and a workers’ compensation plan in the United States. The maximum amount of potential future payments under these arrangements is approximately $2.5 million.

Indemnification

During the normal course of business, the Company makes certain indemnifications and commitments under which it may be required to make payments in relation to certain transactions.  In addition to indemnifications related to non-infringement of patents and intellectual property, other indemnifications include indemnification of the Company’s directors and officers in connection with legal proceedings, indemnification of various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnification of other parties to certain acquisition agreements. The duration of these indemnifications and commitments varies, and in certain cases, is indefinite. The Company believes that substantially all of its indemnities and commitments provide for limitations on the maximum potential future payments the Company could be obligated to make. However, the Company is unable to estimate the


maximum amount of liability related to its indemnities and commitments because such liabilities are contingent upon the occurrence of events which are not reasonably determinable.  The Company believes that any liability for these indemnities and commitments would not be material to its accompanying condensed consolidated financial statements.

The Company maintains an accrual for obligations it incurs under its standard product warranty program and customer, part, or process specific matters. The Company’s standard warranty period is one year, however in certain instances the warranty period may be extended to as long as two years.  Management estimates the fair value of the Company’s warranty liability based on actual past warranty claims experience, its policies regarding customer warranty returns and other estimates about the timing and disposition of product returned under the standard program.  Customer, part, or process specific reserves are estimated using a specific identification method.  Historical profit and loss impact related to warranty returns activity has been minimal. The total accrual was $0.5 million as of January 2, 2011 and March 28, 2010, respectively.

Litigation

In April 2008, LSI Corporation and its wholly owned subsidiary Agere Systems Inc. (collectively “LSI”) instituted an action in the United States International Trade Commission (ITC or “Commission”), naming the Company and several other respondents.  The ITC action sought an exclusion order under section 337 of the Tariff Act to prevent importation into the U.S. of semiconductor integrated circuit devices and products made by methods alleged to infringe an LSI patent relating to tungsten metallization in semiconductor manufacturing. LSI also filed a companion case in the U.S. District Court for the Eastern District of Texas seeking an injunction and damages of an unspecified amount relating to such alleged infringement. Some of the defendants in the action have since settled the claims against them.  On March 22, 2010, the full ITC Commission issued its Notice of Decision indicating that it had found that the patent claims asserted by LSI were invalid and that there had been no violation of section 337 by the Company, and thereupon terminated its investigation.  On May 14, 2010, LSI filed a Notice of Appeal in the United States Court of Appeals for the Federal Circuit (“CAFC”) for review of the Final Determination of the Commission.  On July 13, 2010, the patent asserted by LSI in these actions expired.  A motion to dismiss the LSI appeal as moot, based on the expiration of the asserted patent, was granted by the CAFC on November 15, 2010.  The action in the U.S. District Court was previously stayed pending the outcome of the ITC action. The Company intends to vigorously defend itself against any claims that may be raised in this matter implicating the Company.

In November 2010, the Company filed a complaint in the Northern District of California against Phison Electronics Corp. (“Phison”) for infringement of four Company patents directed to oscillator and clock signal technology.  The lawsuit seeks a preliminary and permanent injunction against Phison products as well as damages, attorney's fees and cost of the lawsuit.  Phison filed an answer to the Complaint on January 31, 2011, denying infringement of the patents in suit. A case management conference is set for March 17, 2011.
 

Note 16
Restructuring

The following table shows the provision of the restructuring charges and the liability remaining as of January 2, 2011:

(in thousands)
 
Cost of Goods Sold
   
Operating Expenses
   
Total
 
Balance as of March 28, 2010
  $ 7,064     $ 2,367     $ 9,431  
Provision
    737       398       1,135  
Cash payments
    (1,151 )     (1,102 )     (2,253 )
Balance as of June 27, 2010
  $ 6,650     $ 1,663     $ 8,313  
Provision
    15       44       59  
Cash payments
    (969 )     (718 )     (1,687 )
Balance as of September 26, 2010
  $ 5,696     $ 989     $ 6,685  
Provision
    158       1,525       1,683  
Cash payments
    (97 )     (676 )     (773 )
Balance as of January 2, 2011
  $ 5,757     $ 1,838     $ 7,595  

As part of an effort to streamline operations with changing market conditions and to create a more efficient organization, the Company has undertaken restructuring actions, to reduce its workforce and consolidate facilities.  The Company’s restructuring expenses have been comprised primarily of: (i) severance and termination benefit costs related to the reduction of its workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities. 

In the third quarter of fiscal 2011, the Company initiated a restructuring action intended to further adjust its skills mix to new strategic and product opportunities. The restructuring action included a reduction in headcount in our multiple divisions. As a result, the Company recorded restructuring expenses of approximately $1.7 million for severance payments, payments under federal, state and province notice statutes and retention and other benefits associated with this restructuring action in the third quarter of fiscal 2011. As of January 2, 2011, the Company made severance and retention payments totaling $0.5 million related to this restructuring action. The Company expects to complete this restructuring action in the fourth quarter of fiscal 2011.

In connection with the discontinuing manufacturing operations at our Singapore facility in the fourth quarter of fiscal 2010, the Company exited its leased facility in Singapore in the first quarter of fiscal 2011. As a result, the Company recorded lease impairment charges of approximately $0.8 million in the first nine months of fiscal 2011, which represented the future rental payments under the agreements, reduced by an estimate of sublease incomes, and discounted to present value using an interest rate applicable to us. These charges were recorded as cost of goods sold.  Since the initial restructuring, the Company has made lease payments of $0.2 million.  As of January 2, 2011, the remaining accrued lease liabilities were $0.6 million. The Company expects to pay off the facility lease charges through the third quarter of fiscal 2013.

In connection with the divestitures in the third quarter of fiscal 2010, the Company exited certain leased facilities. As a result, the Company recorded lease impairment charges of approximately $0.9 million, which represented the future rental payments under the agreements, reduced by an estimate of sublease incomes, and discounted to present value using an interest rate applicable to us. These charges were recorded as SG&A.  Since the initial restructuring, the Company has made lease payments of $0.6 million related to the vacated facilities.  As of January 2, 2011, the remaining accrued lease liabilities were $0.3 million. The Company expects to pay off the facility lease charges through the first quarter of fiscal 2013.

In addition, in connection with its plan to transition the manufacture of products to TSMC, the Company’s management approved a plan to exit wafer production operations at its Oregon fabrication facility.  As a result, the Company accrued restructuring expenses of $4.8 million for severance payments and other benefits associated with this restructuring action in fiscal 2010. The Company expects to complete this restructuring action in the third quarter of fiscal 2012.


During the second quarter of fiscal 2006, the Company completed the consolidation of its Northern California workforce into its San Jose headquarters and exited a leased facility in Salinas, California. The Company recorded lease impairment charges of approximately $2.1 million, of which $0.6 million was recorded as cost of revenues, $0.9 million was recorded as R&D expense and $0.6 million was recorded as SG&A expense. Since the initial restructuring, the Company has made lease payments of $1.4 million related to the vacated facility in Salinas.  As of January 2, 2011, the remaining accrued lease liabilities were $0.7 million.  The Company expects to pay off this facility charges through the third quarter of fiscal 2014.

Note 17
Income Taxes

The Company recorded an income tax provision of $30.5 thousand in the third quarter of fiscal 2011, a decrease of $0.1 million compared to the third quarter of fiscal 2010.   The provision for income taxes in the third quarter of fiscal 2011 was attributable to estimated U.S. and state taxes and foreign income taxes. The income tax provision in the third quarter of fiscal 2010 was attributable to a discrete tax provision of $1.3 million related to its fiscal 2009 income tax return filing and a discrete tax benefit of $1.5 million as a result of the military business and NWD asset sales and the estimated U.S. Federal and state taxes and estimated foreign income taxes.
 
As of January 2, 2011, the Company was subject to examination in the U.S. federal tax jurisdiction for the fiscal years beginning with 2004. In February 2009, the Internal Revenue Service (IRS) commenced a tax audit for fiscal years beginning 2006 through 2008. The Company believes that it is reasonably possible that the IRS audit and the audits in foreign jurisdictions may be resolved and/or there will be an expiration of the statute of limitations within the next twelve months, which could result in the potential recognition of unrecognized tax benefits within the next twelve months of up to $37 million, including tax, interest and penalties. The specific positions that may be resolved include issues regarding transfer pricing, extraterritorial income exclusion and various other matters.
 
Note 18
Share Repurchase Program

On July 21, 2010, the Company’s Board of Directors approved a share repurchase plan to repurchase up to $225 million of its common stock.  During the second quarter of fiscal 2011, the Company repurchased approximately 4.6 million shares at an average price of $5.53 per share for a total purchase price of $25.6 million under this plan.  During the third quarter of fiscal 2011, the Company repurchased approximately 6.6 million shares at an average price of $6.25 per share for a total purchase price of $41.4 million. As of January 2, 2011, approximately $158.0 million was available for future purchase under this share repurchase program.  Share repurchases were recorded as treasury stock and resulted in a reduction of stockholders’ equity.  




ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains 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.  Forward-looking statements involve a number of risks and uncertainties.  These include, but are not limited to: global business and economic conditions; operating results; new product introductions and sales; competitive conditions; capital expenditures and resources; manufacturing capacity utilization; customer demand and inventory levels; intellectual property matters; mergers and acquisitions and integration activities; and the risk factors set forth in Part II, Item 1A “Risk Factors” to this Report on Form 10-Q.  As a result of these risks and uncertainties, actual results could differ from those anticipated in the forward-looking statements.  Unless otherwise required by law, we undertake no obligation to publicly revise these statements for future events or new information after the date of this Report on Form 10-Q.

This discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying Notes included in this report and the Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended March 28, 2010 filed with the SEC. Operating results for the three months and nine months ended January 2, 2011 are not necessarily indicative of operating results for an entire fiscal year. The Company’s fiscal year is the 52- or 53-week period ending on the Sunday closest to March 31.  In a 52-week year, each fiscal quarter consists of 13 weeks.  In a 53-week year, the additional week is usually added to the third quarter, making such quarter consist of 14 weeks.  The third quarter of fiscal 2011 was a fourteen week period, while the third quarter of fiscal 2010 was a thirteen week period.

Forward-looking statements, which are generally identified by words such as “anticipates,” “expects,” “plans,” and similar terms, include statements related to revenues and gross profit, research and development activities, selling, general and administrative expenses, intangible expenses, interest income and other, taxes, capital spending and financing transactions, as well as statements regarding successful development and market acceptance of new products, industry and overall economic conditions and demand, and capacity utilization.

Results of Operations

We design, develop, manufacture and market a broad range of high-performance, mixed-signal semiconductor solutions for the advanced communications, computing and consumer industries.  This is achieved by developing detailed systems-level knowledge, and applying our fundamental semiconductor heritage in high speed serial interfaces, timing, switching and memory to create solutions to compelling technology problems faced by customers.

Our reportable segments include the following:

§  
Communications segment: includes high-performance timing products, Rapid I/O switching solutions, flow-control management devices, FIFOs, multi-port products, integrated communications processors, high-speed SRAM, military application (divested in the third quarter of fiscal 2010), digital logic, telecommunications and network search engines (divested in the second quarter of fiscal 2010),
§  
Computing and Consumer segment: includes timing products, PCI Express switching and bridging solutions, high-performance server memory interfaces, touch controller, signal integrity products, PC audio and video products.


Revenues

(in thousands)
 
Three months ended
   
Nine months ended
 
   
Jan 2, 2011
 
Dec. 27, 2009
   
Jan 2, 2011
 
Dec. 27, 2009
 
Communications
  $ 72,775     $ 61,689     $ 220,159     $ 179,663  
Computing and Consumer
    80,455       80,791       258,251       218,275  
    Total
  $ 153,230     $ 142,480     $ 478,410     $ 397,938  

Communications Segment

Revenues in our Communications segment increased $11.1 million, or 18% in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 reflected the improvement in overall economic conditions and the ramp up of new products.  Revenues from our communication products increased 24% due to the significant growth in demand for our timing and telecom products in the communications markets.  Revenues from our flow control management products more than doubled as sales of our Rapid I/O switching solutions products continued to ramp. Revenues from our SRAM, multi-port, FIFO, and digital logic products increased 17% due to the strength in the communication integrated circuit market.  Partially offsetting these increases was a decrease in sales of our networking search engine products and military products as a result of our divestiture of the networking (NWD) assets and military (MNC) business in the second quarter and third quarter of fiscal 2010, respectively.

Computing and Consumer Segment

Revenues in our Computing and Consumer segment decreased $0.3 million in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 due to the decreased demand and channel inventory re-balancing at some of our distributors. Revenues within our analog and power division decreased 15% driven by lower demand for our personal computer and consumer products and reduction of distributor channel inventories.  Revenues within our Enterprise Computing division increased 23%, due to the continued growth in our Data Double Rate 3 (DDR3) and PCI Express products partially offset by the decline in our Advanced Memory Buffer (AMB) products.  Revenue within video and display division increased 28% attributable to the ramp up of new products.

Revenues (first nine months of fiscal 2011 compared to first nine months of fiscal 2010). Our year-to-date revenues through the third quarter of fiscal 2011 were $478.4 million, an increase of $80.5 million, or 20% when compared to the same period one year ago. The increase in revenues was primarily attributable to the improvement in overall economic conditions following the significant declines in the prior year, design wins and ramp up of new products. Revenue in our Communications segment increased $40.5 million, or 23%, driven by the factors discussed above.  Revenue in our Computing and Consumer segment increased $40.0 million, or 18% driven by strong sales of our DDR3, PCI Express products and ramp up of our video and display products, partially offset by the  broad demand weakness from our personal computing and consumer end markets and continued ramp down of our AMB products.

Revenues in APAC, North America, Japan and Europe accounted for 61%, 17%, 13% and 9%, respectively, of our consolidated revenues in the third quarter of fiscal 2011 compared to 65%, 16%, 11% and 8%, respectively, in the third quarter of fiscal 2010.  The Asia Pacific region continues to be our strongest region, as many of our largest customers utilize manufacturers in that region.


Included in the Balance Sheet caption “Deferred income on shipments to distributors” are amounts related to shipments to certain distributors for which revenue is not recognized until our product has been sold by the distributor to an end customer. The components as of January 2, 2011 and March 28, 2010 are as follows:
 
(in thousands)
 
Jan. 2,
2011
   
Mar. 28,
2010
 
Gross deferred revenue   $ 18,457     $ 22,008  
Gross deferred costs
    (2,985     (3,247
Deferred income on shipments to distributors
  $ 15,472       18,761  

The gross deferred revenue represents the gross value of shipments to distributors at the list price billed to the distributor less any price protection credits provided to them in connection with reductions in list price while the products remain in their inventory.  Based on our history, the amount ultimately recognized as revenue will be lower than this amount as a result of ship from stock pricing credits, which are issued in connection with the sell through of the product to an end customer.  As the amount of price adjustments subsequent to shipment is dependent on the overall market conditions, the levels of these adjustments can fluctuate significantly from period to period. Historically, this amount has represented an average of approximately 25% of the list price billed to the customer.  As these credits are issued, there is no impact to working capital as this reduces both accounts receivable and deferred revenue.  The gross deferred costs represent the standard costs (which approximate actual costs) of products we sell to the distributors.  The deferred income on shipments to distributors decreased $3.3 million or 18% for the third quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010.  The decrease was primarily attributable to our effort of channel inventory re-balancing at some of our distributors.

Gross Profit

(in thousands)
 
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Dec. 27, 2009
   
Jan. 2, 2011
 
Dec. 27, 2009
 
Gross profit
  $ 82,475     $ 59,729     $ 254,935     $ 158,025  
Gross margin
    54 %     42 %     53 %     40 %

Gross profit (the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010). Gross profit for the third quarter of fiscal 2011 was $82.5 million, an increase of $22.7 million, or 38% compared to the third quarter of fiscal 2010.  The increase in gross profit was primarily driven by higher revenue.  Our gross margin percentage was positively impacted by a favorable shift in the mix of products sold, a higher utilization of our fabrication facility and manufacturing cost reduction initiatives. The utilization of our manufacturing capacity in Oregon increased from approximately 90% of equipped capacity in the third quarter of fiscal 2010 to 100% of equipped capacity in the third quarter of fiscal 2011.  In addition, gross margin in the third quarter of fiscal 2011 was positively impacted by cost savings from the closure of our test facility in Singapore and consolidation of our test operations in Malaysia.  Our gross profit in the third quarter of fiscal 2010 was negatively impacted by $8.4 million related to the sale of acquired inventory valued at fair market value, less an estimated selling cost, associated with our acquisition of Tundra, while we had no such charges in the third quarter of fiscal 2011.

Gross Profit (first nine months of fiscal 2011 compared to the first nine months of fiscal 2010). Our year to date gross profit through the third quarter of fiscal 2011 was $254.9 million, an increase of $96.9 million, or 61% compared to the same period one year ago. The increase in gross profit was primarily attributable to the factors discussed above including higher utilization of our fabrication facility, a favorable shift in the mix of products sold and cost savings from the consolidation of our manufacturing operations in Malaysia. In addition, our gross profit for the first nine months of fiscal 2010 was negatively impacted by the sale of acquired inventory from Tundra which were valued at fair market value, less an estimated selling cost,  severance and benefit costs related to a reduction in force associated with our acquisition of Tundra, the restructuring action within our Oregon fabrication facility in the second quarter of fiscal 2010 and an impairment charge related to a note receivable net of deferred gain for the assets we sold to our


subcontractor in fiscal 2007, while we had no such charges in the first nine months of fiscal 2011.  Our gross margin for the nine months of fiscal 2011 also benefited from decreases in equipment expense and stock based compensation expense.  Partially offsetting these decreases was an increase in incentive compensation expense.  

Operating Expenses

The following table shows our operating expenses:

   
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2011
   
% of Net
Revenues
   
Dec. 27,
2009
   
% of Net
Revenues
   
Jan. 2,
2011
   
% of Net
Revenues
   
Dec. 27,
2009
   
% of Net
Revenues
 
Research and Development
  $ 46,143       30 %   $ 38,316       27 %   $ 133,865       28 %   $ 116,086       29 %
Selling, General and Administrative
  $ 27,056       18 %   $ 24,754       17 %   $ 81,255       17 %   $ 80,851       20 %


Research and Development (“R&D”)

R&D (the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010). R&D expenses increased $7.8 million, or 20%, to $46.1 million in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010.  The increase in R&D was primarily attributable to an additional one week in the third quarter of fiscal 2011, $1.5 million increase in incentive compensation expense, $0.7 million increase in other performance bonus expense associated with the acquisitions and $0.4 million increase in 401K matching.  Equipment expenses, product developments and photomasks expense increased $0.6 million, $0.3 million and $0.5 million, respectively, as we increased development efforts to bring new products to market. Partially offsetting these increases was a $0.2 million decrease in consulting service expense.

R&D (the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010). Our year to date R&D expenses were $133.9 million, an increase of $17.8 million, or 15% compared to the same period one year ago. The increase was primarily attributable to an additional one week in the first nine months of fiscal 2011, $6.3 million increase in the incentive compensation expense and $2.5 million increase in other performance bonus expense as a result of acquisitions.  Equipment expenses and product development expenses increased $2.9 million and $1.1 million, respectively. Partially offsetting these increases was a $1.3 million decrease in photomask expense and a $1.0 million decrease in severance and retention expense.
 
Selling, general and administrative (“SG&A”)

SG&A (the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010). SG&A expenses increased $2.3 million, or 9%, to $27.0 million in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010.  The increase in SG&A was primarily due to an additional one week in the third quarter of fiscal 2011, $0.4 million increase in severance and retention expense and $0.6 million increase in incentive compensation expense. Sales representative commissions increased $0.6 million attributable to higher revenues in the third quarter of fiscal 2011.  In addition, travel and entrainment costs, trade show and outside services expense increased $0.3 million, $0.5 million and $0.5 million, respectively. Partially offsetting these increases was a $0.4 million decrease in intangible assets amortization expense as the majority of intangible assets acquired from the ICS acquisition were fully amortized.

SG&A (the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010). Our year to date SG&A expenses were $81.3 million, an increase of $0.4 million, or 1% compared to the same period one year ago. The increase was primarily attributable to an additional one week in the first nine months of fiscal 2011, $2.6 million increase in incentive compensation expense, $1.8 million increase in stock based compensation expense, $1.1 million increase in travel and entertainment costs and $0.8 million increase in


sales conference and trade shows.  In addition, sales commission expense increased $0.9 million due to revenue increase. Partially offsetting these decreases was a $5.6 million decrease in severance and retention expense and a $2.1 million decrease in outside service expense primarily related to reductions in legal, tax, accounting and outside consulting services.
 
Restructuring

As part of an effort to streamline operations with changing market conditions and to create a more efficient organization, we have undertaken restructuring actions to reduce our workforce and consolidate facilities.  Our restructuring expenses have been comprised primarily of: (i) severance and termination benefit costs related to the reduction of our workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities.

In the third quarter of fiscal 2011, we initiated a restructuring action intended to further adjust our skills mix to new strategic and product opportunities. The restructuring action included a reduction in headcount in our multiple divisions. As a result, we recorded restructuring expenses of approximately $1.7 million for severance payments, payments under federal, state and province notice statutes and retention and other benefits associated with this restructuring action in the third quarter of fiscal 2011. As of January 2, 2011, we made severance and retention payments totaling $0.5 million related to this restructuring action. We expect to complete this restructuring action in the fourth quarter of fiscal 2011.

In connection with the discontinuing manufacturing operations at our Singapore facility in the fourth quarter of fiscal 2010, we exited the leased facility in Singapore in the first quarter of fiscal 2011. As a result, we recorded lease impairment charges of approximately $0.8 million in the first nine months of fiscal 2011, which represented the future rental payments under the agreements, reduced by an estimate of sublease incomes, and discounted to present value using an interest rate applicable to us. These charges were recorded as cost of goods sold.  Since the initial restructuring, we have made lease payments of $0.2 million.  As of January 2, 2011, the remaining accrued lease liabilities were $0.6 million. We expect to pay off the facility lease charges through the third quarter of fiscal 2013.

In connection with the divestitures in the third quarter of fiscal 2010, we exited certain leased facilities. As a result, we recorded lease impairment charges of approximately $0.9 million, which represented the future rental payments under the agreements, reduced by an estimate of sublease incomes, and discounted to present value using an interest rate applicable to us. These charges were recorded as SG&A.  Since the initial restructuring, we have made lease payments of $0.6 million related to the vacated facilities.  As of January 2, 2011, the remaining accrued lease liabilities were $0.3 million. We expect to pay off the facility lease charges through the first quarter of fiscal 2013.

In addition, in connection with its plan to transition the manufacture of products to TSMC, our management approved a plan to exit wafer production operations at our Oregon fabrication facility.  As a result, we accrued restructuring expenses of approximately $4.8 million for severance payments and other benefits associated with this restructuring action in fiscal 2010. We expect to complete this restructuring action in the third quarter of fiscal 2012.

During the second quarter of fiscal 2006, we completed the consolidation of our Northern California workforce into our San Jose headquarters and exited a leased facility in Salinas, California. We recorded lease impairment charges of approximately $2.1 million, of which $0.6 million was recorded as cost of revenues, $0.9 million was recorded as R&D expense and $0.6 million was recorded as SG&A expense. Since the initial restructuring, we have made lease payments of $1.4 million related to the vacated facility in Salinas.  As of January 2, 2011, the remaining accrued lease liabilities were $0.7 million.  We expect to pay off this facility charges through the third quarter of fiscal 2014.


Interest Income and Other, Net 

The components of interest income and other, net are summarized as follows:

 (in thousands)
 
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 2011
   
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 2009
   
Jan. 2,
 2011
   
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 2009
 
Interest income
  $ 272     $ 412     $ 833     $ 1,436