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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 July 1, 2018 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
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 ý No o 

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 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 ý 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. 
Large accelerated filer
ý
 
Accelerated Filer
¨
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No ý 
The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of August 3, 2018 was approximately 129,347,795.



Table of Contents

INTEGRATED DEVICE TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

PART I-FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II-OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited, in thousands)
July 1, 2018
 
April 1, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
148,071

 
$
136,873

Short-term investments
198,188

 
222,026

Accounts receivable, net
122,977

 
108,779

Inventories
66,177

 
68,702

Prepayments and other current assets
12,193

 
12,734

Total current assets
547,606

 
549,114

Property, plant and equipment, net
86,935

 
86,845

Goodwill
420,117

 
420,117

Intangible assets, net
170,899

 
180,781

Deferred tax assets
9,355

 
11,764

Other assets
48,809

 
61,910

Total assets
$
1,283,721

 
$
1,310,531

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
33,579

 
$
41,070

Accrued compensation and related expenses
28,679

 
44,002

Current portion of bank loan
1,980

 
2,000

Other accrued liabilities
32,493

 
26,524

Total current liabilities
96,731

 
113,596

Deferred tax liabilities
11,516

 
10,221

Long-term income tax payable
23,573

 
25,034

Convertible notes
303,166

 
299,551

Long-term bank loan, net
190,803

 
191,073

Other long-term liabilities
27,369

 
25,684

Total liabilities
653,158

 
665,159

Commitments and contingencies (Note 13)


 


Stockholders' equity:
 

 
 

Preferred stock: $0.001 par value: 10,000 shares authorized; no shares issued

 

Common stock: $0.001 par value: 350,000 shares authorized; 129,677 and 129,531 shares outstanding as of July 1, 2018 and April 1, 2018, respectively
130

 
130

Additional paid-in capital
2,773,242

 
2,752,784

Treasury stock at cost: 130,076 and 128,518 shares as of July 1, 2018 and April 1, 2018, respectively
(1,850,962
)
 
(1,801,624
)
Accumulated deficit
(284,405
)
 
(301,155
)
Accumulated other comprehensive loss
(7,442
)
 
(4,763
)
Total stockholders' equity
630,563

 
645,372

Total liabilities and stockholders' equity
$
1,283,721

 
$
1,310,531

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

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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
(Unaudited, in thousands, except per share data)
July 1, 2018
 
July 2, 2017
Revenues
$
228,516

 
$
196,713

Cost of revenues
91,909

 
86,675

Gross profit
136,607

 
110,038

Operating expenses:
 

 
 

Research and development
52,234

 
48,449

Selling, general and administrative
42,995

 
41,942

Total operating expenses
95,229

 
90,391

Operating income
41,378

 
19,647

Other-than-temporary impairment loss on investment
(2,000
)
 

Interest expense
(7,185
)
 
(6,897
)
Interest income and other, net
1,671

 
2,982

Income before income taxes
33,864

 
15,732

Benefit from (provision for) income taxes
(3,144
)
 
982

Net income
$
30,720

 
$
16,714

Net income per share:
 
 
 
Basic
$
0.24

 
$
0.13

Diluted
$
0.23

 
$
0.12

Weighted average shares:
 

 
 

Basic
129,560

 
133,302

Diluted
132,806

 
136,642


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

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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
(Unaudited, in thousands)
July 1, 2018
 
July 2, 2017
Net income
$
30,720

 
$
16,714

Other comprehensive income (loss), net of taxes:
 
 
 
Currency translation adjustments
(2,708
)
 
1,403

Change in net unrealized gain on investments, net of tax
29

 
134

Total other comprehensive income (loss)
(2,679
)
 
1,537

Comprehensive income
$
28,041

 
$
18,251


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


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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
(Unaudited, in thousands)
July 1, 2018
 
July 2, 2017
Cash flows from operating activities:
 
 
 
Net income
$
30,720

 
$
16,714

Adjustments:
 

 
 

Depreciation
6,586

 
6,116

Amortization of intangible assets
10,097

 
11,736

Amortization of debt issuance costs and debt discount
3,820

 
3,641

Other-than-temporary impairment loss on investment
2,000

 

Stock-based compensation expense, net of amounts capitalized in inventory
15,063

 
11,820

Deferred income tax
3,704

 
(3,023
)
Changes in assets and liabilities, net of acquisitions:
 

 
 

   Accounts receivable, net
(3,234
)
 
582

   Inventories
2,505

 
253

   Prepayments and other assets
(2,625
)
 
239

   Accounts payable
(6,008
)
 
(5,530
)
   Accrued compensation and related expenses
(15,324
)
 
(6,226
)
   Deferred income on shipments to distributors

 
233

   Income taxes payable and receivable
(1,937
)
 
917

   Other accrued liabilities and long-term liabilities
(1,074
)
 
(2,499
)
   Net cash provided by operating activities
44,293

 
34,973

Cash flows from investing activities:
 

 
 

Business acquisitions, net of cash acquired

 
(237,716
)
Purchases of property, plant and equipment, net
(8,459
)
 
(8,434
)
Purchases of intangible assets
(778
)
 
(259
)
Purchases of short-term investments
(3,478
)
 
(47,689
)
Proceeds from sales of short-term investments
2,425

 
14,568

Proceeds from maturities of short-term investments
24,419

 
11,401

 Net cash provided by (used in) investing activities
14,129

 
(268,129
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
5,415

 
3,209

Repurchases of common stock
(49,338
)
 
(34,826
)
Payment of capital lease obligations
(449
)
 
(200
)
Proceeds of Initial Term B Loan, net of discount and issuance costs

 
194,252

Principal payments of long-term bank loan
(495
)
 
(500
)
Payment of contingent consideration
(750
)
 

 Net cash provided by (used in) financing activities
(45,617
)
 
161,935

Effect of exchange rates on cash and cash equivalents 
(1,607
)
 
1,200

Net increase (decrease) in cash and cash equivalents
11,198

 
(70,021
)
Cash and cash equivalents at beginning of period
136,873

 
214,554

Cash and cash equivalents at end of period
$
148,071

 
$
144,533









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Supplemental disclosure of cash flow information
Three Months Ended
(Unaudited, in thousands)
July 1, 2018
 
July 2, 2017
Non-cash investing and financing activities:
 
 
 
Additions to property, plant and equipment included in accounts payable
$
524

 
$
1,879

Additions to intangible assets included in accounts payable and other accrued liabilities
$
215

 
$

Fair value of partially vested employee equity awards related to pre-combination services that were assumed as part of the business acquisition
$

 
$
3,400


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


Table of Contents


INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Business.  Integrated Device Technology, Inc. (IDT or the Company) designs, develops, manufactures and markets a broad range of integrated circuits for the advanced communications, computing, consumer and automotive industries.
Basis of Presentation.  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 first quarter of fiscal 2019 and fiscal 2018 was 13 week periods.
Principles of Consolidation.  The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Significant Accounting Policies. For a description of significant accounting policies, see Note 1, Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's annual report on Form 10-K for the fiscal year ended April 1, 2018. There have been no material changes to the Company's significant accounting policies since the filing of the annual report on Form 10-K other than Revenue Recognition Policy detailed below.
Revenue Recognition Policy Effective April 2, 2018
Effective April 2, 2018, the Company adopted Financial Accounting Standards Board or FASB ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method applied to those contracts which were not completed as of April 2, 2018.
The Company recognizes revenue when control of its goods and services is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for its services. Sales taxes are excluded from revenue. The Company determines revenue recognition through the following steps:
Identification of the contract or contracts with a customer
Identification of the performance obligation in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company’s revenue results from semiconductor products 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. Revenue for semiconductor products is recognized when the control is transferred to the customer, which is typically upon shipment to customers. Distributors have rights to price protection, ship from stock pricing credits and stock rotation. The Company accounts for the right of returns, rebates and other pricing adjustments as variable consideration and uses the portfolio approach to estimate these amounts based on the expected amount to be provided to customers and reduce the revenue recognized. The Company utilizes historical experience and market trends to estimate the reserves. Historically, differences between actual and estimated credits have not been material.
For proprietary software licenses that constitute functional intellectual properties, revenue is recognized at the later of when (i) the license term starts and (ii) the software is made available to customers.
The Company recognizes revenue from per-unit royalty-based IP licenses in the period the licensee consumes the licenses. The revenues from fixed-price support or maintenance performance obligations are recognized ratably over the support period consistently with the stand-ready nature of these performance obligations.
The Company’s non-recurring engineering (“NRE”) contracts with customers may include multiple performance obligations. For NRE arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Revenue is recognized over time in the amount to which the Company has a right to invoice, if the right to consideration from the customer is in an amount that corresponds reasonably with the value to the customer of the entity’s performance completed to date.

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Practical Expedients and Elections
The Company recognizes commission costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. As a result, no commission costs are capitalized.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed. The Company does not disclose the nature of the performance obligations and the remaining duration of the performance obligations.
The Company has elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.
The Company also elects to exclude amounts collected from customers for all sales taxes from the transaction price.
The Company has adopted the practical expedient which states an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less.
In the opinion of management, these condensed consolidated financial statements, consisting only of normal recurring adjustments, reflect all adjustments which are necessary for the fair statement of the condensed consolidated financial statements for the interim period.
Accounting Pronouncements Recently Adopted
Adoption of ASC Topic 606:
On May 28, 2014, FASB issued ASC Topic 606, which creates a single source of revenue guidance under US generally accepted accounting principles for all companies, in all industries, effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Under the new standard, an entity is required to recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration received in exchange for goods and services. The FASB also issued additional guidance that defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates, and also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. This new guidance supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the standard.
Effective April 2, 2018, the Company adopted ASC Topic 606 using the modified retrospective method applied to those contracts which were not completed as of April 2, 2018. Results for reporting periods beginning after April 2, 2018 are presented under ASC Topic 606. Prior period amounts are not adjusted and continue to be reported in accordance with its historic accounting under ASC Topic 605. The sale of semiconductor products accounts for the substantial majority of the Company’s consolidated revenue and recognition for such product sales has remained the same under ASC Topic 606 as that under Topic 605. Additionally, other revenue streams remain substantially unchanged. Hence, there was no impact on the opening accumulated deficit as of April 2, 2018 due to the adoption of Topic 606. The Company expects the ongoing impact of the new revenue standard to be immaterial to the consolidated financial statements. Additionally, the balance sheet presentation of certain reserve balances previously shown net within accounts receivable are now presented as refund liabilities within “Other Accrued Liabilities” on the Condensed Consolidated Balance Sheets. Refer to Significant Accounting Policies section above for the Company’s practical expedients and elections.
Other recently adopted pronouncements:
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes the current accounting related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. Most notably, ASU 2016-01 requires that equity investments, with certain exemptions, be measured at fair value with changes in fair value recognized in net income as opposed to other comprehensive income. The guidance further clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Company adopted this guidance in the first quarter of fiscal 2019 on a retrospective basis and concluded that there is no cumulative effect adjustment. The Company has elected to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (referred to as the measurement alternative). See Note 6 for details.

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In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to a third party or otherwise recovered through use. The Company adopted the new guidance in the first quarter of fiscal 2019. Upon adoption, the Company applied a modified retrospective transition approach and recognized the unamortized portion of the deferred tax charge of $13.9 million through a cumulative-effect adjustment to accumulated deficit.
In March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments allow companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. As of April 1, 2018, the Company has made reasonable estimates of the effects on its existing deferred tax balances and the one-time repatriation tax recording provisional charges as a component of income tax expense from continuing operations. As of July 1, 2018, the Company had not fully completed its accounting for the tax effects of the enactment of the TCJA. The Company’s provision for income taxes is based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances. The Company will continue to assess the impact of the recently enacted tax law and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting on its business and consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which clarifies the definition of business. The update provides a more robust framework to use in determining when a set of assets and activities is a business. The new guidance provides a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new guidance becomes effective in fiscal years beginning after December 15, 2017, though early adoption is permitted. The Company adopted the new guidance prospectively in the first quarter of fiscal 2019. There was no material impact in the period of adoption.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the requirements related to accounting in changes to stock compensation awards. The guidance in ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the new guidance in the first quarter of fiscal 2019. There was no material impact in the period of adoption.
Accounting Pronouncements Not Yet Effective for Fiscal 2019
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows an entity to elect to reclassify the stranded tax effects resulting from the change in income tax rate from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.  The amendments in this update are effective for periods beginning after December 15, 2018. The Company plans to adopt the new standard effective the first quarter of fiscal 2020. The Company does not believe that the adoption of this new accounting guidance will have any material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted. The Company does not believe that the adoption of this new accounting guidance will have any material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The new guidance will be effective for the Company starting in the first quarter of fiscal 2021. Early adoption is permitted starting in the first quarter of fiscal 2020. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.

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In February 2016, the FASB issued an ASU 2016-02, Leases (Topic 842). In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases which clarifies, corrects or consolidates authoritative guidance issued in ASU 2016-02 and is effective upon adoption of ASU 2016-02. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create a right-of-use asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. This ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. As currently issued, entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. There are additional optional practical expedients that an entity may elect to apply. The Company plans to adopt the new standard effective the first quarter of fiscal 2020 and expects to elect certain available transitional practical expedients. The Company is currently assessing the impact that the new standard will have on its consolidated financial statements, which will consist primarily of a balance sheet gross up of right-of-use assets and lease liabilities on the Condensed Consolidated Balance Sheets upon adoption, which will increase the Company's total assets and liabilities.
Note 2. Net Income Per Share
Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income 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, restricted stock units and performance-based stock units. For purposes of computing diluted net income per share, weighted average potential common shares do not include potential common shares that are anti-dilutive under the treasury stock method.
The following table sets forth the computation of basic and diluted net income per share: 
 
Three Months Ended
 (in thousands, except per share amounts)
July 1, 2018
 
July 2, 2017
Numerator (basic and diluted):
 
 
 
Net income
$
30,720

 
$
16,714

Denominator:
 
 
 
Weighted average common shares outstanding, basic
129,560

 
133,302

Dilutive effect of employee stock options, restricted stock units and performance stock units
3,246

 
3,340

Weighted average common shares outstanding, diluted
132,806

 
136,642

 
 
 
 
Basic net income per share
$
0.24

 
$
0.13

Diluted net income per share
$
0.23

 
$
0.12

Potential dilutive common shares of 0.2 million and 24 thousand pertaining to employee stock options, restricted stock units and performance-based stock units were excluded from the calculation of diluted earnings per share for the three months ended July 1, 2018 and July 2, 2017, respectively, because the effect would have been anti-dilutive.
The denominator for diluted net income per share for each of the three months ended July 1, 2018 and July 2, 2017 does not include any effect from the 0.875% Convertible Senior Notes due 2022, or the Convertible Notes. In accordance with ASC 260, Earnings per Share, the Convertible Notes will not impact the denominator for diluted net income per share unless the average price of our common stock, as calculated under the terms of the Convertible Notes, exceeds the conversion price of $33.45 per share. Likewise, the denominator for diluted net income per share will not include any effect from the warrants unless the average price of our common stock, as calculated under the terms of the warrants, exceeds $48.66 per share.
The denominator for diluted net income per share for each of the three months ended July 1, 2018 and July 2, 2017 also does not include any effect from the convertible note hedge transaction, or the Note Hedges. In future periods, the denominator for diluted net income per share will exclude any effect of the Note Hedges, as their effect would be anti-dilutive. In the event an actual conversion of any or all of the Convertible Notes occurs, the shares that will be delivered to us under the Note Hedges are designed to neutralize the dilutive effect of the shares that the Company will issue under the Convertible Notes. Refer to Note 15 for further discussion regarding the Convertible Notes.


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Note 3. Revenue
Disaggregated Revenue by Timing of Recognition*
Three Months Ended
(in thousands)
July 1, 2018
 
July 2, 2017
Goods/services transferred at a point in time
$
226,590

 
$
196,488

Goods/services transferred over time
1,926

 
225

Total Revenue
$
228,516

 
$
196,713

* For other disaggregated revenue information, refer to Note 18.
Contract Balances and Refund Liabilities
 
 
 
The following table provides information about contract assets, refund liabilities and contract liabilities on the condensed consolidated balance sheets:
(in thousands)
July 1, 2018
 
April 2, 2018
 
 
 
(as adjusted**)
Contract assets - unbilled revenue
$
2,051

 
$
1,595

Refund liabilities - price adjustment and other revenue reserves
$
(9,519
)
 
$
(10,964
)
Contract Liabilities - short-term
$
(774
)
 
$
(778
)
Contract Liabilities - long-term
$
(1,161
)
 
$
(1,354
)
** The as adjusted balances at April 2, 2018 reflect the comparative amounts under ASC Topic 606.

Contract assets consist of the Company’s unbilled revenue to transfer goods or services to a customer for which the Company has yet to receive consideration or the amount is due from the customer. Contract assets are included in “Accounts Receivable, Net” on the Condensed Consolidated Balance Sheets.
The beginning and ending balances of contract assets in the first quarter of fiscal 2019 was $1.6 million and $2.1 million, respectively. During the three months ended July 1, 2018, contract assets increased by $2.0 million associated with unbilled revenue for additional goods and services transferred to customers in the quarter, which was offset by $1.5 million decrease primarily due to invoices issued to customers.
Refund liabilities consist of variable consideration estimates for returns, rebates, price protection, ship from stock pricing credits and stock rotation. Such reserves were previously shown net within “Accounts Receivable, Net” and are now presented within “Other Accrued Liabilities” on the Condensed Consolidated Balance Sheets effective April 2, 2018.
Contract liabilities consist of the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration or the amount is due from the customer. Contract liabilities are classified as short-term or long-term within “Other Accrued Liabilities” or “Other Long-term Liabilities”, respectively, on the Condensed Consolidated Balance Sheets.
Remaining Performance Obligations
As of the end of a reporting period, some of the performance obligations associated with contracts will have been unsatisfied or only partially satisfied. In accordance with the practical expedients available in the guidance, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less, and the remaining duration of the performance obligations for contracts with an original expected duration of greater than one year. As of July 1, 2018, the Company’s remaining performance obligations from contracts with an original expected duration of greater than one year is $4.8 million.
Practical Expedients
The Company has elected to apply the practical expedient to expense commission costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. As a result, no commission costs are capitalized. The Company records these costs within selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
The Company has adopted the practical expedient which states an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less. The Company does not have payments associated with performance obligations outside this one-year time frame.


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Table of Contents

Note 4. Acquisitions
GigPeak, Inc.
On April 4, 2017, the Company completed its purchase all of the outstanding shares of GigPeak, Inc, a publicly held company mainly operating in the United States, for approximately $250.1 million (the "Acquisition"). GigPeak was a global supplier of semiconductor integrated circuits and software solutions for high-speed connectivity and high-quality video compression over the network and the cloud. The Company funded the Acquisition from its available cash on hand and net proceeds from borrowings under its credit facility entered into on April 4, 2017 with JP Morgan Chase Bank, N.A. as administrative agent and the various lenders signatory thereto (the "Credit Agreement"). The Credit Agreement provides for a $200 million term loan facility (the "Initial Term B Loan"). Refer to Note 16 for details.
Total consideration consisted of the following:
(in thousands)
 
Cash paid to GigPeak shareholders
$
246,717

Fair value of partially vested employee equity awards related to pre-combination services
3,400

Total purchase price
250,117

Less: cash acquired
(9,001
)
Total purchase price, net of cash acquired
$
241,116

In connection with the Acquisition, the Company assumed unvested restricted stock units ("RSUs") originally granted by GigPeak and converted them into IDT RSUs. IDT included $3.4 million, representing the portion of the fair value of the assumed GigPeak unvested equity awards associated with service rendered through the date of the Acquisition, as a component of the total estimated acquisition consideration. As of April 4, 2017, the total unrecognized stock-based compensation expense, net of estimated forfeitures, was also $3.4 million, which is expected to be recognized over the remaining weighted average service period of 2.6 years.
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. Because the Acquisition was structured as a stock acquisition for income tax purposes, none of the asset step-up or asset recognition required by purchase accounting, including the goodwill described below, is deductible for tax purposes.
The fair value of accounts receivable, other current assets, accounts payable, and other accrued liabilities were generally determined using historical carrying values given the short-term nature of these assets and liabilities. The fair values for acquired inventory, property, plant and equipment and intangible assets were determined with the assistance of a third-party valuation using discounted cash flow analysis, and estimate made by management. The fair values of certain other assets and liabilities were determined internally using historical carrying values and estimates made by management. During the second quarter of fiscal 2018, the Company obtained additional information in regards to inventory, deferred tax assets, accounts receivable and assumed liabilities and recorded purchase accounting adjustments which were not considered to be material.
The financial results of the GigPeak business have been included in the Company’s Condensed Consolidated Statements of Operations from April 4, 2017, the closing date of the acquisition. Goodwill is primarily attributable to the assembled workforce of GigPeak, anticipated synergies and economies of scale expected from the operations of the combined company.

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Table of Contents

The Company's allocation of the purchase price is as follows:
 
(in thousands)
Estimated Fair Value
Cash and cash equivalents
$
9,001

Accounts receivable
14,806

Inventories
18,399

Prepayments and other current assets
2,641

Property, plant and equipment
2,434

Goodwill
113,192

Intangible assets
97,860

Deferred tax assets
7,610

Other assets
1,501

Accounts payable
(5,753
)
Accrued compensation and related expenses
(3,279
)
Other accrued liabilities
(3,538
)
Long-term income tax payable
(1,253
)
Other long-term liabilities
(3,504
)
Total purchase price
$
250,117

A summary of the fair value of intangible assets and their estimated useful lives is as follows:
(in thousands)
Estimated Fair Value
 
Estimated Useful Life
Developed technology
$
56,000

 
5 years
Customer contracts and related relationships
28,900

 
5 years
Order backlog
200

 
1 year
Software licenses
2,560

 
less than a year
In-process research and development ("IPR&D")
10,200

 
 
Total
$
97,860

 
 

IPR&D represents the fair value of incomplete research and development projects that had not reached technological feasibility as of the date of acquisition. IPR&D consisted of various projects. As of the acquisition date, the estimated remaining costs to complete and the estimated fair value of the IPR&D projects were approximately $7.5 million and $10.2 million, respectively. The IPR&D projects will either be amortized or impaired depending upon whether the project is completed or abandoned. The fair value of IPR&D was determined using the MPEE method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. A discount rate of 17% was used to discount the cash flows to the present value. The acquired IPR&D will not be amortized until completion of the related products which is determined by when the underlying projects reach technological feasibility and commence commercial production. In fiscal 2018, $1.2 million of purchased IPR&D projects reached technological feasibility and was reclassified as core and developed technology and began being amortized over its estimated useful life. In addition, in fiscal 2018, the Company recognized a total of $2.0 million impairment charge related to certain IPR&D projects, which was recorded in Research and Development Expense in the Condensed Consolidated Statements of Operations. During the three months ended July 1, 2018, $2.0 million of purchased IPR&D projects reached technological feasibility and was reclassified as core and developed technology and began being amortized over its estimated useful life. The Company expects to complete the remaining projects in fiscal 2019. Refer to Note 11 for additional information.


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Table of Contents

Note 5. Fair Value Measurements
Financial Assets Measured at Fair Value on a Recurring Basis:
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of July 1, 2018:
 
Fair Value at Reporting Date Using
(in thousands)
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Total
Assets
 
 
 
 
 
Cash Equivalents and Short-Term Investments:
 
 
 
 
 
US government treasuries and agencies securities
$
60,288

 
$

 
$
60,288

Money market funds
26,979

 

 
26,979

Asset-backed securities

 
15,865

 
15,865

Corporate bonds

 
109,482

 
109,482

International government bonds

 
2,644

 
2,644

Corporate commercial paper

 
10,683

 
10,683

Bank deposits

 
41,456

 
41,456

Repurchase agreement

 
291

 
291

Total assets measured at fair value
$
87,267

 
$
180,421

 
$
267,688

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of April 1, 2018:
 
Fair Value at Reporting Date Using
 
 
 
(in thousands)
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Total
Assets
 
 
 
 
 
Cash Equivalents and Short-Term Investments:
 
 
 
 
 
US government treasuries and agencies securities
$
60,272

 
$

 
$
60,272

Money market funds
48,847

 

 
48,847

Asset-backed securities

 
16,687

 
16,687

Corporate bonds

 
109,605

 
109,605

International government bonds

 
2,638

 
2,638

Corporate commercial paper

 
9,034

 
9,034

Bank deposits

 
45,080

 
45,080

Repurchase agreements

 
142

 
142

Total assets measured at fair value
$
109,119

 
$
183,186

 
$
292,305

U.S. government treasuries and U.S. government agency securities as of July 1, 2018 and April 1, 2018 do not include any U.S. government guaranteed bank issued paper.
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, non-binding market prices that are corroborated by observable market data. There were no transfers into or out of Level 1 or Level 2 financial assets during the three months ended July 1, 2018.
Deferred Compensation Plan:
The deferred compensation plan assets of $18.1 million and $16.9 million as of July 1, 2018 and April 1, 2018, are carried on the Condensed Consolidated Balance Sheets at their fair value which were determined on the basis of market prices observable for similar instruments and are considered Level 2 in the fair value hierarchy. See Note 14 for additional information on the Employee Benefit Plans.

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Table of Contents

Convertible Notes:
The Convertible Notes are carried on the Condensed Consolidated Balance Sheets at their original issuance value including accreted interest, net of unamortized debt discount and issuance cost. The Convertible Notes are not marked to fair value at the end of each reporting period. The fair value of Convertible Notes was $426.3 million and $422.0 million as of July 1, 2018 and April 1, 2018, which was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. See Note 15 for additional information on the Convertible Notes.
Bank Loan:
The Term B-1 Loan is carried on the Condensed Consolidated Balance Sheets at its outstanding principal balance including accreted interest, net of unamortized debt discount and issuance cost. The fair value of the Term B-1 Loan and the Initial Term B Loan was $199.6 million as of July 1, 2018 and April 1, 2018, respectively. The Company classified the Term B-1 Loan as Level 2 fair value measurement hierarchy as the debt is not actively traded and has variable interest structure based upon market rates currently available to the Company for debt with similar terms and maturities. Refer to Note 16 for additional information.
Others:
In fiscal 2017, IDT purchased substantially all of the assets and liabilities of Synkera Technologies, Inc. (Synkera) for total purchase consideration of approximately $2.8 million, of which $1.5 million was paid in cash at closing and $1.3 million was recorded as a liability representing the fair value of contingent cash consideration of up to $1.5 million. The liability was recognized for the Company’s estimate of the fair value of contingent consideration on the acquisition date based on probability-based attainment of certain milestones. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement, which reflects the Company’s own assumptions concerning the milestones related to the acquired business in measuring fair value. During the three months ended July 1, 2018, the Company paid $0.7 million upon the achievement of certain milestones. The fair value of the liability measured using significant unobservable inputs (Level 3) was approximately $0.6 million and $1.3 million as of July 1, 2018 and April 1, 2018, respectively.
In fiscal 2018, the Company purchased certain assets of SpectraBeam, LLC ("SpectraBeam") for a total purchase consideration of $17.0 million, of which $12.9 million was paid in cash at closing and $4.1 million was recorded as a liability representing the contingent cash consideration. The liability was recognized for the Company’s estimate of the fair value of contingent consideration on the acquisition date based on probability-based attainment of certain milestones. The fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement, which reflects the Company’s own assumptions concerning the milestones related to the asset acquisition in measuring fair value. The fair value of the liability measured using significant unobservable inputs (Level 3) was approximately $4.1 million as of July 1, 2018 and April 1, 2018.
Note 6. Investments
Available-for-Sale Securities

The amortized cost and fair value of available-for-sale investments as of July 1, 2018 were as follows:
 
(in thousands)
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Estimated Fair
 Value
U.S. government treasuries and agencies securities
$
61,184

 
$

 
$
(896
)
 
$
60,288

Money market funds
26,979

 

 

 
26,979

Asset-backed securities
15,958

 

 
(93
)
 
15,865

Corporate bonds
111,135

 
37

 
(1,690
)
 
109,482

International government bonds
2,650

 

 
(6
)
 
2,644

Corporate commercial paper
10,683

 

 

 
10,683

Bank deposits
41,456

 

 

 
41,456

Repurchase agreements
291

 

 

 
291

Total available-for-sale investments
270,336

 
37

 
(2,685
)
 
267,688

Less amounts classified as cash equivalents
(69,500
)
 

 

 
(69,500
)
Short-term investments
$
200,836

 
$
37

 
$
(2,685
)
 
$
198,188



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Table of Contents

The amortized cost and fair value of available-for-sale investments as of April 1, 2018 were as follows:
 
(in thousands)
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Estimated Fair
 Value
U.S. government treasuries and agencies securities
$
61,166

 
$

 
$
(894
)
 
$
60,272

Money market funds
48,847

 

 

 
48,847

Asset-backed securities
16,797

 

 
(110
)
 
16,687

Corporate bonds
111,266

 
43

 
(1,704
)
 
109,605

International government bonds
2,650

 

 
(12
)
 
2,638

Corporate commercial paper
9,034

 

 

 
9,034

Bank deposits
45,080

 

 

 
45,080

Repurchase agreements
142

 

 

 
142

Total available-for-sale investments
294,982

 
43

 
(2,720
)
 
292,305

Less amounts classified as cash equivalents
(70,279
)
 

 

 
(70,279
)
Short-term investments
$
224,703

 
$
43

 
$
(2,720
)
 
$
222,026


The cost and estimated fair value of available-for-sale securities as of July 1, 2018, by contractual maturity, were as follows:
(in thousands)
Amortized
Cost
 
Estimated Fair
Value
Due in 1 year or less
$
103,395

 
$
103,252

Due in 1-2 years
120,978

 
119,343

Due in 2-5 years
45,963

 
45,093

Total investments in available-for-sale securities
$
270,336

 
$
267,688


The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of July 1, 2018, aggregated by investment category and 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
$
79,242

 
$
(1,358
)
 
$
23,324

 
$
(332
)
 
$
102,566

 
$
(1,690
)
Asset-backed securities
13,027

 
(77
)
 
2,340

 
(16
)
 
15,367

 
(93
)
U.S. government treasuries and agencies securities
25,348

 
(248
)
 
34,940

 
(648
)
 
60,288

 
(896
)
International government bonds


 


 
2,644

 
(6
)
 
2,644

 
(6
)
Total
$
117,617

 
$
(1,683
)
 
$
63,248

 
$
(1,002
)
 
$
180,865

 
$
(2,685
)


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Table of Contents

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, as of April 1, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized 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
$
78,726

 
$
(1,324
)
 
$
23,286

 
$
(380
)
 
$
102,012

 
$
(1,704
)
Asset-backed securities
14,147

 
(90
)
 
2,540

 
(20
)
 
16,687

 
(110
)
U.S. government treasuries and agencies securities
25,352

 
(221
)
 
34,920

 
(673
)
 
60,272

 
(894
)
International government bonds

 

 
2,638

 
(12
)
 
2,638

 
(12
)
Total
$
118,225

 
$
(1,635
)
 
$
63,384

 
$
(1,085
)
 
$
181,609

 
$
(2,720
)

Currently, a significant portion of the Company’s available-for-sale investments that it holds are high grade instruments. As of July 1, 2018, the unrealized losses on the Company’s available-for-sale investments represented an insignificant amount in relation to its total available-for-sale portfolio. Substantially all of the Company’s unrealized losses on its available-for-sale marketable debt instruments can be attributed to fair value fluctuations in an unstable credit environment that resulted in a decrease in the market liquidity for debt instruments. Because the Company has the ability to hold these investments until a recovery of fair value, which maybe maturity, the Company did not consider these investments to be other-than-temporarily impaired as of July 1, 2018 and April 1, 2018.
Non-marketable Equity Securities
As of July 1, 2018 and April 1, 2018, the Company holds capital stock of privately-held companies with total amount of $25.3 million and $27.3 million, respectively. These investments in stocks (included in Other Assets on the Condensed Consolidated Balance Sheets) are accounted for as cost-method investments, as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of each entity. The Company measures equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (referred to as the measurement alternative). The Company recorded an impairment charge of $2.0 million for certain investment during the three months ended July 1, 2018. There was no impairment charge in the three months ended July 2, 2017.

Note 7. Stock-Based Employee Compensation

Total stock-based compensation expense, related to all of the Company’s share-based awards, was comprised as follows:
 
Three Months Ended
(in thousands)
July 1, 2018

July 2, 2017
Cost of revenues
$
1,028

 
$
632

Research and development
7,136

 
5,963

Selling, general and administrative
6,899

 
5,225

Total stock-based compensation expense
$
15,063

 
$
11,820

The amount of stock-based compensation expense that was capitalized during the periods presented above was immaterial.

Note 8. Stockholders' Equity
Stock Repurchase Program. On April 24, 2018, the Company's Board of Directors approved an increase to the share repurchase authorization of $400 million. In the three months ended July 1, 2018 and July 2, 2017, the Company repurchased 1.6 million shares for $49.3 million and 1.4 million shares for $34.8 million, respectively. As of July 1, 2018, approximately $457.5 million was available for future purchase under the share repurchase program. Shares repurchased were recorded as treasury stock and resulted in a reduction of stockholder's equity.


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Table of Contents

Note 9. Balance Sheet Detail
(in thousands)
July 1, 2018
 
April 1, 2018
Inventories, net
 
 
 
Raw materials
$
5,137

 
$
4,345

Work-in-process
43,782

 
45,713

Finished goods
17,258

 
18,644

Total inventories, net
$
66,177

 
$
68,702

Accounts receivable, net
 
 
 
Accounts receivable, gross
$
124,539

 
$
120,953

Allowance for returns, price credits and doubtful accounts (1)
(1,562
)
 
(12,174
)
Total accounts receivable, net
$
122,977

 
$
108,779

Property, plant and equipment, net
 

 
 

Land
$
11,535

 
$
11,535

Machinery and equipment
291,073

 
285,784

Building and leasehold improvements
50,647

 
50,722

  Total property, plant and equipment, gross
353,255

 
348,041

Less: accumulated depreciation (2)
(266,320
)
 
(261,196
)
Total property, plant and equipment, net
$
86,935

 
$
86,845

Other accrued liabilities
 
 
 
Accrued restructuring costs (3)
$
2,055

 
$
4,637

Current income tax payable
5,801

 
6,281

Refund liabilities (1)
9,519

 

Other (4)
15,118

 
15,606

Total other accrued liabilities
$
32,493

 
$
26,524

Other long-term obligations
 
 
 
Deferred compensation related liabilities
$
18,105

 
$
16,310

Other (5)
9,264

 
9,374

Total other long-term liabilities
$
27,369

 
$
25,684

(1) Upon adoption of ASC Topic 606 under the modified retrospective method, price adjustment and other revenue reserves were presented in “Other Accrued Liabilities” effective April 2, 2018. Those reserves were previously included in “Accounts Receivable, Net”. Refer to Note 3 for additional information.
(2) Depreciation expense was $6.6 million and $6.1 million for the three months ended July 1, 2018 and July 2, 2017, respectively.
(3) Includes accrued severance costs related to various restructuring actions. Refer to Note 12 for additional information.
(4) Other current liabilities consist primarily of accrued royalties and outside commissions, current portion of deferred revenue, current portion of lease payable, current portion of liability for contingent consideration, and other accrued unbilled expenses.
(5) Other long-term obligations consist primarily of non-current portion of liability for contingent consideration, non-current portion of deferred revenue, non-current portion of lease payable, and other long-term accrued liabilities.

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Table of Contents

Note 10. Accumulated Other Comprehensive Income (Loss)
Changes in the balance of accumulated other comprehensive income (loss) by component, net of tax, for the three months ended July 1, 2018 consisted of the following:
(in thousands)
Cumulative translation adjustments
 
Unrealized gain (loss) on available-for-sale investments
 
Pension adjustments
 
Total
Balance as of April 1, 2018
$
(2,151
)
 
$
(2,677
)
 
$
65

 
$
(4,763
)
Other comprehensive income (loss) before reclassifications
(2,708
)
 
29

 

 
(2,679
)
Net current-period other comprehensive income (loss)
(2,708
)
 
29

 

 
(2,679
)
Balance as of July 1, 2018
$
(4,859
)
 
$
(2,648
)
 
$
65

 
$
(7,442
)

There was no reclassification out of accumulated other comprehensive income or loss during the three months ended July 1, 2018.

Note 11. Goodwill and Intangible Assets, Net
During the first quarter of fiscal 2019, the Company revised the composition of its reportable segments as a result of certain organizational changes (Refer to Note 18 for details). Goodwill was reallocated between the two reportable segments using a relative fair value approach. As a result, the Company completed assessments of any potential goodwill impairment for all reportable segments immediately prior to and after the reallocation and determined that no impairment existed.
Goodwill balances by reportable segment as of July 1, 2018 and April 1, 2018 are as follows:
 
Reportable Segments
(in thousands)
Communications
 
Computing, Consumer and Industrial
 
Total
Balance as of April 1, 2018
$
141,300

 
$
278,817

 
$
420,117

Reallocation of goodwill
(21,206
)
 
21,206

 

Balance as of July 1, 2018
$
120,094

 
$
300,023

 
$
420,117


Goodwill balances as of July 1, 2018 and April 1, 2018 were net of $920.3 million in accumulated impairment losses.
Intangible asset balances as of July 1, 2018 and April 1, 2018 are summarized as follows:
 
July 1, 2018
(in thousands)
Gross Assets
 
Accumulated
Amortization
 
Net Assets
Purchased intangible assets:
 
 
 
 
 
Developed technology
$
338,365

 
$
(230,174
)
 
$
108,191

Trademarks
5,391

 
(5,391
)
 

Customer relationships
201,997

 
(152,458
)
 
49,539

Intellectual property licenses
7,500

 
(4,201
)
 
3,299

Software licenses
6,237

 
(1,406
)
 
4,831

Total amortizable purchased intangible assets
559,490

 
(393,630
)
 
165,860

In-process research and development (IPR&D)
5,039

 

 
5,039

Total purchased intangible assets
$
564,529

 
$
(393,630
)
 
$
170,899


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Table of Contents

 
April 1, 2018
(in thousands)
Gross Assets
 
Impairment
 
Accumulated
Amortization
 
Net Assets
Purchased intangible assets:
 
 
 
 
 
 
 
Developed technology
$
336,402

 
$

 
$
(223,882
)
 
$
112,520

Trademarks
5,391

 

 
(5,391
)
 

Customer relationships
201,997

 

 
(149,416
)
 
52,581

Intellectual property licenses
7,500

 

 
(3,901
)
 
3,599

Software licenses
6,023

 

 
(943
)
 
5,080

Total amortizable purchased intangible assets
557,313

 

 
(383,533
)
 
173,780

In-process research and development (IPR&D)
9,017

 
(2,016
)
 

 
7,001

Total purchased intangible assets
$
566,330

 
$
(2,016
)
 
$
(383,533
)
 
$
180,781


Amortization expense for the three months ended July 1, 2018 and July 2, 2017 was $10.1 million and $11.7 million, respectively.
As a result of the acquisition of GigPeak, the Company recognized additional intangible assets with fair value of $97.9 million during the three months ended July 2, 2017 (see Note 4). In the first quarter of fiscal 2018, the Company recorded an accelerated amortization charge of $2.0 million related to certain software licenses as the estimated future cash flows expected resulting from the use of the assets were less than the carrying amount.
The intangible assets are being amortized over estimated useful lives of 1 to 7 years.
Based on the intangible assets recorded as of July 1, 2018, the expected future amortization expense for intangible assets is as follows (in thousands):
Fiscal Year
Amount
2019 (Remaining 9 months)
$
30,530

2020
40,573

2021
39,617

2022
37,331

2023 and thereafter
17,809

Total amortizable purchased intangible assets
165,860

IPR&D
5,039

Total intangible assets
$
170,899


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Note 12. Restructuring
The following table shows the provision of the restructuring charges and the liability remaining as of July 1, 2018:
 
 
 
 
 
 
(in thousands)
Continuing
Operations
 
HSC
(Discontinued Operations)
 
Total
Severance and related charges:
 
 
 
 
 
Balance as of April 1, 2018
$
4,013

 
$
624

 
$
4,637

Provision
533

 

 
533

Payments and other adjustments
(3,115
)
 

 
(3,115
)
Balance as of July 1, 2018
$
1,431

 
$
624

 
$
2,055

Facility and related charges:
 
 
 
 
 
Balance as of April 1, 2018
$
2,281

 
$

 
$
2,281

Provision
121

 

 
121

Payments and other adjustments
(202
)
 

 
(202
)
Balance as of July 1, 2018
$
2,200

 
$

 
$
2,200

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 consist primarily of severance and termination benefit costs related to the reduction of its workforce, asset impairment charges and lease obligation charges related to a facility that is no longer used.
Integration-related Restructuring Plans
In fiscal 2018, the Company implemented planned cost reduction and restructuring activities in connection with the acquisition of GigPeak. Accordingly, the Company reduced headcount by 46 and recorded severance costs of approximately $2.7 million, of which $2.1 million was paid during fiscal 2018. The Company paid $0.4 million during the first quarter of fiscal 2019 and the remaining $0.2 million will be paid by the second quarter of fiscal 2019.
In connection with the GigPeak integration, the Company recorded $2.8 million in fiscal 2018 for lease obligation charges related to a facility that the Company had determined to meet the cease-use date criteria. The fair value of this liability at the cease-use date was determined based on the remaining cash flows for lease rentals, and minimum lease payments, reduced by estimated sublease rentals, discounted using a credit adjusted risk free rate in accordance with ASC 420, Exit or Disposal Cost Obligations. As of July 1, 2018, the total accrued balance for the lease obligation was $2.2 million, of which $1.5 million was classified as other long-term liabilities and the remaining $0.7 million was recorded as other accrued liabilities.
Other Restructuring Plans
In fiscal 2018, the Company exited certain non-strategic businesses and reduced headcount by 63. The Company recorded employee severance costs of approximately $5.1 million, of which $2.3 million was paid during fiscal 2018. The Company recorded additional accruals of $0.5 million and paid $2.2 million during the first quarter of fiscal 2019. As of July 1, 2018, the total accrued balance for employee severance costs related to this action was $1.1 million which is expected to be paid by the second quarter of fiscal 2019. In addition, in fiscal 2018, the Company recorded an impairment charge of $7.8 million on certain assets comprised of intangibles, equipment and prepaid licenses, which were determined to be specifically used in these non-strategic businesses and had no alternative use. Impairment charges of $5.4 million and $2.4 million, were included in Cost of Revenues and Research and Development Expenses, respectively in the Condensed Consolidated Statements of Operations.
In fiscal 2017, the Company prepared a workforce-reduction plan with respect to employees and closed its remaining business in France. The Company has substantially completed payments of termination benefits and the total accrued balance related to this action was $0.8 million as of April 1, 2018. The Company paid $0.5 million during the first quarter of fiscal 2019. Accordingly, the total accrued balance for employee severance costs related to this action was $0.3 million as of July 1, 2018. The Company expects to complete this action by the third quarter of fiscal 2019.
In fiscal 2015, the Company prepared a workforce-reduction plan with respect to employees of its HSC business in France and the Netherlands. The Company has substantially completed payments of termination benefits and the total accrued balance related to this action was $0.6 million as of April 1, 2018 and July 1, 2018. The Company expects to complete this action by the third quarter of fiscal 2019.
Note 13. Commitments and Contingencies
Warranty

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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 accruals are estimated using a specific identification method. Historical profit and loss impact related to warranty returns activity has been minimal. The total warranty accrual was $0.3 million as of both July 1, 2018 and April 1, 2018.
Litigation
On March 23, 2018, a compliant for patent infringement was served on the Company by DIFF Scale Operations Research, LLC (“DSOR”) in the Federal Court for the District of Delaware. DSOR alleged to be the owner of a certain collection of patents previously owned by ADC Communications, some of which were the subject of the litigation against the Company. This dispute between the parties has now been resolved, and the court case dismissed based on a joint stipulation of the parties on June 28, 2018, with no finding of infringement liability against IDT.
In January 2012, Maxim I Properties, a general partnership that had purchased a certain parcel of real property (the Property) in 2003, filed a complaint in the Northern District of California naming approximately 30 defendants, including the Company ("Defendants"), alleging various environmental violations of the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Resource Conservation and Recovery Act (RCRA), the California Hazardous Substance Account Act (HSAA), and other common law claims (the Complaint). The Complaint alleged that Defendants including the Company “…generated, transported, and/or arranged for the transport and/or disposal of hazardous waste to the Property.” On August 15, 2012, Maxim I Properties voluntarily dismissed its Complaint without prejudice. However, another defendant, Moyer Products, Inc., counter-claimed against the plaintiff, Maxim, and cross-claimed against the remaining co-Defendants, including the Company. Thus, the Company remains a cross-defendant in this action.
In a related, but independent action, the California Department of Toxic Substances Control (DTSC) notified the Company in September 2012 that the Company, and more than 50 other entities, were being named as respondents to DTSC's Enforcement Order, as “a generator of hazardous waste.” In April 2013, the Company, along with the other “respondent” parties, entered into a Corrective Action Consent Agreement (CACA) with the DTSC, agreeing to conduct the Property investigation and corrective action selection. The CACA supersedes the DTSC's Enforcement Order. The District Court for the Northern District of California stayed the Maxim/Moyer litigation pending the Property investigation under the CACA and DTSC's corrective action selection.
Property investigation activity took place between April 2013 and June 2015. On June 23, 2015, the DTSC deemed the Property investigation complete. The DTSC continues to evaluate corrective action alternatives. The Company will continue to vigorously defend itself against the allegations in the Complaint and evaluate settlement options with Moyer upon notification from DTSC of its corrective action selection. No specific corrective action has been selected yet, and thus no specific monetary demands have been made.
The Company may also be a party to various other legal proceedings and claims arising in the normal course of business from time to time. With regard to the matters listed above, along with various other legal proceedings and claims and future matters that may arise, potential liability and probable losses or ranges of possible losses due to an unfavorable litigation outcome cannot be reasonably estimated at this time. Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in any particular lawsuit or claim. Pending lawsuits, claims as well as potential future litigation, could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Note 14. Employee Benefit Plans
401(k) Plan
The Company sponsors a 401(k) retirement matching plan for qualified domestic employees. The Company recorded expenses of approximately $1.2 million and $0.8 million in matching contributions under the plan during the three months ended July 1, 2018 and July 2, 2017, respectively.
Deferred Compensation Plans
Effective November 1, 2000, the Company established an unfunded deferred compensation plan to provide benefits to executive officers and other key employees. Under the plan, participants can defer any portion of their salary and bonus compensation into the plan and may choose from a portfolio of funds from which earnings are measured. Participant balances are always 100% vested. As of July 1, 2018 and April 1, 2018, obligations under the plan totaled approximately $18.1 million and $16.3 million. Additionally, the Company has set aside assets in a separate trust that is invested in corporate owned life insurance intended to substantially fund the liability under the plan. As of July 1, 2018 and April 1, 2018, the deferred compensation plan assets were approximately $18.1 million and $16.9 million respectively.
During the first quarter of fiscal 2013, the Company assumed a deferred compensation plan associated with the acquisition of Fox Enterprises, Inc. Under this plan, participants in retirement are entitled to receive a fixed amount from the Company on a monthly basis. The Company has purchased life insurance policies with the intention of funding the liability under this plan. As of July 1, 2018 and April 1, 2018, the deferred compensation plan assets were approximately $0.4 million, respectively. As of July 1, 2018 and April 1, 2018, the liabilities under this plan were approximately $0.8 million, respectively.
Note 15. Convertible Senior Notes, Warrants and Hedges
Convertible Notes Offering
On October 29, 2015, the Company priced its private offering of $325 million in aggregate principal amount of 0.875% Convertible Senior Notes due 2022 ("Initial Convertible Notes"). On November 3, 2015, the initial purchasers in such offering exercised in full the over-allotment option to purchase an additional $48.8 million in aggregate principal amount of Convertible Notes (“Additional Convertible Notes”, and together “Convertible Notes”). The aggregate principal amount of Convertible Notes is $373.8 million. The net proceeds from this offering were approximately $363.4 million, after deducting the initial purchasers’ discounts and commissions and the offering expenses.
The Convertible Notes are governed by the terms of an indenture, dated November 4, 2015 (“Indenture”), between the Company and a trustee. The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of 0.875% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, commencing May 15, 2016. The Convertible Notes will mature on November 15, 2022, unless earlier repurchased or converted. At any time prior to the close of business on the business day immediately preceding August 15, 2022, holders may convert their Convertible Notes at their option only under the certain circumstances as defined in the Indenture. On or after August 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of such circumstances.
The conversion rate for the Convertible Notes will initially be 29.8920 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to an initial conversion price of approximately $33.45 per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers.
As of July 1, 2018, none of the conditions allowing holders of the Notes to convert had been met.
At the debt issuance date, the Convertible Notes, net of issuance costs, consisted of the following:

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(in thousands)
November 3, 2015

Liability component
 
    Principal
$
274,435

    Less: Issuance cost
(7,568
)
    Net carrying amount
266,867

Equity component *


    Allocated amount
99,316

    Less: Issuance cost
(2,738
)
    Net carrying amount
96,578

Convertible Notes, net
$
363,445

* Recorded on the Condensed Consolidated Balance Sheets within additional paid-in capital.
The following table includes total interest expense recognized related to the Convertible Notes during the three months ended July 1, 2018 and July 2, 2017:
 
Three Months Ended
(in thousands)
July 1, 2018
 
July 2, 2017
Contractual interest expense
$
827

 
$
827

Amortization of debt discount
3,345

 
3,166

Amortization of debt issuance costs
270

 
270

 
$
4,442

 
$
4,263

The net liability component of Convertible Notes is comprised of the following as of July 1, 2018:
(in thousands)
July 1, 2018
Net carrying amount as of April 1, 2018
$
299,551

Amortization of debt issuance costs during the period
3,345

Amortization of debt discount during the period
270

Net carrying amount as of July 1, 2018
$
303,166

During the three months ended July 1, 2018 and July 2, 2017, the Company paid contractual interest on the Convertible Notes of approximately $1.6 million, respectively. See Note 5 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's Convertible Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, on October 29, 2015, the Company entered into convertible note hedge transaction (the "Initial Bond Hedge"), with JPMorgan Chase Bank, National Association (the “Option Counterparty”) and paid $81.9 million.
On October 29, 2015, the Company also entered into separate warrant transaction (the "Initial Warrant Transaction") with the Option Counterparty and received $49.4 million.
In connection with the exercise of the Over-Allotment Option, on November 3, 2015, the Company entered into a convertible note hedge transaction (the “Additional Bond Hedge”, and together with the Initial Bond Hedges, the “Bond Hedge”) with the Option Counterparty and paid $12.3 million. On November 3, 2015, the Company also entered into separate additional warrant transaction (the “Additional Warrant Transaction”, and together with the Initial Warrant Transaction, the “Warrant Transactions”) with the Option Counterparty and received $7.4 million. Total amount paid for the purchase of bond hedge and total amount received for the sale of warrants were $94.2 million and $56.8 million, respectively.

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The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price $33.45 of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is $48.66 per share. The Bond Hedges and Warrants are not marked to market. The value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified as stockholders' equity in accordance with ASC 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity. As of July 1, 2018 and April 1, 2018, no warrants have been exercised.
Note 16. Term B Loan
On April 4, 2017, the Company, JP Morgan Chase bank, N.A.("JP Morgan") as administrative agent and a group of lenders entered into a credit agreement that provides for variable rate term loans in aggregate principal amount of $200 million, with an original term of 7 years (the "Initial Term B Loan"). After payment of transaction costs associated with the Credit Agreement, the Company received net proceeds from the Initial Term B Loan of approximately $194.3 million, which was used to partially finance the acquisition of GigPeak and other payments related to such transaction.
On May 29, 2018 (the "Closing Date"), the Company entered into Amendment No. 1 (the “Amendment”) to its Credit Agreement, for the purpose of, among other things, reducing the interest margin applicable to loans under the Credit Agreement by 0.50%, all of which was treated as a debt modification. On the Closing Date, the aggregate principal amount of the term loans outstanding under the Credit Agreement was approximately $198.0 million. Under the Amendment, the lenders agreed to provide to IDT new term loans (the “Term B-1 Loan”) in the same aggregate principal amount as the outstanding Initial Term B Loan. Such Term B-1 Loan was used to refinance the outstanding Initial Term B Loan in full. The maturity date of the Term B-1 Loan is April 4, 2024; provided that if any of the Company's Convertible Notes are outstanding on August 16, 2022, the maturity date of which had not otherwise been extended to a date that is no earlier than 91 days after April 4, 2024, the Term B-1 Loan maturity date shall instead be August 16, 2022, unless the Company and its guarantors shall have cash, permitted investments and/or unwithdrawn revolving credit commitments in an aggregate amount not less than the aggregate principal amount of then outstanding Convertible Notes.
The Company will repay the principal amount of the Term B-1 Loan on the last day of each March 31, June 30, September 30 and December 31, in an amount equal to 0.25% of the principal amount of the Term B-1 Loan; and on the maturity date, as described above, in an amount equal to the remainder of the outstanding principal amount of the Term B-1 Loan. The Company may prepay the Term B-1 Loan, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may not be reborrowed. The interest rate of the Term B-1 Loan is based on adjusted LIBO rate which is equal to the LIBO rate for such interest period multiplied by statutory reserve rate, plus an applicable margin of 2.5% (3.0% prior to the Amendment. For the three-month periods ended June 30, 2018 and June 30, 2017, the interest rate on the Term B-1 Loan and the Initial Term B Loan is approximately 4.59% and 4.15%, respectively.
The following table summarizes the outstanding borrowings as of July 1, 2018 and April 1, 2018, respectively:
(in thousands)
July 1, 2018
 
April 1, 2018
Outstanding principal balance
$
197,505

 
$
198,000

Unamortized debt issuance costs and debt discount
(4,722
)
 
(4,927
)
Outstanding principal, net of unamortized debt issuance costs and debt discount
$
192,783

 
$
193,073

Classified as follows:
 
 
 
Current portion of bank loan
$
1,980

 
$
2,000

Long-term bank loan
$
190,803

 
$
191,073


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The Company made payments totaling $0.5 million towards the outstanding principal balance of the long-term bank loan during the three months ended July 1, 2018 and July 2, 2017, respectively. The following table includes the total interest expense recognized during the three months ended July 1, 2018 and July 2, 2017, respectively:
 
Three Months Ended
(in thousands)
July 1, 2018
 
July 2, 2017
Contractual interest expense
$
2,345

 
$
2,106

Amortization of debt issuance costs and debt discount
205

 
205

Total
$
2,550

 
$
2,311

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Credit Agreement includes customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with covenants. Under certain circumstances, a default interest rate will apply on all overdue obligations under the Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations. The Company is in compliance with the covenants as of July 1, 2018.
See Note 5 to the Company's consolidated financial statements for fair value determination.
Note 17. Income Taxes
During the three ended July 1, 2018 and July 2, 2017, the Company recorded an income tax expense of $3.1 million and an income tax benefit of $1.0 million, respectively.
The income tax expense recorded in the three ended July 1, 2018 was primarily due to the impacts of the current year U.S. taxation of certain income of the Company’s foreign subsidiaries and an increase in higher-taxed earnings in foreign jurisdictions, partially offset by tax benefits from U.S. research and development. The income tax benefit recorded in the three months ended July 2, 2017 was primarily due to the benefit from research and development tax credits and excess tax benefits from stock based compensation.
The Company’s effective tax rate was significantly less than the U.S. federal statutory rate of 21% in all periods primarily due to the benefits of lower-taxed earnings in foreign jurisdictions, including Malaysia, where a tax holiday is in effect through fiscal 2021.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). The TCJA provides for numerous significant tax law changes and modifications including, among other things, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; and creating a new limitation on deductible interest expense. Certain provisions of the TCJA began to impact the Company fiscal year 2018, while other provisions began to impact the Company beginning in fiscal year 2019.
The SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. As of April 1, 2018, the Company has made reasonable estimates of the effects on its existing deferred tax balances and the one-time repatriation tax recording provisional charges of $10.3 million and $103.9 million, respectively, as a component of income tax expense from continuing operations.
The $10.3 million charge for the effect on the Companies deferred tax balances resulted from the reduction of the corporate income tax rate to 21%. U.S. GAAP requires companies to remeasure their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment. The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future.
The $103.9 million charge for the one-time repatriation tax increased other accrued liabilities by $1.5 million, increased long-term income taxes payable by $24.1 million, and reduced deferred tax assets, for the utilization of tax attributes, by $78.3 million. The liabilities resulting from the repatriation tax are payable over a period of up to eight years. The provisional amount was based on the Company’s total post-1986 earnings and profits (“E&P”) of its foreign subsidiaries. The majority of these earnings were historically permanently reinvested outside the United States, thus no taxes had previously been provided for these earnings. In addition, the one-time repatriation tax is based in part on the amount of those earnings held in cash and other specified assets either as of the end of fiscal year 2018 or the average of the year-end balances for fiscal years 2016 and 2017.
The TCJA creates a new Global Intangible Low-Taxed Income (“GILTI”) requirement under which certain income earned by controlled foreign corporations (“CFC”s) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.
Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing the Company’s global income to determine what the impact is expected to be. The Company is not yet able to reasonably estimate the effect of this provision of the TCJA. Therefore, the Company has not made a policy decision regarding whether to record deferred taxes on GILTI. As a result, for the period ended July 1, 2018, the Company has treated GILTI as a period cost and will continue to refine the calculations as additional analysis is completed.

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As of July 1, 2018, the Company had not fully completed its accounting for the tax effects of the enactment of the TCJA. The Company’s provision for fiscal year 2018 was based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances. The Company will continue to assess the impact of the recently enacted tax law and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting on its business and consolidated financial statements.
In fiscal year 2018, in connection with the TCJA and review of the Company’s projected offshore cash flows, and global cash requirements, the Company determined that historical foreign earnings would no longer be permanently reinvested. The Company plans to continue to repatriate its offshore earnings to the U.S. for domestic operations, and has accrued for the related tax impacts accordingly.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to a third party or otherwise recovered through use. The Company adopted the new guidance in the first quarter of fiscal 2019. Upon adoption, the Company applied a modified retrospective transition approach and recognized the unamortized portion of the deferred tax charge of $13.9 million through a cumulative-effect adjustment to accumulated deficit.
As of July 1, 2018, the Company continues to maintain a valuation allowance against the Company's net deferred tax assets in certain foreign and state jurisdictions, as the Company is not able to conclude that it is more likely than not that these deferred tax assets will be realized. The Company reached this decision based on judgment, which included consideration of historical operating results and projections of future profits. The Company will continue to monitor the need for the valuation allowance on a quarterly basis.
The Company benefits from tax incentives granted by local tax authorities in certain foreign jurisdictions. In the fourth quarter of fiscal 2011, the Company agreed with the Malaysia Industrial Development Board to enter into a new tax incentive agreement which is a full tax exemption on statutory income for a period of 10 years commencing April 4, 2011. This tax incentive agreement is subject to the Company meeting certain financial targets, investments, headcounts and activities in Malaysia.
As of July 1, 2018, the Company is under examination in Malaysia for fiscal years 2012 through 2015 and in Canada for fiscal years 2016 through 2017. Although the final outcome of each examination is uncertain, based on currently available information, the Company believes that the ultimate outcome will not have a material adverse effect on its financial position, cash flows or results of operations.
The Company's open years in the U.S. federal jurisdiction are fiscal year 2015 and later years. In addition, the Company is effectively subject to federal tax examination adjustments for tax years ended on or after fiscal year 2000, in that the Company has tax attribute carryforwards from these years that could be subject to adjustments, if and when utilized. The Company's open years in various state and foreign jurisdictions are fiscal years 2011 and later.
The Company does not expect a material change in unrecognized tax benefits within the next twelve months.
Note 18. Segment Information
The Chief Operating Decision Maker is the Company’s President and Chief Executive Officer.
During the first quarter of fiscal 2019, the Company reorganized its operating segment structure resulting in a change to the composition of its reportable segments. Prior to the reorganization, some product groups of the acquired GigPeak business were aggregated into the Communications segment while the rest were included in the Computing, Consumer and Industrial segment. As a result of the reorganization, the entire GigPeak business was aggregated to the Computing, Consumer and Industrial segment. The segment financial results for the three months ended July 2, 2017 have been adjusted to conform to the new reportable segment structure effective April 2, 2018.
The Company's reportable segments include the following:
Communications segment: includes clock and timing solutions, radio frequency (RF), flow-control management such as multi-port products, telecommunication interface, high-speed static random access memory, first in and first out memory, digital logic and frequency control solutions and Serial RapidIO® switching solutions.
Computing, Consumer and Industrial segment: includes clock generation and distribution products, high-performance server memory interfaces, wireless power, PCI Express®, signal integrity, power management solutions, signal integrity products, optical interconnect, video distribution and contribution solutions and sensing products for mobile, automotive and industrial solutions.

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The tables below provide information about these segments:
 Revenues by segment
Three Months Ended
(in thousands)
July 1, 2018

July 2, 2017
 
 
 
(1)
Communications
$
67,086

 
$
56,548

Computing, Consumer and Industrial
161,430

 
140,165

Total revenues
$
228,516

 
$
196,713

Income by segment
Three Months Ended
(in thousands)
July 1, 2018
 
July 2, 2017
 
 
 
(1)
Communications
$
31,536

 
$
20,752

Computing, Consumer and Industrial
36,227

 
28,931

Unallocated expenses:
 
 
 
Amortization of intangible assets
(9,334
)
 
(10,841
)
Inventory fair market value adjustment
(790
)
 
(4,081
)
Stock-based compensation
(15,063
)
 
(11,820
)
Severance, retention and facility closure costs
(488
)
 
(653
)
Acquisition-related costs and other

 
(2,225
)
Other-than-temporary impairment loss on investment
(2,000
)
 

Interest expense and other, net
(6,224
)
 
(4,331
)
Income before income taxes
$
33,864

 
$
15,732

(1) Prior period numbers have been adjusted to conform to the current organizational structure.
The Company does not allocate goodwill and intangible assets impairment charge, IPR&D, severance, acquisition-related costs, stock-based compensation, interest income and other, 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.
Revenues from unaffiliated customers by geographic area, based on the customers' shipment locations, were as follows:
 
Three Months Ended
(in thousands)
July 1, 2018
 
July 2, 2017
Hong Kong
$
80,675

 
$
63,888

Korea
27,527

 
18,162

Rest of Asia Pacific
67,292

 
64,536

Americas (2)
23,268

 
25,795

Europe
29,754

 
24,332

Total revenues
$
228,516

 
$
196,713

(2) The revenues from the customers in the U.S. were $18.2 million and $22.1 million in the three months ended July 1, 2018 and July 2, 2017, respectively.
The Company utilizes global and regional distributors around the world, that buy products directly from the Company on behalf of their customers. Two distributors, Uniquest and its affiliates and Avnet and its affiliates, accounted for 14% and 13%, respectively, of the Company's revenues in the three months ended July 1, 2018. One direct original equipment manufacturer (OEM) customer, SK Hynix, accounted for 10% of the Company's revenues in the three months ended July 1, 2018. One distributor, Avnet and its affiliates accounted for 11% of the Company's revenues in the three months ended July 2, 2017. One direct OEM customer, Samsung Electronics accounted for 11% of the Company's revenues in the three months ended July 2, 2017.

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As of July 1, 2018, one distributor represented approximately 20% of the Company’s gross accounts receivable. As of April 1, 2018, one distributor represented approximately 15% of the Company’s gross accounts receivable.
The Company’s significant operations outside of the United States include a test facility in each of Malaysia and Germany, design centers in the U.S., Canada and China, and sales subsidiaries in APAC and Europe. The Company's net property, plant and equipment are summarized below by geographic area: 
(in thousands)
July 1, 2018
 
April 1, 2018
United States
$
40,704

 
$
41,230

Malaysia
29,379

 
28,264

Germany
9,689

 
10,210

All other countries
7,163

 
7,141

Total property, plant and equipment, net
$
86,935

 
$
86,845

Note 19. Interest Income and Other, Net 
The components of interest income and other, net are summarized as follows:
 
Three Months Ended
(in thousands)
July 1, 2018
 
July 2, 2017
Interest income
$
1,176

 
$
757

Other income, net
495

 
2,225

Interest income and other, net
$
1,671

 
$
2,982

Interest income is derived from earnings on cash and short-term investments. Other income, net primarily consists of gains or losses in the value of deferred compensation plan assets, foreign currency gains or losses and other non-operating gains or losses.
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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking. Forward-looking statements, which are generally identified by words such as “anticipates,” “expects,” “plans,” “intends,” “seeks,” “targets,” “believes,” “can,” “may,” “might,” “could,” “should,” “would,” “will” and similar terms, include statements related to, among others, revenues and gross profit, research and development activities, selling, general and administrative expenses, restructuring costs, 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. Forward-looking statements are based upon current expectations, estimates, forecasts and projections that involve a number of risks and uncertainties. These risks and uncertainties 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; product performance; intellectual property matters; mergers and acquisitions and integration activities; and the risk factors set forth in Part II, Item 1A, “Risk Factors” to this Quarterly Report on Form 10-Q. As a result of these risks and uncertainties, actual results could differ significantly from those expressed or implied 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 Quarterly Report on Form 10-Q.
This discussion and analysis should be read in conjunction with our 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 April 1, 2018 filed with the SEC on May 18, 2018. Operating results for the three months ended July 1, 2018 are not necessarily indicative of operating results for an entire fiscal year.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates and assumptions are based on historical experience and other factors that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates and assumptions.

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For a discussion of our critical accounting policies, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended April 1, 2018 and our Condensed Consolidated Financial Statements and accompanying Notes included in this report. We believe that these accounting policies are "critical," as defined by the SEC, in that they are both highly important to the portrayal of our financial condition and results, and they require difficult management judgments, estimates and assumptions about matters that are inherently uncertain. Except for the adoption of ASC Topic 606 and other newly adopted accounting policies discussed in Note 1 to the Condensed Consolidated Financial Statements included in this report, we believe that there have been no other significant changes during the three months ended July 1, 2018 to the items that we disclosed as our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended April 1, 2018.
Business Overview
We develop system-level solutions that optimize our customers’ applications in key markets. IDT’s market-leading products in radio frequency (RF), timing, real-time interconnect, wireless power transfer, serial switching, memory interfaces, automotive application-specific integrated circuits (ASICs), optical interconnect, video distribution and contribution, sensor signal conditioner integrated circuits (ICs) and environmental sensors are among our broad array of complete mixed-signal solutions for the communications, computing, consumer, automotive and industrial segments. These products are used for development in areas such as 4G/5G infrastructure, network communications, cloud datacenters, autonomous driving, connected homes, smart appliances and power management for computing and mobile devices.
Our top talent and technology, paired with an innovative product-development philosophy, allows us to solve complex customer problems when designing communications, computing, consumer, automotive and industrial applications.
On a worldwide basis, we primarily market our products to original equipment manufacturers (OEMs) through a variety of channels, including direct sales, distributors, electronic manufacturing suppliers (EMSs) and independent sales representatives.
For more information on our business, please see Part I, Item 1, “Business,” in our Annual Report on Form 10-K for the fiscal year ended April 1, 2018.
Recent developments
Refinancing of Term B Loan
On May 29, 2018 (the "Closing Date"), we entered into Amendment No. 1 (the “Amendment”) to our Credit Agreement dated April 4, 2017, for the purpose of, among other things, reducing the interest margin applicable to loans under the Credit Agreement by 0.50%, all of which was treated as a debt modification. On the Closing Date, the aggregate principal amount of the term loans outstanding under the Credit Agreement was approximately $198.0 million. Under the Amendment, the lenders agreed to provide to IDT new term loans (the “Term B-1 Loan”) in the same aggregate principal amount as the outstanding Initial Term B Loan. Such Term B-1 Loan was used to refinance the outstanding Initial Term B Loan in full. Refer to Note 16 for details.
Asset Acquisition
On August 10, 2017, we purchased certain assets of SpectraBeam for a total purchase consideration of $17.0 million, of which $12.9 million was paid in cash at closing and $4.1 million was recorded as a liability representing the fair value of contingent cash consideration. The acquisition did not meet the criteria for a business combination in accordance with ASC 805, Business Combinations, and accordingly, was accounted for as an asset acquisition. Aside from developed technology classified as an intangible asset, there was no other asset or liability that was allocated value in the purchase price allocation. The contingent cash consideration will be paid based upon achievement of certain milestones to be completed within two years from the closing date. Given that the milestones are probable of being achieved and the related amounts are estimable, the fair value of the contingent consideration was recognized as part of the cost of asset acquired at closing date. Accordingly, the total purchase consideration of $17.0 million was allocated to the developed technology.
Acquisition of GigPeak, Inc.
On April 4, 2017, we completed the acquisition of all of the outstanding common stock of GigPeak, a publicly held company mainly operating in the United States in an all-cash transaction for approximately $250.1 million (the "Acquisition"). As a result of this Acquisition, we recorded amortizable intangible assets of $97.9 million and goodwill of $113.2 million during the first quarter of fiscal 2018. In addition, we recorded approximately $2.2 million of acquisition related costs during the first quarter of fiscal 2018, which were included in Selling, General and Administrative Expenses in the Condensed Consolidated Statements of Operations. Refer to Note 4 for details.

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Overview
The following table and discussion provide an overview of our operating results for the three months ended July 1, 2018 and July 2, 2017
 
Three Months Ended
(in thousands, except for percentage)
July 1, 2018
 
July 2, 2017
Revenues
$
228,516

 
$
196,713

Gross profit
$
136,607

 
$
110,038

As a % of revenues
60
%
 
56
%
Operating income
$
41,378

 
$
19,647

As a % of revenues
18
%
 
10
%
Net income
$
30,720

 
$
16,714

As a % of revenues
13
%
 
8
%

Our revenues increased by $31.8 million, or 16%, to $228.5 million during the quarter ended July 1, 2018 compared to the quarter ended July 2, 2017. The increase was primarily due to increased demand for memory interface products, higher revenue contribution from automotive/industrial/sensing products and revenue increases from other communications and certain legacy products. These increases were partially offset by other computing, consumer and industrial products. Gross profit percentage and operating income percentage were 60% and 18%, respectively, for the quarter ended July 1, 2018; and 56% and 10%, respectively, for the quarter ended July 2, 2017. Net income was $30.7 million in the first quarter of fiscal 2019, as compared to net income $16.7 million in the first quarter of fiscal 2018. The increase in net income was primarily driven by higher operating income, which was partially offset by higher net other expense and provision for income taxes as compared to the same period in prior fiscal year.

Results of Operations
Revenues
Revenues by segment:
Three Months Ended
(in thousands)
July 1, 2018

July 2, 2017
 
 
 
(1)
Communications
$
67,086

 
$
56,548

Computing, Consumer and Industrial
161,430

 
140,165

Total revenues
$
228,516

 
$
196,713

Product groups representing greater than 10% of net revenues:
 
 
 
 
Three Months Ended
As a percentage of net revenues
July 1, 2018

July 2, 2017
Communications:
 
 
(1)
Communications timing products
11
%
 
11
%
All others less than 10% individually (2)
18
%
 
18
%
     Total Communications
29
%
 
29
%
Computing, Consumer and Industrial:
 
 
 
Memory interface products
29
%
 
25
%
Wireless power products
11
%
 
12
%
Automotive, industrial and sensing products
15
%
 
13
%
All others less than 10% individually (2)
16
%
 
21
%
Total Computing, Consumer and Industrial
71
%
 
71
%
Total
100
%
 
100
%

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(1) Prior period numbers have been adjusted to conform to our current organizational structure. The percentage of net revenues for prior period remained the same as previously reported. See Note 18 for details.
(2) Includes product group with less than 10% of net revenue individually in a given year.
Communications Segment
Revenues in our Communications segment increased by $10.5 million, or 19%, to $67.1 million during the quarter ended July 1, 2018 as compared to the quarter ended July 2, 2017. The increase was primarily due to a $6.9 million revenue increase in other communications products and a $3.6 million revenue increase from our legacy products.
Computing, Consumer and Industrial Segment
Revenues in our Computing, Consumer and Industrial segment increased by $21.3 million, or 15% to $161.4 million during the quarter ended July 1, 2018 as compared to the quarter ended July 2, 2017. The increase was primarily due to a $15.4 million revenue increase in our memory interface products and an $8.1 million revenue increase in our automotive/industrial/sensing products. The increase was partially offset by decreases from other computing, consumer and industrial products.
Revenues by Region
Revenues, based on shipped to locations, in Hong Kong, Korea, rest of APAC, Americas and Europe accounted for 35%, 12%, 30%, 10% and 13%, respectively, of consolidated revenues in the quarter ended July 1, 2018 compared to 32%, 9%, 33%, 13% and 13%, respectively, of our consolidated revenues in the quarter ended July 2, 2017.
Gross Profit
 
Three Months Ended
(in thousands, except for percentages)
July 1, 2018

July 2, 2017
Gross Profit
$
136,607

 
$
110,038

Gross Profit Percentage
59.8
%
 
55.9
%
Gross profit increased by $26.6 million in the three months ended July 1, 2018 compared to the three months ended July 2, 2017, as a result of increased revenues. Gross profit as a percentage of revenues increased by 3.9% in the three months ended July 1, 2018 compared to the three months ended July 2, 2017. Gross profit percentage increased primarily due to an improved shipment mix of higher margin products and an improved inventory management.
Operating Expenses
The following table presents our operating expenses for the three ended July 1, 2018 and July 2, 2017:
 
Three Months Ended
 
 
July 1, 2018

July 2, 2017
 
(in thousands, except for percentages)
Dollar Amount
% of Net
Revenue
 
Dollar Amount
% of Net
Revenue
 
Research and development
$
52,234

23
%
 
$
48,449

25
%
 
Selling, general and administrative
$
42,995

19
%
 
$
41,942

21
%
 
Research and Development (R&D)
R&D expense increased by $3.8 million, or 7.8%, to $52.2 million in the quarter ended July 1, 2018 compared to the quarter ended July 2, 2017. The increase was primarily driven by higher personnel-related costs (including stock-based compensation) which resulted from a mix of increased variable compensation, salary increases and new hires to support future product development.
Selling, General and Administrative (SG&A)
SG&A expense increased by $1.1 million, or 2.5%, to $43.0 million in the quarter ended July 1, 2018 as compared to the quarter ended July 2, 2017. The increase was primarily driven by a $3.2 million from higher personnel-related costs (including stock-based compensation) which resulted from a mix of increased variable compensation and salary increases. This increase was partially offset by a $2.2 million decrease in acquisition-related expenses as a result of GigPeak acquisition during the quarter ended July 2, 2017.
Interest Expense
The components of interest expense for the three months ended July 1, 2018 and July 2, 2017 are summarized as follows:

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Three Months Ended
(in thousands)
July 1, 2018
 
July 2, 2017
Contractual interest expense
3,172

 
2,932

Amortization of debt discount
3,345

 
3,166

Amortization of debt issuance costs
475

 
475

Other
193

 
324

Total interest expense
$
7,185

 
$
6,897

Interest expense for the three months ended July 1, 2018 and July 2, 2017 was primarily related to the Convertible Notes and the term loans.
Interest Income and Other, Net 
The components of interest income and other, net are summarized as follows:
 
Three Months Ended
(in thousands)
July 1, 2018
 
July 2, 2017
Interest income
$
1,176

 
$
757

Other income, net
495

 
2,225

Interest income and other, net
$
1,671

 
$
2,982


Interest income is derived from earnings on our cash and short-term investments. Other income, net primarily consists of gains or losses in the value of deferred compensation plan assets, foreign currency gains or losses and other non-operating gains or losses. The increase in interest income in the three months ended July 1, 2018 as compared to the same periods in prior year was primarily attributable to higher average interest rates for the period. The decrease in other income in the three months ended July 1, 2018 as compared to the same periods in prior year was primarily driven by the unfavorable impact of foreign currency fluctuations which were partially offset by the increase in fair value of the underlying investments of the deferred compensation plan.
Income Tax Expense (Benefit)
During the three months ended July 1, 2018 and July 2, 2017, we recorded an income tax expense of $3.1 million and an income tax benefit of $1.0 million, respectively. The income tax expense recorded in the three ended July 1, 2018 was primarily due to the impacts of the current year U.S. taxation of certain income of our foreign subsidiaries and an increase in higher-taxed earnings in foreign jurisdictions, partially offset by tax benefits from U.S. research and development. The income tax benefit recorded in the three months ended July 2, 2017 was primarily due to the benefit from research and development tax credits and excess tax benefits from stock based compensation.
As of July 1, 2018, we continue to maintain a valuation allowance against our net deferred tax assets in certain foreign and state jurisdictions, as we are not able to conclude that is more likely than not that these deferred tax assets will be realized. We reached this decision based on judgment, which included consideration of historical operating results and projections of future profits. We will continue to monitor the need for the valuation allowance on a quarterly basis.
In fiscal year 2018, in connection with the TCJA and review of our projected offshore cash flows, and global cash requirements, we determined that historical foreign earnings would no longer be permanently reinvested. We plans to continue to repatriate its offshore earnings to the U.S. for domestic operations, and has accrued for the related tax impacts accordingly.
The SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. As of April 1, 2018, we have made reasonable estimates of the effects on our existing deferred tax balances and the one-time repatriation tax recording provisional charges as a component of income tax expense from continuing operations. As of July 1, 2018, we had not fully completed our accounting for the tax effects of the enactment of the TCJA. Our provision for income taxes is based in part on a reasonable estimate of the effects on our transition tax and existing deferred tax balances. We will continue to assess the impact of the recently enacted tax law and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting on our business and consolidated financial statements.
We benefit from tax incentives granted by local tax authorities in certain foreign jurisdictions. In the fourth quarter of fiscal 2011, we agreed with the Malaysia Industrial Development Board to enter into a new tax incentive agreement which is a full tax exemption on statutory income for a period of 10 years commencing April 4, 2011. This tax incentive agreement is subject to the Company meeting certain financial targets, investments, headcounts and activities in Malaysia.

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As of July 1, 2018, we are under examination in Malaysia for fiscal years 2012 through 2015 and in Canada for fiscal years 2016 through 2017. Although the final outcome of each examination is uncertain, based on currently available information, we believe that the ultimate outcome will not have a material adverse effect on its financial position, cash flows or results of operations.
Our open years in the U.S. federal jurisdiction are fiscal year 2015 and later years. In addition, we are effectively subject to federal tax examination adjustments for tax years ended on or after fiscal year 2000, in that we have tax attribute carryforwards from these years that could be subject to adjustments, if and when utilized. Our open years in various state and foreign jurisdictions are fiscal years 2011 and later.
We do not expect a material change in unrecognized tax benefits within the next twelve months.
Liquidity and Capital Resources
Our cash and cash equivalents and short-term investments were $346.3 million at July 1, 2018, a decrease of $12.6 million compared to April 1, 2018. We had an outstanding debt in the form of Convertible Notes amounting to $373.8 million as of July 1, 2018 and April 1, 2018, and term loans with outstanding principal balance of $197.5 million and $198.0 million as of July 1, 2018 and April 1, 2018, respectively.
The Convertible Notes are governed by the terms of an indenture, dated November 4, 2015, between the Company and a trustee. The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of 0.875% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, commencing May 15, 2016. The Convertible Notes will mature on November 15, 2022, unless earlier repurchased or converted. At any time prior to the close of business on the business day immediately preceding August 15, 2022, holders may convert their Convertible Notes at their option only under the certain circumstances as defined in the indenture. On or after August 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of such circumstances. The conversion rate for the Convertible Notes will initially be 29.8920 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to an initial conversion price of approximately $33.45 per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers. As of July 1, 2018, none of the conditions allowing holders of the Convertible Notes to convert had been met.
On May 29, 2018 (the "Closing Date"), we entered into Amendment No. 1 (the “Amendment”) to its Credit Agreement, for the purpose of, among other things, reducing the interest margin applicable to loans under the Credit Agreement by 0.50%, all of which was treated as a debt modification. On the Closing Date, the aggregate principal amount of the term loans outstanding under the Credit Agreement was approximately $198.0 million. Under the Amendment, the lenders agreed to provide to IDT new term loans (the “Term B-1 Loan”) in the same aggregate principal amount as the outstanding Initial Term B Loan. Such Term B-1 Loan was used to refinance the outstanding Initial Term B Loan in full. The maturity date of the Term B-1 Loan is April 4, 2024; provided that if any of our Convertible Notes are outstanding on August 16, 2022, the maturity date of which had not otherwise been extended to a date that is no earlier than 91 days after April 4, 2024, the Term B-1 Loan maturity date shall instead be August 16, 2022, unless we and its guarantors shall have cash, permitted investments and/or unwithdrawn revolving credit commitments in an aggregate amount not less than the aggregate principal amount of then outstanding Convertible Notes.
We will repay the principal amount of the Term B-1 Loan on the last day of each March 31, June 30, September 30 and December 31, in an amount equal to 0.25% of the original principal amount of the Initial Term B Loan; and on the maturity date, as described above, in an amount equal to the remainder of the outstanding principal amount of the Term B-1 Loan. We may prepay the Term B-1 Loan, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may not be reborrowed. The interest rate of the Term B-1 Loan is based on adjusted LIBO rate which is equal to the LIBO rate for such interest period multiplied by statutory reserve rate, plus an applicable margin of 2.5% (3.0% prior to the Amendment. For the three-month periods ended June 30, 2018 and June 30, 2017, the interest rate on the Term B-1 Loan and the Initial Term B Loan is approximately 4.59% and 4.15%, respectively.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $44.3 million in the three months ended July 1, 2018 compared to $35.0 million in the three months ended July 2, 2017. Cash provided by operating activities in the three months ended July 1, 2018 consisted of our net income of $30.7 million, adjusted to add back non-cash items such as stock-based compensation, depreciation, amortization, impairment charges, amortization of debt issue cost and debt discount and deferred income tax which totaled $41.3 million; and cash used for working capital requirements of $27.7 million.

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Cash Flows from Investing Activities
Net cash provided by investing activities in the three months ended July 1, 2018 was $14.1 million compared to net cash used of $268.1 million in the three months ended July 2, 2017. Net cash provided by investing activities in the three months ended July 1, 2018 was primarily due to $26.8 million of proceeds from short term investments. Those were partly offset by $3.5 million net purchases of short-term investments and $9.2 million of expenditures to purchase capital equipment and intangible assets.
Cash Flows from Financing Activities
Net cash used by financing activities in the three months ended July 1, 2018 was $45.6 million compared to net cash provided of $161.9 million in the three months ended July 2, 2017. Cash provided by financing activities in the three months ended July 1, 2018 was primarily due to $5.4 million of proceeds from exercise of employee stock options and the issuance of stock under our employee stock purchase plan. Those were partly offset by $49.3 million of proceeds used in the repurchase of our common stock.
We anticipate capital expenditures of approximately $30 million to $40 million during the next 12 months to be financed through cash generated from operations and existing cash and investments.
In addition, as much of our revenues are generated outside the U.S., a significant portion of our cash and investment portfolio accumulates in the foreign countries in which we operate. As of July 1, 2018, we had cash, cash equivalents and investments of approximately $213.5 million invested overseas in accounts belonging to various IDT foreign operating entities. While these amounts are primarily invested in U.S. dollars, a portion is held in foreign currencies, and all offshore balances are exposed to local political, banking, currency control and other risks. In addition, these amounts may be subject to tax and other transfer restrictions.
We believe that existing cash and investment balances, together with cash flows from operations, will be sufficient to meet our working capital and capital expenditure needs through at least the next 12 months. We may choose to investigate other financing alternatives to supplement U.S. liquidity; however, we cannot be certain that additional financing will be available on satisfactory terms.
Off-Balance Sheet Arrangements
As of July 1, 2018, we did not have any significant off-balance sheet arrangement, as defined under SEC Regulation S-K Item 303(a)(4)(ii), other than the items discussed and in "Note 13 - Commitments and Contingencies - Commitments" in Part I, Item 1 of this quarterly report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest rate risk relates primarily to our short-term investments of $198.2 million and $222.0 million as of July 1, 2018 and April 1, 2018, respectively.  By policy, we limit our exposure to long-term investments and mitigate the credit risk through diversification and adherence to a policy requiring the purchase of highly rated securities. As of July 1, 2018 and April 1, 2018, our cash, cash equivalents and investment portfolio was concentrated in securities with same day liquidity and a substantial majority of securities in our investment portfolio had maturities of less than two years. A hypothetical 10% change in interest rates would not have a material effect on the value of our investment portfolio as of July 1, 2018. We do not currently use derivative financial instruments in our investment portfolio.
As of July 1, 2018, we had an outstanding principal balance in our Term B-1 Loan of $197.5 million. The interest rate of the Term B-1 Loan is based on adjusted LIBO rate which is equal to the LIBO rate for such interest period multiplied by statutory reserve rate, plus an applicable margin of 2.5%. As the applicable interest rate is based on a floating rate index, we are exposed to interest rate risk. A one hundred basis point change in the contractual interest rate would increase the interest expense for the next 12 months on our outstanding Term B-1 Loan by $2.0 million.
At July 1, 2018 and April 1, 2018, we had an outstanding debt of $373.8 million in the form of convertible note. The fair value of our Convertible Notes is subject to interest rate risk, market risk and other factors due to the convertible feature. The fair value of the Convertible Notes will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of the Convertible Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines in value. The interest and market value changes affect the fair value of our Convertible Notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation.
We are exposed to foreign currency exchange rate risk as a result of international sales, assets and liabilities of foreign subsidiaries, local operating expenses of our foreign entities and capital purchases denominated in foreign currencies. We may use derivative financial instruments to help manage our foreign currency exchange exposures. We do not enter into derivatives for speculative or trading purposes. We have foreign exchange facilities used for hedging arrangements with banks that allow us to enter into foreign exchange contracts totaling approximately $32 million, all of which was available at July 1, 2018. As of July 1, 2018 and April 1, 2018, we had no material outstanding foreign exchange contracts.

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A substantial majority of our sales is denominated in U.S. dollars. We therefore do not have material foreign currency risk associated with sale of products. We performed a sensitivity analysis for the three months ended July 1, 2018 and July 2, 2017 and determined that, without hedging the exposure, a 10% change in foreign currency exchange rates would result in an approximate 0.6% and 0.8% impact on our revenues (as a percentage of revenue), respectively. For the three months ended July 1, 2018 and July 2, 2017, a 10% change in foreign currency exchange rates would result in an approximate 0.9% impact on gross profit margin percentage, respectively, as we operate manufacturing testing facilities in Malaysia and Germany. For the three months ended July 1, 2018 and July 2, 2017, a 10% change in foreign currency exchange rates would result in an approximate 0.7% and 0.5% impact to operating expenses (as a percentage of revenue), respectively, as we operate sales offices in Japan, Taiwan and South Korea and throughout Europe and design centers in China and Canada.
Additionally, a relatively small amount of our monetary assets and liabilities are denominated in foreign currencies. Fluctuations in these currencies relative to the United States dollar will result in transaction gains or losses included in net earnings. To date, foreign currency transaction gains or losses due to fluctuations in foreign currency exchange rates were not material. 
We did not have any material currency exposure related to any outstanding capital purchases as of July 1, 2018 and April 1, 2018.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
As of July 1, 2018, the end of the quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure control and procedures were effective at a reasonable assurance level. There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonable likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

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ITEM 1. LEGAL PROCEEDINGS
Litigation
On March 23, 2018, a compliant for patent infringement was served on the Company by DIFF Scale Operations Research, LLC (“DSOR”) in the Federal Court for the District of Delaware. DSOR alleged to be the owner of a certain collection of patents previously owned by ADC Communications, some of which were the subject of the litigation against the Company. This dispute between the parties has now been resolved, and the court case dismissed based on a joint stipulation of the parties on June 28, 2018, with no finding of infringement liability against IDT.
In January 2012, Maxim I Properties, a general partnership that had purchased a certain parcel of real property (the Property) in 2003, filed a complaint in the Northern District of California naming approximately 30 defendants, including the Company ("Defendants"), alleging various environmental violations of the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Resource Conservation and Recovery Act (RCRA), the California Hazardous Substance Account Act (HSAA), and other common law claims (the Complaint). The Complaint alleged that Defendants including the Company “…generated, transported, and/or arranged for the transport and/or disposal of hazardous waste to the Property.” On August 15, 2012, Maxim I Properties voluntarily dismissed its Complaint without prejudice. However, another defendant, Moyer Products, Inc., counter-claimed against the plaintiff, Maxim, and cross-claimed against the remaining co-Defendants, including the Company. Thus, the Company remains a cross-defendant in this action. In a related, but independent action, the California Department of Toxic Substances Control (DTSC) notified the Company in September 2012 that the Company, and more than 50 other entities, were being named as respondents to DTSC's Enforcement Order, as “a generator of hazardous waste.” In April 2013, the Company, along with the other “respondent” parties, entered into a Corrective Action Consent Agreement (CACA) with the DTSC, agreeing to conduct the Property investigation and corrective action selection. The CACA supersedes the DTSC's Enforcement Order. The District Court for the Northern District of California stayed the Maxim/Moyer litigation pending the Property investigation under the CACA and DTSC's corrective action selection. Property investigation activity took place between April 2013 and June 2015. On June 23, 2015, the DTSC deemed the Property investigation complete. The DTSC continues to evaluate corrective action alternatives. The Company will continue to vigorously defend itself against the allegations in the Complaint and evaluate settlement options with Moyer upon notification from DTSC of its corrective action selection. No specific corrective action has been selected yet, and thus no specific monetary demands have been made.
The Company may also be a party to various other legal proceedings and claims arising in the normal course of business from time to time. With regard to the matters listed above, along with various other legal proceedings and claims and future matters that may arise, potential liability and probable losses or ranges of possible losses due to an unfavorable litigation outcome cannot be reasonably estimated at this time. Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in any particular lawsuit or claim. Pending lawsuits, claims as well as potential future litigation, could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's financial condition, results of operations or cash flows.
ITEM 1A.  RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this report before you decide to purchase our common stock. These risk factors are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that we may face. Our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risk and uncertainties, both known and unknown, we may be unable to conduct our business as currently planned and our financial condition and operating results could be adversely impacted. In addition, the price of our securities is subject to volatility and could decline due to the occurrence of any of these risks, causing investors to lose all or part of their investment.
Our operating results can fluctuate dramatically.  Our operating results have fluctuated in the past and are likely to vary in the future. Past financial results may not be a reliable indicator of future performance. Fluctuations in operating results can result from a wide variety of factors, including:
global economic conditions, including those related to the credit markets;
the cyclicality of the semiconductor industry;
changes in the demand for and mix of products sold and in the markets we and our customers serve;
the availability of industry-wide wafer processing capacity;
the availability of industry-wide and package specific assembly subcontract capacity and related raw materials;
competitive pricing pressures;
the success and timing of new product and process technology announcements and introductions from us or our competitors;
potential loss of market share among a concentrated group of customers;

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difficulty in attracting and retaining key personnel;
difficulty in predicting customer product requirements;
production difficulties and interruptions caused by our complex manufacturing and logistics operations;
limited control over our manufacturing and product delivery as a result of our reliance on subcontractors, foundry and other manufacturing services;
unrealized potential of acquired businesses and resulting assets impairment;
availability and costs of raw materials from a limited number of suppliers;
political, economic and health conditions in various geographic areas;
trade-relations disputes and/or tariffs imposed by various countries;
imposition and/or enforcement of U.S. export control restrictions or similar regulatory trade limitations;
timing and execution of plans and programs subject to foreign labor law requirements, including consultation with work councils;
reduced customer demand as a result of the impact from natural and/or man-made disasters which may adversely impact our customer's manufacturing capability or reduce our customer's ability to acquire critical materials or components to manufacture their end products;
costs associated with other events, such as intellectual property disputes or other litigation; and
legislative, tax, accounting, or regulatory changes or changes in their interpretation.
Global economic and geo-political conditions may adversely affect our business and results of operations.
We have and/or rely on facilities and operations in many countries throughout the world and some of our operations are concentrated in one or more geographic regions. A significant portion of our revenue comes from shipments to locations outside the United States. As a result of the breadth of our international operations, we are subject to the potential for substantial volatility in global capital markets and the global demand for semiconductor product. Our financial results and operations, including our ability to manufacture, assemble and test, design, develop and sell products, may be adversely affected by various global economic and geo-political conditions which can include:
slow, uneven economic growth throughout the world;
uncertainty regarding macroeconomic conditions and/or an institutional or economic collapse in a geographic region;
geo-political events and security breaches throughout the world, such as armed conflict, civil or military unrest, political instability, terrorist activity, cyber attacks and data fraud or theft;
natural disasters and public health issues including pandemics and outbreaks of infectious diseases;
large scale disruptions in transportation, communications and information technology networks;
disruption from trade-relations disputes and/or tariffs imposed by various countries; and
imposition and/or enforcement of U.S. export control restrictions or similar regulatory trade limitations.
The cyclicality of the semiconductor industry exacerbates the volatility of our operating results. 
The semiconductor industry is highly cyclical and has experienced significant downturns, often in connection with product cycles of both semiconductor companies and their customers, but also related to declines in general economic conditions. These downturns have been characterized by volatile customer demand, high inventory levels and accelerated erosion of average selling prices. Any future economic downturns could materially and adversely affect our business from one period to the next relative to demand and product pricing. In addition, the semiconductor industry may experience periods of increased demand, during which we may experience internal and external manufacturing constraints. We may also experience substantial changes in future operating results due to the cyclical nature of the semiconductor industry.
Our acquisitions and the integration of businesses, operations and employees with our own will involve risks and the failure to integrate successfully in the expected time frame may adversely affect our future results.
Any failure to successfully integrate the business, operations and employees of acquired companies could harm our results of operations. Our ability to realize these benefits will depend, in part, on the timely integration and consolidation of organizations, operations, facilities, procedures, policies and technologies, and the harmonization of differences in the business cultures between the companies and their personnel. Implementation and integration of acquired businesses will be complex and time-consuming, will involve additional expense and could disrupt our business and divert management's attention from ongoing business concerns. The challenges involved in integrating acquired businesses will include:
preserving customer, supplier and other important relationships of the acquired companies and the Company;