form10q_100211.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

/x/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2011

OR

/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                             .

Commission File No. 0-12695

INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
 
94-2669985
(I.R.S. Employer
Identification No.)
 
6024 SILVER CREEK VALLEY ROAD, SAN JOSE, CALIFORNIA
(Address of Principal Executive Offices)
 
 
95138
(Zip Code)

Registrant's Telephone Number, Including Area Code: (408) 284-8200

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common stock, $.001 par value
 
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý No ¨
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes 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.
 
x  Large accelerated filer
¨Accelerated filer
¨  Non-accelerated filer
¨Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No ý

The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of October 31, 2011, was approximately 142,051,332.

 
 

 

INTEGRATED DEVICE TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 2, 2011
TABLE OF CONTENTS
 
   
Page
PART I—FINANCIAL INFORMATION
 
     
Item 1.
3
 
4
 
5
 
6
 
7
     
Item 2.
23
Item 3.
32
Item 4.
32
     
PART II—OTHER INFORMATION
     
Item 1.
33
Item 1A.
33
Item 2.
44
Item 3.
44
Item 4.
44
Item 5.
44
Item 6.
45
 
46
   


 
PART I            FINANCIAL INFORMATION
ITEM 1.           FINANCIAL STATEMENTS

INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited in thousands, except per share amounts)
 
October 2,
2011
   
April 3,
 2011
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 133,391     $ 104,680  
Short-term investments
    186,755       194,512  
Accounts receivable, net
    76,440       81,798  
Inventories
    79,808       67,041  
Prepayments and other current assets
    22,012       23,929  
Total current assets
    498,406       471,960  
                 
Property, plant and equipment, net
    72,054       67,754  
Goodwill
    95,452       104,020  
Acquisition-related intangible assets, net
    41,080       51,021  
Deferred tax assets
    2,034       2,034  
Other assets
    33,969       30,671  
Total assets
  $ 742,995     $ 727,460  
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Accounts payable
  $ 30,293     $ 36,470  
Accrued compensation and related expenses
    26,531       28,212  
Deferred income on shipments to distributors
    16,033       12,853  
Deferred tax liabilities
    2,220       2,224  
Other accrued liabilities
    29,018       30,886  
Total current liabilities
    104,095       110,645  
                 
Deferred tax liabilities
    1,516       1,513  
Long-term income tax payable
    726       712  
Other long-term obligations
    15,223       15,808  
Total liabilities
    121,560       128,678  
                 
Commitments and contingencies (Note 14)
               
Stockholders' equity:
               
Preferred stock: $.001 par value: 10,000 shares authorized; no shares issued
    --       --  
Common stock: $.001 par value: 350,000 shares authorized; 143,590 and 148,352 shares issued and outstanding at October 2, 2011 and April 3, 2011, respectively
      144         148  
Additional paid-in capital
    2,359,698       2,343,726  
Treasury stock at cost: 86,932 shares and 80,037 shares at October 2, 2011 and April 3, 2011, respectively
    (957,289 )     (909,824 )
Accumulated deficit
    (782,337 )     (837,075
Accumulated other comprehensive income
    1,219       1,807  
Total stockholders' equity
    621,435       598,782  
Total liabilities and stockholders' equity
  $ 742,995     $ 727,460  
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three Months Ended
   
Six Months Ended
 
   
Oct. 2,
 2011
   
Sept. 26,
 2010
   
Oct. 2,
 2011
   
Sept. 26,
 2010
 
                         
Revenues
  $ 138,318     $ 159,570     $ 287,603     $ 313,191  
Cost of revenues
    64,015       71,449       131,584       144,705  
Gross profit
    74,303       88,121       156,019       168,486  
                                 
Operating expenses:
                               
Research and development
    39,567       38,012       79,234       75,992  
Selling, general and administrative
    24,868       25,604       50,716       51,675  
Total operating expenses
    64,435       63,616       129,950       127,667  
Operating income (loss)
    9,868       24,505       26,069       40,819  
                                 
Interest income and other, net
    (1,828 )     1,178       (1,784 )     1,441  
Income from continuing operations before income taxes
    8,040       25,683       24,285       42,260  
Provision for (benefit from) income taxes
    (367 )     441       580       1,386  
Net income from continuing operations
  $ 8,407     $ 25,242     $ 23,705     $ 40,874  
                                 
Discontinued operations:
                               
Gain from divestiture
    45,939       ---       45,939       ---  
Loss from discontinued operations before income taxes
    (7,352 )     (5,039 )     (14,996 )     (10,280 )
Benefit from income taxes
    (60 )     (21 )     (89 )     (43 )
Net income (loss) from discontinued operations
    38,647       (5,018 )     31,032       (10,237
                                 
Net income
  $ 47,054     $ 20,224     $ 54,737     $ 30,637  
                                 
Basic net income per share – continuing operations
  $ 0.06     $ 0.16     $ 0.16     $ 0.26  
Basic net income (loss) per share – discontinued operations
    0.27       (0.03 )     0.21       (0.07 )
Basic net income per share
  $ 0.33     $ 0.13     $ 0.37     $ 0.19  
                                 
Diluted net income per share – continuing operations
  $ 0.06     $ 0.16     $ 0.16     $ 0.26  
Diluted net income (loss) per share – discontinued operations
    0.26       (0.03 )     0.21       (0.07 )
Diluted net income per share
  $ 0.32     $ 0.13     $ 0.37     $ 0.19  
                                 
Weighted average shares:
                               
Basic
    144,682       157,021       146,249       159,340  
Diluted
    146,169       157,649       148,686       160,171  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended
 
   
Oct. 2,
2011
   
Sept. 26,
2010
 
Cash flows provided by operating activities:
           
Net income
  $ 54,737     $ 30,637  
Adjustments:
               
Depreciation
    9,570       9,098  
Amortization of intangible assets
    8,123       9,927  
Gain from divestiture
    (45,939 )     --  
Stock-based compensation expense
    8,149       8,694  
Deferred tax provision
    (2 )     72  
Changes in assets and liabilities (net of effects of acquisitions and divestiture):
               
Accounts receivable, net
    5,358       (4,476 )
Inventories
    (12,628 )     (1,372 )
Prepayments and other assets
    2,958       7,006  
Accounts payable
    (6,930 )     (971 )
Accrued compensation and related expenses
    (1,342 )     9,981  
Deferred income on shipments to distributors
    3,180       318  
Income taxes payable and receivable
    1,116       892  
Other accrued liabilities and long term liabilities
    (3,414 )     (3,116 )
                 
Net cash provided by operating activities
    22,936       66,690  
                 
Cash flows provided by (used for) investing activities
               
Acquisitions, net of cash acquired
    --       (6,247 )
Proceeds from divestitures
    51,670       --  
Cash in escrow related to acquisition
    --       (1,800 )
Purchases of property, plant and equipment
    (13,322 )     (9,501 )
Purchase of non-marketable equity securities
    --       (2,000 )
Purchases of short-term investments
    (310,494 )     (247,447 )
Proceeds from sales of short-term investments
    220,163       13,396  
Proceeds from maturities of short-term investments
    98,068       190,598  
                 
Net cash provided by (used for) investing activities
    46,085       (63,001 )
                 
Cash flows provided by (used for) financing activities
               
Proceeds from issuance of common stock
    7,679       5,382  
Repurchases of common stock
    (47,465 )     (55,528 )
                 
Net cash used for financing activities
    (39,786 )     (50,146 )
                 
Effect of exchange rates on cash and cash equivalents 
    (524 )     323  
Net increase (decrease) in cash and cash equivalents
    28,711       (46,134 )
Cash and cash equivalents at beginning of period
    104,680       120,526  
Cash and cash equivalents at end of period
  $ 133,391     $ 74,392  

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

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

Note 1
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Integrated Device Technology, Inc. (“IDT” or the “Company”) contain all adjustments that are, in the opinion of management, necessary to state fairly the interim financial information included therein. Certain prior period balances have been reclassified to conform to the current period presentation. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The Company’s fiscal year is the 52- or 53-week period ending on the Sunday closest to March 31.  In a 52-week year, each fiscal quarter consists of thirteen weeks.  In a 53-week year, the additional week is usually added to the third quarter, making such quarter consist of fourteen weeks.  The first and second quarters of fiscal 2012 and fiscal 2011 were thirteen week periods.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the Company’s financial statements and the accompanying notes. Actual results could differ from those estimates.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended April 3, 2011.  Operating results for the three and six months ended October 2, 2011 are not necessarily indicative of operating results for an entire fiscal year.

There have been no significant changes in the Company’s significant accounting policies during the six months ended October 2, 2011, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended April 3, 2011.

Note 2
Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (FASB) issued amended guidance regarding the testing of goodwill for impairment. The objective of this amendment is to simplify how entities test goodwill for impairment. Under the updated guidance an entity is to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011. The adoption of this guidance on April 2, 2012 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued amended guidance regarding the presentation of comprehensive income. The amended guidance requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amended guidance also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The amended guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance on January 2, 2012 is not expected to have a material impact on the Company’s consolidated financial statements.

 
In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance on January 2, 2012 is not expected to have a material impact on the Company’s consolidated financial statements.

Note 3
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 and restricted stock units.

   
Three Months Ended
   
Six Months Ended
 
  (in thousands, except per share amounts)
 
 
Oct. 2,
 2011
   
Sept. 26,
 2010
   
Oct. 2,
 2011
   
Sept. 26,
 2010
 
Numerators (basic and diluted):
                       
Net income from continuing operations
  $ 8,407     $ 25,242     $ 23,705     $ 40,874  
Net income (loss) from discontinued operations (including gain from divestiture)
    38,647       (5,018 )     31,032       (10,237
Net income
  $ 47,054     $ 20,224     $ 54,737     $ 30,637  
                                 
Denominators:
                               
Weighted average shares outstanding – basic
    144,682       157,021       146,249       159,340  
Dilutive effect of employee stock options and restricted stock units
    1,487       628       2,437       831  
Weighted average common shares outstanding, assuming dilution
    146,169       157,649       148,686       160,171  
                                 
Basic net income (loss) per share:
                               
Net income from continuing operations
  $ 0.06     $ 0.16     $ 0.16     $ 0.26  
Net income (loss) from discontinued operations
    0.27       (0.03 )     0.21       (0.07 )
Net income
  $ 0.33     $ 0.13     $ 0.37     $ 0.19  
                                 
Diluted net income (loss) per share:
                               
Net income from continuing operations
  $ 0.06     $ 0.16     $ 0.16     $ 0.26  
Net income (loss) from discontinued operations
    0.26       (0.03 )     0.21       (0.07 )
Net income
  $ 0.32     $ 0.13     $ 0.37     $ 0.19  

Stock options to purchase 13.7 million shares and 10.7 million shares for the three and six months ended October 2, 2011, respectively, and 19.7 million shares and 19.9 million shares for the three and six months ended September 26, 2010, respectively, were outstanding, but were excluded from the calculation of diluted earnings per share because the exercise price of the stock options was greater than the average share price of the common shares and therefore, the effect would have been anti-dilutive. In addition, unvested restricted stock units of  0.9 million and 0.7 million for the three and six months ended October 2, 2011, respectively, and less than 0.1 million for the three and six months ended September 26, 2010, respectively, were excluded from the calculation because they were anti-dilutive after considering unrecognized stock-based compensation expense.

 
Note 4
Business Combinations

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

On April 16, 2010, the Company completed its acquisition of certain assets of IKOR, a former subsidiary of iWatt Corporation.  IKOR designed and manufactured power voltage regulator module (VRM) solutions for high-performance computing. Pursuant to the agreement, the Company acquired IKOR- patented coupled inductor (“CL”) technology and related assets and hired members of IKOR’ engineering team. The total purchase price was $7.7 million, including the fair value of contingent consideration of $1.5 million payable upon the achievement of certain business performance metrics during the twelve months after the closing date. The fair value of the contingent consideration was estimated using probability-based forecasted revenue for the business as of the acquisition date.  The maximum payment for this contingent consideration is $2.8 million.  Pursuant to the agreement, $1.8 million in cash has been held in escrow and will be utilized to fund the contingent consideration payment. During the third quarter of fiscal 2011, the fair value of the contingent consideration was remeasured based on the revised revenue forecast for the business.  As a result, the fair value of the contingent consideration increased $0.3 million to $1.8 million.  The change in the fair value of the contingent consideration was recorded in selling and administrative expenses in fiscal 2011.  There was no change in the fair value of the contingent consideration during the first six months of fiscal 2012.

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

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

The aggregate purchase price has been allocated as follows:

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

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

(in thousands)
 
Fair Value
 
Amortizable intangible assets:
     
    Existing technologies
  $ 5,224  
    Customer relationships
    443  
    Backlog
    44  
Total
  $ 5,711  
 
 
Identifiable Tangible Assets and Liabilities

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

Amortizable Intangible Assets

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

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

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

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

Note 5
Discontinued Operations and Assets Held For Sale

On September 26, 2011, the Company completed the transfer of certain assets related to IDT’s Hollywood Quality Video (“HQV”) and Frame Rate Conversion (“FRC”) video processing product lines to Qualcomm pursuant to an Asset Purchase Agreement. The sale of these HQV and FRC video processing assets is intended to allow the Company to intensify focus on its analog-intensive mixed-signal, timing and interface and  solutions. Upon the closing of the transaction, Qualcomm paid the Company $58.7 million in cash consideration, of which $6.0 million was withheld in an escrow account and is included in the Company’s balance sheet as other assets (non-current). In the second quarter of fiscal 2012, the Company recorded a gain of $45.9 million related to this divestiture. The following table summarizes the components of the gain (in thousands):

Cash proceeds from sale (including amounts held in escrow)
  $ 58,744  
Less cost basis of assets sold and direct costs related to the sale:
       
   Fixed assets transferred to Qualcomm
    (434 )
   Goodwill write-off
    (8,568 )
   Intangible assets write-off
    (1,818 )
   License write-off
    (525 )
   Transaction and other costs
    (1,460 )
Gain on divestiture
  $ 45,939  

The Company’s HQV and FRC product lines represented a significant portion of the Company’s video processing assets. The Company currently intends to fully divest its remaining video processing product lines within the next twelve months and has classified these assets as available for sale.  As of October 2, 2011 the remaining video processing assets classified as available for sale consisted of $0.9 million in fixed assets and $0.7 million in intangible assets. The video processing lines were included as are part of the Company’s Computing and Consumer reportable segment.  For financial statement purposes, the results of operations for these discontinued businesses have been segregated from those of the continuing operations and are presented in the Company's consolidated financial statements as discontinued operations.


The results of discontinued operations for the three and six months ended October 2, 2011 and September 26, 2011 are as follows (in thousands):

   
Three Months Ended
   
Six Months Ended
 
   
Oct. 2,
 2011
   
Sept. 26,
 2010
   
Oct. 2,
 2011
   
Sept. 26,
 2010
 
Revenues
  $ 2,902     $ 7,338     $ 5,103     $ 11,990  
Cost of revenue
    (4,038 )     (5,165 )     (6,564 )     (8,016 )
Operating expenses
    (6,216 )     (7,212 )     (13,535 )     (14,254 )
Gain on divestiture
    45,939       --       45,939       --  
Benefit for income taxes
    60       21       89       43  
Net income (loss) from discontinued operations
  $ 38,647     $ (5,018 )   $ 31,032     $ (10,237 )

Note 6
Fair Value Measurement

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

Fair Value Hierarchy

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

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

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

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

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

   
Fair Value at Reporting Date Using:
 
(in thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Balance
 
Cash Equivalents and Short Term Investments:
                       
US government treasuries and agencies securities
  $ 162,475     $ --     $ --     $ 162,475  
Money market funds
    76,271       --       --       76,271  
Corporate commercial paper
    --       18,297       --       18,297  
Corporate bonds
    --       20,031       --       20,031  
Bank deposits
    --       19,657       --       19,657  
Municipal bonds
    --       367       --       367  
Total assets measured at fair value
  $ 238,746     $ 58,352     $ --     $ 297,098  
                                 
Liabilities:
                               
Fair value of contingent consideration
    --       --       1,800       1,800  
Total liabilities measured at fair value
  $ --     $ --     $ 1,800     $ 1,800  

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of April 3, 2011:

   
Fair Value at Reporting Date Using:
 
(in thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Balance
 
Cash Equivalents and Short-Term investments:
                       
US government treasuries and agencies securities
  $ 119,926     $ --     $ --     $ 119,926  
Money market funds
    32,203       --       --       32,203  
Corporate bonds
    --       57,087       --       57,087  
Corporate commercial paper
    --       51,785       --       51,785  
Bank deposits
    --       17,764       --       17,764  
Municipal bonds
    --       369       --       369  
Total assets measured at fair value
  $ 152,129     $ 127,005     $ --     $ 279,134  
Liabilities:
                               
Fair value of contingent consideration
    --       --       1,800       1,800  
Total liabilities measured at fair value
  $ --     $ --     $ 1,800     $ 1,800  

U.S. government treasuries and U.S. government agency securities as of October 2, 2011 and April 3, 2011 do not include any U.S. government guaranteed bank issued paper. Corporate bonds include bank-issued securities that are guaranteed by the Federal Deposit Insurance Corporation (FDIC).

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

In connection with the acquisition of IKOR (please see “Note 4 – Business Combinations”), a liability was recognized for the Company’s estimate of the fair value of contingent consideration on the acquisition date based on probability-based forecasted revenue.  This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. This fair value measurement is valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions concerning future revenue of the acquired business in measuring fair value.

The following table summarizes the change in the fair value of the contingent consideration measured using significant unobservable inputs (Level 3) during the first six months of fiscal 2012:

(in thousands)
 
Estimated Fair
Value
 
Balance as of April 3, 2011
  $ 1,800  
Additions
    --  
Balance as of October 2, 2011
  $ 1,800  

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


All of the Company’s available-for-sale investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. This determination requires significant judgment. For publicly traded investments, impairment is determined based upon the specific facts and circumstances present at the time, including a review of the closing price over the length of time, general market conditions and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for recovery. Although the Company believes its portfolio continues to be comprised of sound investments due to high credit ratings and government guarantees of the underlying investments, a further decline in the capital and financial markets would adversely impact the market values of its investments and their liquidity. The Company continually monitors the credit risk in its portfolio and future developments in the credit markets and makes appropriate changes to its investment policy as deemed necessary.  The Company did not record any impairment loss related to its short-term investments in the three and six months ended October 2, 2011 and September 26, 2010.

Note 7
Investments

Available- for -Sale Securities

All of the Company’s cash equivalents and marketable securities are classified as “available-for-sale” securities. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.

Available-for-sale investments at October 2, 2011 were as follows:
 
(in thousands)
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated Fair
Value
 
                         
U.S. government treasuries and agency securities
  $ 162,451     $ 32     $ (8 )   $ 162,475  
Corporate commercial paper
    18,296       1       --       18,297  
Corporate bonds
    20,040       35       (44 )     20,031  
Money market funds
    76,271       --       --       76,271  
Bank deposits
    19,657       --       --       19,657  
Municipal bonds
    365       2       --       367  
Total available-for-sale investments
    297,080       70       (52 )     297,098  
Less amounts classified as cash equivalents
    (110,343 )     --       --       (110,343 )
Short-term investments
  $ 186,737     $ 70     $ (52 )   $ 186,755  
 
Available-for-sale investments at April 3, 2011 were as follows:
 
(in thousands)
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated Fair
Value
 
                         
U.S. government treasuries and agency securities
  $ 119,917     $ 17     $ (8 )   $ 119,926  
Corporate commercial paper
    51,785       --       --       51,785  
Corporate bonds
    57,001       104       (18 )     57,087  
Money market funds
    32,203       --       --       32,203  
Bank deposits
    17,764       --       --       17,764  
Municipal bonds
    368       1       --       369  
Total available-for-sale investments
    279,038       122       (26 )     279,134  
Less amounts classified as cash equivalents
    (84,623 )     --       1       (84,622 )
Short-term investments
  $ 194,415     $ 122     $ (25 )   $ 194,512  
 

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

(in thousands)
 
Amortized Cost
   
Estimated Fair Value
 
Due in 1 year or less
  $ 285,318     $ 285,353  
Due in 1-2 years
    9,471       9,459  
Due in 2-5 years
    2,291       2,286  
Total investments in available-for-sale debt securities
  $ 297,080     $ 297,098  
 
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of October 2, 2011, aggregated by length of time that individual securities have been in a continuous loss position.

 
Less than 12 months
 
12 months or Greater
 
Total
 
(in thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Corporate bonds
  $ 8,767     $ (47 )   $ --     $ --     $ 8,767     $ (47 )
U.S. Government treasuries and agency securities
    58,867       (8 )     --       --       58,867       (8 )
Total
  $ 67,634     $ (55 )   $ --     $ --     $ 67,634     $ (55 )

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of April 3, 2011, aggregated by length of time that individual securities have been in a continuous loss position.

 
Less than 12 months
 
12 months or Greater
 
Total
 
(in thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Corporate bonds
  $ 24,176     $ (18 )   $ --     $ --     $ 24,176     $ (18 )
U.S. Government treasuries and agency securities
    36,531       (8 )     --       --       36,531       (8 )
Total
  $ 60,707     $ (26 )   $ --     $ --     $ 60,707     $ (26 )

A significant portion of the available-for-sale investments held by the Company are high grade instruments.  As of October 2, 2011, the unrealized losses on the Company’s available-for-sale investments represented an insignificant amount in relation to its total available-for-sale portfolio. 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 may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at October 2, 2011 and April 3, 2011.

Non-Marketable Equity Securities

The Company accounts for its equity investments in privately held companies under the cost method.  These investments are subject to periodic impairment review and measured and recorded at fair value when they are deemed to be other-than-temporarily impaired. In determining whether a decline in value of its investment has occurred and is other than temporary, an assessment was made by considering available evidence, including the general market conditions, the investee’s financial condition, near-term prospects, market comparables and subsequent rounds of financing.  The valuation also takes into account the investee’s capital structure, liquidation preferences for its capital and other economic variables. The valuation methodology for determining the decline in value of non-marketable equity securities is based on inputs that require management judgment. The aggregate carrying value of the Company’s non-marketable equity securities was approximately $8.5 million and was classified within other assets on the Company’s Consolidated Balance Sheets as of October 2, 2011 and April 3, 2011.  The Company did not recognize any impairment loss in the first six months of fiscal 2012 and fiscal 2011.

 
Note 8
Stock-Based Compensation

Compensation Expense

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

   
Three Months Ended
   
Six Months Ended
 
   
Oct. 2,
 2011
   
Sept. 26,
 2010
   
Oct. 2,
 2011
   
Sept. 26,
 2010
 
                         
Cost of revenue
  $ 453     $ 381     $ 879     $ 890  
Research and development
    2,052       2,458       4,360       5,149  
Selling, general and administrative
    1,524       1,147       2,910       2,655  
Total stock-based compensation expense
  $ 4,029     $ 3,986     $ 8,149     $ 8,694  

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

Valuation Assumptions

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

   
Three Months Ended
   
Six Months Ended
 
   
Oct. 2,
2011
   
Sept. 26,
2010
   
Oct. 2,
2011
   
Sept. 26,
2010
 
                         
Stock option plans:
                       
     Expected Term
 
4.33 years
   
4.58 years
   
4.3 years
   
4.58 years
 
     Risk-free interest rate
    0.8 %     1.36 %     1.46 %     2.00 %
     Volatility
    45.6 %     42.5 %     42.6 %     41.7 %
     Dividend Yield
    0.0 %     0.0 %     0.0 %     0.0 %
     Weighted average grant-date fair value
  $ 2.38     $ 1.96     $ 3.00     $ 2.16  
ESPP:
                               
     Expected Term
 
0.25 years
   
0.25 years
   
0.25 years
   
0.25 years
 
     Risk-free interest rate
    0.2 %     0.2 %     0.4 %     0.2 %
     Volatility
    62.5 %     44.9 %     47.6 %     46.3 %
     Dividend Yield
    0.0 %     0.0 %     0.0 %     0.0 %
     Weighted average fair value
  $ 2.21     $ 1.28     $ 1.88     $ 1.39  

Equity Incentive Programs

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

 
2004 Equity Plan (“2004 Plan”)

In September 2004, the Company’s stockholders approved the 2004 Plan.  On July 21, 2010, the Board of Directors of the Company approved an amendment to the Company’s 2004 Plan to increase the number of shares of common stock reserved for issuance thereunder from 28,500,000 shares to 36,800,000 shares (an increase of 8,300,000 shares), provided, however, that the aggregate number of common shares available for issuance under the 2004 Plan is reduced by 1.74 shares for each common share delivered in settlement of any full value award, which are awards other than stock options and stock appreciation rights, that are granted under the 2004 Plan on or after September 23, 2010.  On September 23, 2010, the stockholders of the Company approved the proposed amendment described above, which also includes certain other changes to the 2004 Plan, including an extension of the term of the 2004 Plan. Options granted by the Company under the 2004 Plan generally expire seven years from the date of grant and generally vest over a four-year period from the date of grant, with one-quarter of the shares of common stock vesting on the one-year anniversary of the grant date and the remaining shares vesting monthly for the 36 months thereafter.  The exercise price of the options granted by the Company under the 2004 Plan shall not be less than 100% of the fair market value for a common share subject to such option on the date the option is granted.  Full value awards made under the 2004 Plan shall become vested over a period of not less than three years (or, if vesting is performance-based, over a period of not less than one year) following the date such award is made; provided, however, that full value awards that result in the issuance of an aggregate of up to 5% of common stock available under the 2004 Plan may be granted to any one or more participants without respect to such minimum vesting provisions.   As of October 2, 2011, there were 12.4 million shares available for future grant under the 2004 Plan.

Restricted stock units available for grant by the Company under the 2004 Plan generally vest over at least a three-year period from the grant date with a proportionate share of the restricted stock units vesting annually over the total vesting period (e.g., for an award with a total three-year vesting period, one-third of the restricted stock units will vest on each one-year anniversary).  Prior to vesting, participants holding restricted stock units do not have shareholder rights.  Shares are issued on or as soon as administratively practicable following the vesting date of the restricted stock units and upon issuance, recordation and delivery, the participant will have all the rights of a shareholder of the Company with respect to voting such stock and receipt of dividends and distributions on such stock.  As of October 2, 2011, 2.4 million restricted stock unit awards were outstanding under the 2004 Plan.

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

(in thousands, except per share data)
 
Shares
   
Weighted Average Exercise Price
 
Options outstanding as of April 3, 2011
    17,814     $ 8.49  
Granted
    3,325       8.34  
Exercised
    (365 )     5.61  
Canceled, forfeited or expired
    (2,050 )     10.06  
Options outstanding as of October 2, 2011
    18,724       8.34  
Options exercisable at October 2, 2011
    11,037     $ 9.32  

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

(in thousands, except per share data)
 
Shares
   
Weighted Average Grant Date Fair Value
 
RSU’s outstanding as of April 3, 2011
    2,342     $ 6.70  
Granted
    966       8.33  
Released
    (689 )     7.76  
Forfeited
    (238 )     6.79  
RSU’s outstanding as of  October 2, 2011
    2,381     $ 7.05  

 
2009 Employee Stock Purchase Plan (“2009 ESPP")

On June 18, 2009, the Board approved implementation of the 2009 Employee Stock Purchase Plan (“2009 ESPP”) and authorized the reservation and issuance of up to 9,000,000 shares of the Company’s common stock, subject to stockholder approval. On September 17, 2009, the Company’s stockholders approved the plan at the 2009 Annual Meeting of Stockholders.  The 2009 ESPP is intended to be implemented in successive quarterly purchase periods commencing on the first day of each fiscal quarter of the Company.  In order to maintain its qualified status under Section 423 of the Internal Revenue Code, the 2009 ESPP imposes certain restrictions, including the limitation that no employee is permitted to participate in the 2009 ESPP if the rights of such employee to purchase common stock of the Company under the 2009 ESPP and all similar purchase plans of the Company or its subsidiaries would accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time the right is granted) for each calendar year.  During the six months ended October 2, 2011, the Company issued 1.1 million shares of common stock with a weighted-average purchase price of $5.23 per share.

Note 9
Balance Sheet Detail

(in thousands)
 
October 2,
2011
   
April 3,
2011
 
Inventories
           
Raw materials
  $ 7,946     $ 4,709  
Work-in-process
    45,247       41,517  
Finished goods
    26,615       20,815  
   Total inventories
  $ 79,808     $ 67,041  

Note 10
Deferred Income on Shipments to Distributors

Included in the caption “Deferred income on shipments to distributors” on the Condensed Consolidated Balance Sheets are amounts related to shipments to certain distributors for which revenue is not recognized until the Company’s product has been sold by the distributor to an end customer. The components at October 2, 2011 and April 3, 2011 were as follows:
 
(in thousands)
 
October 2,
2011
   
April 3,
2011
 
Gross deferred revenue
  $ 19,382     $ 15,463  
Gross deferred costs
    (3,349 )     (2,610 )
   Deferred income on shipments to distributors
  $ 16,033     $ 12,853  
 
The gross deferred revenue represents the gross value of shipments to distributors at the list price billed to the distributor less any price protection credits provided to them in connection with reductions in list price while the products remain in their inventory.  The amount ultimately recognized as revenue will be lower than this amount as a result of future price protection and ship from stock pricing credits which are issued in connection with the sell through of the Company’s products to end customers. Historically this amount has represented an average of approximately 32% of the list price billed to the customer. The gross deferred costs represent the standard costs, which approximate actual costs of products, the Company sells to the distributors.  Although the Company monitors the levels and quality of inventory in the distribution channel, its experience is that product returned from these distributors are able to be sold to a different distributor or in a different region of the world.  As such, inventory write-downs for products in the distribution channel have not been significant.

 
Note 11
Goodwill and Other Intangible Assets

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

 
(in thousands)
 
Communications
   
Computing and Consumer
   
Total
 
Balance as of April 3, 2011
  $ 74,673     $ 29,347     $ 104,020  
Additions
    --       --       --  
Disposal related to divestiture (see Note 5)
    --       (8,568 )     (8,568 )
Balance as of October 2, 2011
  $ 74,673     $ 20,779     $ 95,452  

Intangible asset balances are summarized as follows:

   
October 2, 2011
 
 
(in thousands)
 
Gross Assets
   
Accumulated Amortization
   
Net Assets
 
Purchased intangible assets:
                 
Existing technology
  $ 216,056     $ (185,681 )   $ 30,375  
Trademarks
    2,911       (935 )     1,976  
Customer relationships
    126,796       (120,778 )     6,018  
Total amortizable purchased intangible assets
    345,763       (307,394 )     38,369  
IPR&D*
    2,711       --       2,711  
Total purchased intangible assets
  $ 348,474     $ (307,394 )   $ 41,080  
 
   
April 3, 2011
 
 
(in thousands)
 
Gross Assets
   
Accumulated Amortization
   
Net Assets
 
Purchased intangible assets:
                 
Existing technology
  $ 219,700     $ (181,722 )   $ 37,978  
Trademarks
    3,421       (904 )     2,517  
Customer relationships
    127,379       (119,564 )     7,815  
Total amortizable purchased intangible assets
    350,500       (302,190 )     48,310  
IPR&D*
    2,711       --       2,711  
Total purchased intangible assets
  $ 353,211     $ (302,190 )   $ 51,021  

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

Amortization expense for purchased intangible assets is summarized below:

   
Three Months Ended
   
Six Months Ended
 
  (in thousands)
 
 
Oct. 2,
 2011
   
Sept. 26,
 2010
   
Oct. 2,
 2011
   
Sept. 26,
 2010
 
Existing technology
  $ 2,918     $ 3,535     $ 6,103     $ 7,007  
Trademarks
    404       122       526       244  
Customer relationships
    606       1,320       1,494       2,632  
Other
    --       26       --       44  
Total
  $ 3,928     $ 5,003     $ 8,123     $ 9,927  

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

Fiscal Year
 
Amount
 
Remainder of FY 2012
  $ 7,354  
2013
    10,410  
2014
    7,960  
2015
    5,297  
2016
    4,249  
Thereafter
    3,099  
Total
  $ 38,369  

Note 12
Comprehensive Income

The components of comprehensive income were as follows:
   
Three Months Ended
   
Six Months Ended
 
 (in thousands)
 
Oct. 2,
2011
   
Sept. 26,
2010
   
Oct. 2,
2011
   
Sept. 26,
2010
 
Net income
  $ 47,054     $ 20,224     $ 54,737     $ 30,637  
Currency translation adjustments
    (763 )     858       (511 )     322  
Change in net unrealized gain (loss) on investment
    (80 )     91       (77 )     (17 )
Comprehensive income
  $ 46,211     $ 21,173     $ 54,149     $ 30,942  

The components of accumulated other comprehensive income, net of tax, were as follows:
     
 
(in thousands)
October 2,
2011
 
April 3,
2011
 
Cumulative translation adjustments
  $ 1,200     $ 1,711  
Unrealized gain on available-for-sale investments
    19       96  
Total accumulated other comprehensive income
  $ 1,219     $ 1,807  

Note 13
Industry Segments
 
The Company’s reportable segments include the following:
 
·  
Communications segment: includes high-performance timing products, Rapid I/O switching solutions, flow-control management devices, FIFOs, integrated communications processors, high-speed SRAM, digital logic, telecommunications.
·  
Computing and Consumer segment: includes timing products, PCI Express switching and bridging solutions, high-performance server memory interfaces, multi-port products, touch controller, signal integrity products and PC audio products.

The tables below provide information about these segments:

Revenues by segment
 
Three Months Ended
 
Six Months Ended
 
 (in thousands)
Oct. 2,
2011
 
Sept. 26,
2010
 
Oct. 2,
2011
 
Sept. 26,
2010
 
Communications
  $ 66,613     $ 76,719     $ 136,535     $ 147,384  
Computing and Consumer
    71,705       82,851       151,068       165,807  
    Total
  $ 138,318     $ 159,570     $ 287,603     $ 313,191  


Income (loss) by segment from continuing operations:
   
Three Months Ended
   
Six Months Ended
 
 (in thousands)
 
Oct. 2,
2011
   
Sept. 26,
2010
   
Oct. 2,
2011
   
Sept. 26,
2010
 
                         
Communications
  $ 25,096     $ 35,338     $ 52,947     $ 63,643  
Computing and Consumer
    (7,719 )     175       (9,247 )     334  
Unallocated expenses:
                               
     Amortization of intangible assets
    (3,861 )     (4,936 )     (7,990 )     (9,794 )
     Acquisition related costs and other
    --       (432 )     --       (1,139 )
     Fair market value adjustment to acquired inventory sold
    --       (117 )     --       (379 )
     Restructuring and related costs
    20       (160 )     (392 )     (1,657 )
     Fabrication product transfer costs
    (816 )     (1,383 )     (2,660 )     (2,212 )
     Compensation expense - deferred compensation plan
    1,337       (616 )     1,282       (488 )
     Impairment of assets
    92       183       182       276  
     Stock-based compensation expense
    (4,281 )     (3,546 )     (8,053 )     (7,765 )
     Interest income (expense) and other, net
    (1,828 )     1,177       (1,784 )     1,441  
Income from continuing operations, before income taxes
  $ 8,040     $ 25,683     $ 24,285,     $ 42,260  

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

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

   
Three Months Ended
   
Six Months Ended
 
 (in thousands)
 
Oct. 2,
2011
   
Sept. 26,
2010
   
Oct. 2,
2011
   
Sept. 26,
2010
 
Asia Pacific
  $ 91,203     $ 105,476     $ 193,766     $ 210,751  
Americas
    18,112       24,657       37,765       47,670  
Japan
    11,913       14,471       23,046       26,046  
Europe
    17,090       14,966       33,026       28,724  
Total consolidated revenues
  $ 138,318     $ 159,570     $ 287,603     $ 313,191  

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

The Company utilizes global and regional distributors around the world, who buy product directly from the Company on behalf of their customers.  One family of distributors, Maxtek and its affiliates represented approximately 17% and 20% of the Company’s revenues for the six months ended October 2, 2011 and September 26, 2010.  At October 2, 2011 and April 3, 2011, Maxtek and its affiliates, represented approximately 22% and 19% of the Company’s gross accounts receivable, respectively.


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

 
(in thousands)
 
Oct 2,
 2011
   
April 3,
 2011
 
             
United States
  $ 53,485     $ 51,642  
Canada
    4,811       5,613  
Malaysia
    12,903       8,599  
All other countries
    855       1,900  
Total property, plant and equipment, net
  $ 72,054     $ 67,754  

Note 14
Commitments and Contingencies

Guarantees

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

Indemnification

During the normal course of business, the Company makes certain indemnifications and commitments under which it may be required to make payments in relation to certain transactions.  In addition to indemnifications related to non-infringement of patents and intellectual property, other indemnifications include indemnification of the Company’s directors and officers in connection with legal proceedings, indemnification of various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnification of other parties to certain acquisition agreements. The duration of these indemnifications and commitments varies, and in certain cases, is indefinite. The Company believes that substantially all of its indemnities and commitments provide for limitations on the maximum potential future payments the Company could be obligated to make. However, the Company is unable to estimate the maximum amount of liability related to its indemnities and commitments because such liabilities are contingent upon the occurrence of events which are not reasonably determinable.  The Company believes that any liability for these indemnities and commitments would not be material to its accompanying consolidated financial statements.
 
The Company maintains an accrual for obligations it incurs under its standard product warranty program and customer, part, or process specific matters. The Company’s standard warranty period is one year, however in certain instances the warranty period may be extended to as long as two years. Management estimates the fair value of the Company’s warranty liability based on actual past warranty claims experience, its policies regarding customer warranty returns and other estimates about the timing and disposition of product returned under the standard program. Customer, part, or process specific 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 and $0.4 million as of October 2, 2011 and April 3, 2011, respectively.

Litigation

In November 2010, the Company filed a complaint in the Northern District of California against Phison Electronics Corp. (“Phison”) for infringement of the Company’s four patents directed to oscillator and clock signal technology.  The lawsuit sought a preliminary and permanent injunction against Phison products as well as damages, attorney's fees and cost of the lawsuit.  Phison filed an answer to the complaint on January 31, 2011, denying infringement of the patents in suit. The companies subsequently entered into a confidential settlement agreement, under which IDT licensed certain patents to Phison and the companies agreed to dismiss all claims and counterclaims in the litigation.  The court issued an order dismissing the lawsuit on August 10, 2011.


Note 15
Restructuring

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

 (in thousands)
 
Cost of
Goods Sold
   
Operating
Expenses
   
Total
 
Balance as of April 3, 2011
  $ 5,166     $ 695     $ 5,861  
Provision
    --       --       --  
Cash payments
    (82 )     (198 )     (280 )
Balance as of October 2, 2011
  $ 5,084     $ 497     $ 5,581  

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

In connection with the discontinuing manufacturing operations at its Singapore facility in the fourth quarter of fiscal 2010, the Company exited its leased facility in Singapore in the first quarter of fiscal 2011. As a result, the Company recorded lease impairment charges of approximately $0.5 million in fiscal 2011, which represented the future rental payments under the agreements, reduced by an estimate of sublease incomes, and discounted to present value using an interest rate applicable to us. These charges were recorded as cost of goods sold.  Since the initial restructuring, the Company has made lease payments of $0.3 million.  As of October 2, 2011, the remaining accrued lease liabilities were $0.2 million. The Company expects to pay off the facility lease charges through the third quarter of fiscal 2013.

In connection with the divestiture of Silicon Logic Engineering business in the third quarter of fiscal 2010, the Company exited a leased facility. As a result, the Company recorded lease impairment charges of approximately $0.5 million, which represented the future rental payments under the agreements, reduced by an estimate of sublease incomes, and discounted to present value using an interest rate applicable to the Company. These charges were recorded as SG&A expense.  Since the initial restructuring, the Company has made lease payments of $0.4 million related to the vacated facilities.  As of October 2, 2011, the remaining accrued lease liabilities were $0.1 million. The Company expects to pay off the facility lease charges through the first quarter of fiscal 2013.

In addition, in connection with its plan to transition the manufacture of products to Taiwan Semiconductor Manufacturing Limited (“TSMC”), the Company’s management approved a plan to exit wafer production operations at its Oregon fabrication facility.  As a result, the Company accrued estimated restructuring expenses of $4.8 million for severance payments and other benefits associated with this restructuring action in fiscal 2010. The ultimate payout of these amounts will be determined based upon the actual number of employees which are not offered employment with a potential acquirer of the wafer fabrication facility.  The Company expects to complete this restructuring action in the fourth quarter of fiscal 2012.

During the second quarter of fiscal 2006, the Company completed the consolidation of its Northern California workforce into its San Jose headquarters and exited a leased facility in Salinas, California. The Company recorded lease impairment charges of approximately $2.1 million, of which $0.6 million was recorded as cost of revenues, $0.9 million was recorded as R&D expense and $0.6 million was recorded as SG&A expense. Since the initial restructuring, the Company has made lease payments of $1.6 million related to the vacated facility in Salinas.  As of October 2, 2011, the remaining accrued lease liabilities were $0.5 million.


Note 16
Income Taxes

The provision for income taxes reflects tax on foreign earnings and federal and state tax on U.S. earnings.  For the six months ended October 2, 2011 the Company had an effective tax rate of 0.9% and an effective tax rate from continuing operations of 2.4%. For the six months ended September 26, 2010 the Company had an effective tax rate of 4.2% and an effective tax rate from continuing operations of 3.3%. The Company's effective tax rate is lower than statutory rates in the U.S. due primarily to its mix of earnings in foreign jurisdictions with lower tax rates.

As of October 2, 2011, the Company continued to maintain a valuation allowance against its net U.S. deferred tax assets, as it is currently unable to conclude that it is more likely than not that the Company will be able to realize these U.S. deferred tax assets in the foreseeable future.

As of October 2, 2011, the Company was subject to examination in the U.S. federal tax jurisdiction for the fiscal years 2009 and 2010.  To date, the Company has not been notified by the IRS that a field audit will be conducted.  The statute of limitations to assess tax for fiscal 2009 expires in December 2012.  The general practice of the IRS is to notify taxpayers of a field audit months before the statute of limitations expire.  If the Company is audited by the IRS 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.

Note 17
Share Repurchase Program

On July 21, 2010, the Company’s Board of Directors approved a plan to repurchase up to $225 million of its common stock.  In fiscal 2011, the Company repurchased 12.8 million shares at an average price of $6.06 per share for a total purchase price of $77.7 million under this plan. During the first six months of fiscal 2012, the Company repurchased 6.9 million shares at an average price of $6.87 per share for a total purchase price of $47.5 million.  As of October 2, 2011, approximately $99.8 million was available for future purchase under this share repurchase program.  Share repurchases were recorded as treasury stock and resulted in a reduction of stockholders’ equity.  

Note 18
Credit Facility
 
On June 13, 2011, the Company entered into a Master Repurchase Agreement (the "Repurchase Agreement") with Bank of America, N.A. (“Bank of America”), pursuant to which the Company has the right, subject to the terms and conditions of the Repurchase Agreement, to sell to Bank of America up to 1,431 shares of Class A preferred shares of one of its wholly owned subsidiaries (the “Subsidiary”), in one or more transactions prior to June 13, 2012 for an aggregate purchase price of $135 million in cash. Pursuant to the Repurchase Agreement, to the extent it sells any such shares to Bank of America, the Company will be obligated to repurchase from Bank of America and Bank of America will be obligated to resell the Company, those preferred shares for the aggregate purchase price paid by Bank of America. In such case, and while such shares are outstanding,  the Company will also be obligated to make monthly payments to Bank of America at a floating interest rate of LIBOR plus 2.125% and will have the right to accelerate the repurchase of all or any portion of the shares prior to June 13, 2016.  In addition, the Company is obligated to pay retention fees associated with amounts available under the Repurchase Agreement. These retention fees have been recorded to interest expense in the Company’s Statement of Operations.  The Repurchase Agreement also contains certain customary events of default. As of October 2, 2011, the Company has not sold any preferred stock to Bank of America.
 
 
In connection with the Repurchase Agreement, the Company has entered into an agreement dated June 13, 2011 in favor of Bank of America and certain additional parties (the “IDTI Agreement”), which contains certain representations and various affirmative and negative covenants of the Company, including an obligation that the Company and its Subsidiary each maintain adequate capital in light of contemplated business operations. This agreement contains certain agreements by the Company intended to maintain the status of its Subsidiary as an entity distinct from the Company and its other subsidiaries, with separate assets and liabilities, as well as an indemnity by the Company.



ITEM 7. 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.  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 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 Report on Form 10-Q.

This discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying Notes included in this report and the Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended April 3, 2011 filed with the SEC. Operating results for the three and six months ended October 2, 2011 are not necessarily indicative of operating results for an entire fiscal year.
 
Critical Accounting Policies

Our 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.

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 3, 2011.  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. We believe that there have been no significant changes during the six months ended October 2, 2011 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 3, 2011.

Our 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 thirteen weeks.  In a 53-week year, the additional week is usually added to the third quarter, making such quarter consist of fourteen weeks.  The first and second quarters of fiscal 2012 and fiscal 2011 were thirteen week periods.




In the second quarter of fiscal 2012, we completed the transfer certain assets related to IDT’s Hollywood Quality Video (“HQV”) and Frame Rate Conversion (“FRC”) video processing product lines to Qualcomm pursuant to an Asset Purchase Agreement. The sale of these HQV and FRC video processing assets is intended to allow us to intensify focus on our analog-intensive mixed-signal, timing, and interface and  solutions. Upon closing of the transaction, Qualcomm paid $58.7 million in cash consideration, of which $6.0 million was withheld in an escrow account. In the second quarter of fiscal 2012, we recorded a gain of $45.9 million related to this divestiture. The HQV and FRC product lines represented a significant portion of our video processing assets. We currently intend to fully divest our remaining video processing product lines and have classified these assets as available for sale.  The video processing lines were previously included as are part of our Computing and Consumer reportable segment.  For financial statement purposes, the results of operations for these discontinued businesses have been segregated from those of the continuing operations and are presented in the consolidated financial statements as discontinued operations. Unless otherwise indicated, the following discussion pertains only to our continuing operations.
 
Strategy and Business

We design, develop, manufacture and market a broad range of low-power, high-performance mixed signal semiconductor solutions for the advanced communications, computing and consumer industries. Currently, we offer communications solutions for customers within the enterprise, data center and wireless markets. Our computing products are designed specifically for desktop, notebook, sub-notebook, storage and server applications, optimized gaming consoles, set-top boxes, digital TV and smart phones for consumer-based clients. Ultimately, we envision equipping every digital system with an interface based on our silicon.

We are focused on the following:

·  
aggressively managing, maintaining and refining our product portfolio including focus on the development and growth of new applications;
·  
maintaining existing customers, pursuing and winning new customers;
·  
developing and marketing new products in a timely and efficient manner;
·  
 differentiating and enhancing our products;
·  
deploying research and development investment in the areas of displays, silicon timing, power management, signal integrity and radio frequency; and
·  
rationalizing our manufacturing operations including the transition to wholly outsourced wafer fabrication operations. 

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 3, 2011.

Results of Operations From Continuing Operations

Our reportable segments include the following:

·  
Communications segment: includes clock and timing solutions, Serial Rapid IO switching solutions, crystal oscillator replacements, radio frequency (RF), signal path products, flow-control management devices, first in and first out (FIFOs), integrated communications processors, high-speed static random access memory (SRAM), digital logic and telecommunications products.

·  
Computing and Consumer segment: includes clock generation and distribution products, PCI Express switching and bridging solutions, high-performance server memory interfaces, multi-port products, touch controller, signal integrity products, PC audio and power management.
 

Revenues

Total revenues, for the second quarter of fiscal 2012 decreased by $21.3 million, or 13%, as compared to the same period in the prior fiscal year. Total revenues, for the first six months of fiscal 2012 decreased by $25.6 million, or 8%, as compared to the same period in fiscal 2011. During the second quarter and for the first half of fiscal 2012, we experienced reduced overall demand for our products in the communications market segment and the computing and consumer market segment.

 
Three Months Ended
 
Six Months Ended
 
 (in thousands)
Oct. 2,
2011
 
Sept. 26,
2010
 
Oct. 2,
2011
 
Sept. 26,
2010
 
Communications
  $ 66,613     $ 76,719     $ 136,535     $ 147,384  
Computing and Consumer
    71,705       82,851       151,068       165,807  
    Total
  $ 138,318     $ 159,570     $ 287,603     $ 313,191  

Communications Segment

Revenues in our Communications segment decreased $10.1 million, or 13% in the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011.  Within this market segment, revenues from SRAM and digital logic products decreased 23% and revenues from communications timing and telecommunications products decreased 10%. These decreases were offset in part by a 19% increase in revenues from our flow control management products.

For the six months ended October 2, 2011, revenues in our Communications segment decreased $10.8 million, or 7% as compared to the first six months of fiscal 2011. Within this market segment, revenues from SRAM and digital logic products decreased 16% and revenues from communications timing and telecommunications products decreased 6%. These decreases were offset in part by a 36% increase in revenues from our flow control management products.

Computing and Consumer Segment

Revenues in our Computing and Consumer segment decreased $11.1 million, or 13% in the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011.  Within this market segment, revenues from our analog and power products decreased 14% primarily due to lower demand for our personal computer and consumer timing products.  In addition, revenues from our enterprise computing products decreased 15%, due lower demand for our Data Double Rate 3 (DDR3) products and Advanced Memory Buffer (AMB) products.  

For the six months ended October 2, 2011, revenues in our Computing and Consumer segment decreased $14.7 million, or 9% as compared to the first six months of fiscal 2011.  Within this market segment, revenues from our analog and power products decreased 22% primarily due to lower demand for our personal computer and consumer timing products.  These decreases were offset in part by a 2% increase in revenues from our enterprise computing products primarily due to increased demand for our DDR3 products.

Revenues by Region

Revenues in Asia Pacific region (“APAC”), Americas, Japan and Europe accounted for 66%, 13%, 9% and 12%, respectively, of consolidated revenues in the second quarter of fiscal 2012 compared to 66%, 16%, 9% and 9%, respectively, for the same period in the prior fiscal year.  For the six months ended October 2, 2011, revenues in Asia Pacific region (“APAC”), Americas, Japan and Europe accounted for 67%, 13%, 8% and 12%, respectively, of consolidated revenues as compared to 67%, 15%, 9% and 9%, respectively, for the first six months of fiscal 2011.  The Asia Pacific region continues to be our strongest region, as many of our largest customers utilize manufacturers in that region.


Deferred Income on Shipments to Distributions

Included in the Balance Sheet caption “Deferred income on shipments to distributors” are amounts related to shipments to certain distributors for which revenue is not recognized until our product has been sold by the distributor to an end customer. The components as of October 2, 2011 and April 3, 2011 are as follows:

(in thousands)
 
Oct. 2, 2011
   
April 3, 2011
 
Gross deferred revenue
  $ 19,382     $ 15,463  
Gross deferred costs
    (3,349 )     (2,610 )
Deferred income on shipments to distributors
  $ 16,033     $ 12,853  

The gross deferred revenue represents the gross value of shipments to distributors at the list price billed to the distributor less any price protection credits provided to them in connection with reductions in list price while the products remain in their inventory.  Based on our history, the amount ultimately recognized as revenue is generally less than the gross deferred revenue as a result of ship from stock pricing credits, which are issued in connection with the sell through of the product to an end customer.  As the amount of price adjustments subsequent to shipment is dependent on the overall market conditions, the levels of these adjustments can fluctuate significantly from period to period. Historically, the price adjustments have represented an average of approximately 32% of the list price billed to the customer.  As these credits are issued, there is no impact to working capital as this reduces both accounts receivable and deferred revenue.  The gross deferred costs represent the standard costs (which approximate actual costs) of products we sell to the distributors.

Gross Profit

Gross profit is affected by a variety of factors including the volume of product sales, product mix, manufacturing capacity utilization, product yields and average selling prices. The following table summarizes gross profit for the periods presented:

 
Three Months Ended
 
Six Months Ended
 
(in thousands
Oct. 2,
 2011
 
Sept. 26,
 2010
 
Oct. 2,
 2011
 
Sept. 26,
 2010
 
Gross profit
  $ 74,303     $ 88,121     $ 156,019     $ 168,486  
Gross profit percentage
    54 %     55 %     54 %     54 %

Gross profit (the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011).  Gross profit for the second quarter of fiscal 2012 was $74.3 million, a decrease of $13.8 million, or 16% compared to the second quarter of fiscal 2011.  The decrease in gross profit was primarily driven by lower revenue levels. Gross profit percentage decreased to 54% of net revenues in the second quarter of fiscal 2012 as compared to 55% for the same period in the prior fiscal year.  Our gross profit percentage for the second quarter of fiscal 2012 was negatively impacted by an increase in charges for inventory reserves.  Manufacturing capacity in our Oregon wafer fabrication facility was 95% utilized during the second quarter of fiscal 2012 and fully utilized during the second quarter of fiscal 2011. However, utilization in second quarter of fiscal 2012 continued to benefit from inventory build in anticipation of our transfer of wafer fabrication operations to third party foundries. . In addition, our gross profit percentage in the second quarter of fiscal 2011 was negatively impacted by the sale of acquired inventory valued at fair market value, less an estimated selling cost, associated with our acquisition of IKOR in April 2010, while we had no such charges in second quarter of fiscal 2012.

Gross profit (the first six months of fiscal 2012 compared to the first six months of fiscal 2011).  Gross profit for the first six months of fiscal 2012 was $156.0 million, a decrease of $12.5 million, or 7% as compared to the first six months of fiscal 2011.  The decrease in gross profit was primarily driven by lower revenue levels. Gross profit percentage remained at 54% of net revenues for the first six months of fiscal 2012 as compared the same period in the prior fiscal year.  Our gross profit percentage for the first half of fiscal 2012 was positively impacted by manufacturing cost savings associated with the closure of our test facility in Singapore and consolidation of our test operations in Malaysia which was completed in the second quarter of fiscal 2011.  This favorable impact on gross profit percentage was offset by increased charges for inventory reserves during the first half of fiscal 2012, as compared to the same period in fiscal 2011. Manufacturing capacity in our Oregon wafer fabrication facility was fully utilized in the first half of fiscal 2012 and 2011, however, utilization in first half of fiscal 2012 benefited from inventory build in anticipation of our transfer of wafer fabrication operations to third party foundries.  In addition, our gross profit percentage in the first half of fiscal 2011 was negatively impacted by the sale of acquired inventory valued at fair market value, less an estimated selling cost, associated with our acquisition of IKOR in April 2010, while we had no such charges in first half of fiscal 2012.

Operating Expenses

The following table presents our operating expenses:

   
Three Months Ended
   
Six Months Ended
 
(in thousands
 
Oct. 2,
 2011
   
Sept. 26,
 2010
   
Oct. 2,
 2011
   
Sept. 26,
 2010
 
Research and development
  $ 39,567     $ 38,012     $ 79,234     $ 75,992  
Selling, general and administrative
    24,868       25,604       50,716       51,675  
Total operating expenses
  $ 64,435     $ 63,616     $ 129,950     $ 127,667  
                                 
As a percent of net revenues: