IDTI-09.28.2014-10Q
Table of Contents

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 September 28, 2014 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. 
 ý  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 o No ý 
The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of October 31, 2014 was approximately 148,650,153.



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)
September 28, 2014
 
March 30, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
105,020

 
$
91,211

Short-term investments
384,493

 
362,604

Accounts receivable, net of allowances of $2,598 and $3,134
77,437

 
68,904

Inventories
37,639

 
49,622

Income tax receivable
112

 
195

Prepayments and other current assets
10,576

 
12,839

Total current assets
615,277

 
585,375

Property, plant and equipment, net
65,765

 
69,827

Goodwill
135,644

 
135,644

Other intangible assets, net
7,882

 
18,741

Deferred non-current tax assets
762

 
762

Other assets
22,864

 
20,611

Total assets
$
848,194

 
$
830,960

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
27,002

 
$
25,442

Accrued compensation and related expenses
28,456

 
24,343

Deferred income on shipments to distributors
15,497

 
14,006

Deferred tax liabilities
1,440

 
1,346

Other accrued liabilities
14,605

 
11,525

Total current liabilities
87,000

 
76,662

Deferred tax liabilities
1,494

 
1,494

Long-term income tax payable
272

 
266

Other long-term liabilities
18,444

 
18,683

Total liabilities
107,210

 
97,105

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; 148,670 and 149,996 shares outstanding at September 28, 2014 and March 30, 2014, respectively
149

 
150

Additional paid-in capital
2,488,614

 
2,467,341

Treasury stock at cost: 98,215 shares at September 28, 2014 and 94,556 shares at March 30, 2014, respectively
(1,070,453
)
 
(1,021,301
)
Accumulated deficit
(677,659
)
 
(713,944
)
Accumulated other comprehensive income
333

 
1,609

Total stockholders' equity
740,984

 
733,855

Total liabilities and stockholders' equity
$
848,194

 
$
830,960


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
 
Six Months Ended
 
(Unaudited, in thousands, except per share data)
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Revenues
$
137,093

 
$
124,047

 
$
263,395

 
$
241,511

Cost of revenues
55,217

 
53,286

 
107,510

 
104,628

Gross profit
81,876

 
70,761

 
155,885

 
136,883

Operating expenses:
 

 
 

 
 
 
 
Research and development
30,742

 
38,937

 
62,792

 
76,876

Selling, general and administrative
26,795

 
27,301

 
52,254

 
54,139

Total operating expenses
57,537

 
66,238

 
115,046

 
131,015

Operating income
24,339

 
4,523

 
40,839

 
5,868

Gain from divestiture

 
82,349

 

 
82,349

Interest income and other, net
405

 
756

 
1,267

 
813

Income before income taxes from continuing operations
24,744

 
87,628

 
42,106

 
89,030

Income tax provision
498

 
217

 
749

 
118

Net income from continuing operations
$
24,246

 
$
87,411

 
$
41,357

 
$
88,912

 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Gain from divestiture before income taxes

 

 
16,840

 

Loss from discontinued operations before income taxes
(9,747
)
 
(3,935
)
 
(21,900
)
 
(7,799
)
Income tax provision (benefit)
57

 
(175
)
 
12

 
(274
)
Net loss from discontinued operations
(9,804
)
 
(3,760
)
 
(5,072
)
 
(7,525
)
 
 
 
 
 
 
 
 
Net income
$
14,442

 
$
83,651

 
$
36,285

 
$
81,387

 
 
 
 
 
 
 
 
Basic net income per share - continuing operations
$
0.16

 
$
0.58

 
$
0.28

 
$
0.60

Basic net loss per share - discontinued operations
$
(0.06
)
 
$
(0.02
)
 
$
(0.04
)
 
$
(0.05
)
Basic net income per share
$
0.10

 
$
0.56

 
$
0.24

 
$
0.55

 
 
 
 
 
 
 
 
Diluted net income per share - continuing operations
$
0.16

 
$
0.57

 
$
0.27

 
$
0.59

Diluted net loss per share - discontinued operations
$
(0.07
)
 
$
(0.03
)
 
$
(0.03
)
 
$
(0.05
)
Diluted net income per share
$
0.09

 
$
0.54

 
$
0.24

 
$
0.54

 
 
 
 
 
 
 
 
Weighted average shares:
 

 
 

 
 

 
 

Basic
148,683

 
149,814

 
148,983

 
148,157

Diluted
153,784

 
153,497

 
153,816

 
151,630


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 (LOSS)

 
Three Months Ended
 
Six Months Ended
 
(Unaudited, in thousands)
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
 
 
 
 
 
 
 
Net income
$
14,442

 
$
83,651

 
$
36,285

 
$
81,387

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Currency translation adjustments, net of tax
(1,585
)
 
750

 
(1,255
)
 
541

Change in net unrealized gain (loss) on investments, net of tax
(448
)
 
619

 
(16
)
 
(111
)
Actuarial loss on post-employment and post-retirement benefit plans, net of tax
(2
)
 
(1
)
 
(5
)
 
(3
)
Total other comprehensive income (loss)
(2,035
)
 
1,368

 
(1,276
)
 
427

Comprehensive income
$
12,407

 
$
85,019

 
$
35,009

 
$
81,814


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
 
Six Months Ended
 
(Unaudited, in thousands)
September 28,
2014
 
September 29,
2013
Cash flows from operating activities:
 
 
 
Net income
$
36,285

 
$
81,387

Adjustments:
 

 
 

Depreciation
10,364

 
10,706

Amortization of intangible assets
4,225

 
8,560

Impairment of assets held for sale
8,471

 

Gain from divestiture, net
(16,840
)
 
(82,349
)
Stock-based compensation expense, net of amounts capitalized in inventory
10,665

 
7,478

Deferred tax provision
94

 
(3
)
Changes in assets and liabilities:
 

 
 

Accounts receivable, net
(8,533
)
 
(9,408
)
Inventories
12,158

 
(1,893
)
Prepayments and other assets
1,701

 
4,343

Accounts payable
1,180

 
2,078

Accrued compensation and related expenses
4,113

 
(1,565
)
Deferred income on shipments to distributors
1,491

 
(973
)
Income taxes payable and receivable
(109
)
 
(1,324
)
Other accrued liabilities and long-term liabilities
4,467

 
4,556

Net cash provided by operating activities
69,732

 
21,593

Cash flows from investing activities:
 

 
 

Cash in escrow related to acquisitions
1,026

 
6,000

Proceeds from divestitures
15,300

 
96,099

Purchases of property, plant and equipment
(8,748
)
 
(10,527
)
Purchases of short-term investments
(111,100
)
 
(255,191
)
Proceeds from sales of short-term investments
56,883

 
84,201

Proceeds from maturities of short-term investments
32,295

 
16,074

Net cash used in investing activities
(14,344
)
 
(63,344
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
10,432

 
24,745

Repurchase of common stock
(49,152
)
 

Payment of acquisition related contingent consideration
(1,600
)
 
(4,701
)
Net cash provided by (used in) financing activities
(40,320
)
 
20,044

Effect of exchange rates on cash and cash equivalents 
(1,259
)
 
541

Net increase (decrease) in cash and cash equivalents
13,809

 
(21,166
)
Cash and cash equivalents at beginning of period
91,211

 
130,837

Cash and cash equivalents at end of period
$
105,020

 
$
109,671


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

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INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 and consumer 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 and second quarters of fiscal 2015 and fiscal 2014 were 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 March 30, 2014. There have been no material changes to the Company's significant accounting policies since the filing of the annual report on Form 10-K.
In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair presentation of the condensed consolidated financial statements, for the interim period.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In February 2013, the Financial Accounting Standards Board (FASB) issued guidance for the recognition, measurement, and disclosure of certain obligations resulting from joint and several liability arrangements for which the total amount is fixed. Such obligations may include debt arrangements, legal settlements, and other contractual arrangements. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2013 and should be applied retrospectively to all prior periods presented for those obligations within the scope which existed as of the beginning of the fiscal year of adoption. The Company adopted this guidance in the first quarter of fiscal 2015 and the adoption did not have a significant impact on the Company's condensed consolidated financial statements.
In March 2013, the FASB issued guidance on the accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The guidance is effective prospectively for fiscal years and interim periods within those fiscal years beginning after December 15, 2013. The Company adopted this guidance in the first quarter of fiscal 2015 and the adoption did not have a significant impact on the Company's condensed consolidated financial statements.
In July 2013, FASB issued an Accounting Standards Update (ASU) on Income Taxes, to improve the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is expected to reduce diversity in practice and is expected to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exists. This guidance is effective for interim and annual periods beginning after December 15, 2013, which, for the Company, is the first quarter of fiscal 2015. The Company has historically accounted for its unrecognized tax benefits in accordance with this guidance and as such, adoption of this guidance had no impact on its condensed consolidated financial statements.
Accounting Pronouncements Not Yet Effective for Fiscal 2015
In April 2014, the FASB issued guidance which changes the criteria for identifying a discontinued operation. The guidance limits the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results. This amended guidance is effective for annual and interim reporting periods beginning after December 15, 2014. The Company expects this guidance to have an impact on its financial statements only in the event of a future disposition which meets the criteria.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is

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effective for the Company starting fiscal 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

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 and restricted 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 from continuing operations: 
 
Three Months Ended
 
Six Months Ended
 
(in thousands, except per share amounts)
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Numerator (basic and diluted):
 
 
 
 
 
 
 
Net income from continuing operations
$
24,246

 
$
87,411

 
$
41,357

 
$
88,912

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
148,683

 
149,814

 
148,983

 
148,157

Dilutive effect of employee stock options and restricted stock units
5,101

 
3,683

 
4,833

 
3,473

Weighted average common shares outstanding, diluted
153,784

 
153,497

 
153,816

 
151,630

 
 
 
 
 
 
 
 
Basic net income per share from continuing operations
$
0.16

 
$
0.58

 
$
0.28

 
$
0.60

Diluted net income per share from continuing operations
$
0.16

 
$
0.57

 
$
0.27

 
$
0.59


Potential dilutive common shares of 9 thousand and 4.0 million pertaining to employee stock options and restricted stock units were excluded from the calculation of diluted earnings per share for the three months ended September 28, 2014 and September 29, 2013, respectively, because the effect would have been anti-dilutive. Potential dilutive common shares of 0.7 million and 4.3 million pertaining to employee stock options and restricted stock units were excluded from the calculation of diluted earnings per share for the six months ended September 28, 2014 and September 29, 2013, respectively, because the effect would have been anti-dilutive.

Note 3. Discontinued Operations
High-Speed Converter (“HSC”) Business
In the third quarter of fiscal 2014, the Company initiated a project to divest its HSC business. The Company believes that this divestiture would allow it to strengthen its focus on its analog-intensive mixed-signal, timing and synchronization, and interface and connectivity solutions. The Company envisions fully divesting its HSC business before the end of fiscal year 2015 and has classified these assets as held for sale and accordingly these assets are no longer being depreciated or amortized.
The HSC business includes the assets of NXP B.V.’s Data Converter Business and Alvand Technologies, Inc., which were acquired by the Company during fiscal 2013. On May 30, 2014, the Company completed the sale of certain assets related to the Alvand portion of the HSC business to a buyer pursuant to an Asset Purchase Agreement. Upon the closing of the transaction, the buyer paid the Company $18.0 million in cash consideration, of which $2.7 million will be held in an escrow account for a period of 18 months. The Company recorded a gain of $16.8 million related to this divestiture during the first quarter of fiscal 2015. The following table summarizes the components of the gain (in thousands):

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Amount
Cash proceeds from sale (including amounts held in escrow)
$
18,000

Less book value of assets sold and direct costs related to the sale:

Intangible assets
(990
)
Transaction and other costs
(170
)
Gain on divestiture
$
16,840


Following the sale of assets related to the Alvand portion of the HSC business, the business had remaining long-lived assets classified as held for sale amounting to $8.5 million, which consisted of $2.9 million in fixed assets and $5.6 million in intangible assets. The Company evaluated the carrying value of these assets and determined that it exceeded its estimated fair value based on estimated selling price less cost to sell. Accordingly, total impairment charge of $8.5 million was recorded to loss from discontinued operations in the Condensed Consolidated Statement of Operations for the first quarter of fiscal 2015.

The HSC business was included in the Company’s Communications reportable segment. For financial statements purposes, the results of operations for the HSC business have been segregated from those of the continuing operations and are presented in the Company's condensed consolidated financial statements as discontinued operations.
The results of discontinued operations of the HSC business for the three and six months ended September 28, 2014 and September 29, 2013 were as follows (in thousands):
 
 
Three Months Ended

Six Months Ended
 
 
September 28, 2014

September 29, 2013

September 28, 2014

September 29, 2013
Revenues
 
$
1,332


$
602


$
2,338


$
1,120

Cost of revenues
 
(413
)

(514
)

(1,018
)

(981
)
Long-lived assets impairment
 




(8,471
)


Severance costs (see Note 13)
 
(6,775
)
 

 
(6,775
)
 

Operating expenses
 
(3,891
)

(4,023
)

(7,974
)

(7,938
)
Gain on divestiture
 




16,840



Income tax benefit (provision)
 
(57
)

175


(12
)

274

Net loss from discontinued operations
 
$
(9,804
)

$
(3,760
)

$
(5,072
)

$
(7,525
)


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Note 4. Other Divestitures (not accounted as discontinued operations)
Sale of ENC
On July 12, 2013, Integrated Device Technology, Inc. and Integrated Device Technology (Malaysia) Sdn. Bhd., a wholly-owned subsidiary of IDT (collectively “IDT”), completed the sale of certain assets of its PCI Express ("PCIe") enterprise flash controller business to PMC-Sierra, Inc., a Delaware corporation (“PMC”), for $96.1 million in cash.
The Company recorded a gain of $82.3 million on divestiture related to this transaction in the second quarter of fiscal 2014.
The following table summarizes the components of the gain on divestiture (in thousands):

Amount
Cash proceeds from sale
$
96,099

Less book value of assets sold and direct costs related to the sale:
 
Fixed assets
(1,312
)
Inventories
(876
)
Goodwill allocation
(7,323
)
Transaction and other costs
(4,239
)
Gain on divestiture
$
82,349

Pursuant to the terms of the Asset Purchase Agreement by and among IDT and PMC, dated May 29, 2013, IDT sold (i) substantially all of the assets that were used by IDT and its subsidiaries in the business of designing, developing, manufacturing, testing, marketing, supporting, maintaining, distributing, provisioning and selling non-volatile memory (flash) controllers and (ii) all technology and intellectual property rights owned by IDT or any of its subsidiaries and used exclusively in, or developed exclusively for use in, (a) switching circuits having the primary function of flexible routing of data from/to multiple switch interface ports, where all switch interface ports conform to the PCIe protocol, or (b) circuits having the primary function of executing all of the capturing, re-timing, re-generating and re-transmitting PCIe signals to help extend the physical reach of the signals in a system (the “Disposition”).
In connection with the closing of the Disposition, a license agreement was entered into by IDT and a subsidiary of PMC simultaneously with the Asset Purchase Agreement, whereby IDT will license certain intellectual property rights and technology to PMC, and PMC will license back to IDT certain of the intellectual property rights and technology acquired by PMC in the Disposition.
In connection with the closing of the Disposition, IDT and PMC also entered into (a) a transition services agreement and (b) a five year supply agreement, whereby IDT will supply wafers for certain products to PMC.
Prior to the divestiture, the operating results for IDT's PCIe flash controller business were included in the Company's Computing and Consumer reportable segment. The PCIe enterprise flash controller business was part of a larger cash-flow generating product group and did not, on its own, represent a separate operation of the Company and, therefore, this sale did not qualify as discontinued operations.


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Note 5. Fair Value Measurement
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 28, 2014:
 
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
Cash Equivalents and Short-Term Investments:
 
 
 
 
 
 
 
US government treasuries and agencies securities
$
119,498

 
$

 
$

 
$
119,498

Money market funds
56,254

 

 

 
56,254

Asset-backed securities

 
23,179

 

 
23,179

Corporate bonds

 
211,757

 

 
211,757

International government bonds

 
1,003

 

 
1,003

Corporate commercial paper

 
9,695

 

 
9,695

Bank deposits

 
20,417

 

 
20,417

Repurchase agreement

 
1,132

 

 
1,132

Municipal bonds

 
8,060

 

 
8,060

Total assets measured at fair value
$
175,752

 
$
275,243

 
$

 
$
450,995


The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 30, 2014:
 
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
Cash Equivalents and Short-Term Investments:
 
 
 
 
 
 
 
US government treasuries and agencies securities
$
112,253

 
$

 
$

 
$
112,253

Money market funds
53,430

 

 

 
53,430

Asset-backed securities

 
22,332

 

 
22,332

Corporate bonds

 
199,806

 

 
199,806

International government bonds

 
3,014

 

 
3,014

Corporate commercial paper

 
6,246

 

 
6,246

Bank deposits

 
18,538

 

 
18,538

Repurchase agreements

 
46

 

 
46

Municipal bonds

 
9,210

 

 
9,210

Total assets measured at fair value
$
165,683

 
$
259,192

 
$

 
$
424,875

Liabilities:
 
 


 
 
 
 
Fair value of contingent consideration

 

 
2,140

 
2,140

Total liabilities measured at fair value
$

 
$

 
$
2,140

 
$
2,140


U.S. government treasuries and U.S. government agency securities as of September 28, 2014 and March 30, 2014 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).

11

Table of Contents

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.
In connection with the acquisition of Alvand Technologies in fiscal 2013, liability was recognized for the Company’s estimate of the fair value of contingent consideration on the acquisition date based on probability-based forecasted revenues, gross profits and attainment of product development milestones. These fair value measurements are based on significant inputs not observed in the market and thus represent a Level 3 measurement, which reflect the Company’s own assumptions concerning future revenues, gross profit and product development milestones of the acquired businesses in measuring fair value.
The following table summarizes the change in the fair value of the contingent consideration measured using significant unobservable inputs (Level 3) for the six months ended September 28, 2014:
(in thousands)
Estimated Fair Value
Balance as of March 30, 2014
$
2,140

Payment, net of fair value adjustments
(1,600
)
Release
(540
)
Balance as of September 28, 2014
$


During the first quarter of fiscal 2015, the Company paid $1.6 million and released the remaining contingent consideration of $0.5 million to discontinued operations, as the remaining future milestones will not be achieved as a result of the sale of certain assets related to the Alvand portion of the HSC business.

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. The Company did not record any impairment charges related to its available-for-sale investments in the six months ended September 28, 2014 and September 29, 2013.

Note 6. Investments
Available-for-Sale Securities
Available-for-sale investments at September 28, 2014 were as follows:
 
(in thousands)
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Estimated Fair
 Value
U.S. government treasuries and agencies securities
$
119,455

 
$
112

 
$
(69
)
 
$
119,498

Money market funds
56,254

 

 

 
56,254

Asset-backed securities
23,179

 
10

 
(10
)
 
23,179

Corporate bonds
211,631

 
292

 
(166
)
 
211,757

International government bonds
1,012

 

 
(9
)
 
1,003

Corporate commercial paper
9,695

 

 

 
9,695

Bank deposits
20,417

 

 

 
20,417

Repurchase agreements
1,132

 

 

 
1,132

Municipal bonds
8,036

 
35

 
(11
)
 
8,060

Total available-for-sale investments
450,811

 
449

 
(265
)
 
450,995

Less amounts classified as cash equivalents
(66,502
)
 

 

 
(66,502
)
Short-term investments
$
384,309

 
$
449

 
$
(265
)
 
$
384,493



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Table of Contents

Available-for-sale investments at March 30, 2014 were as follows:
 
(in thousands)
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Estimated Fair
 Value
U.S. government treasuries and agencies securities
$
112,268

 
$
76

 
$
(91
)
 
$
112,253

Money market funds
53,430

 

 

 
53,430

Asset-backed securities
22,330

 
11

 
(9
)
 
22,332

Corporate bonds
199,598

 
335

 
(127
)
 
199,806

International government bonds
3,023

 

 
(9
)
 
3,014

Corporate commercial paper
6,246

 

 

 
6,246

Bank deposits
18,538

 

 

 
18,538

Repurchase agreements
46

 

 

 
46

Municipal bonds
9,196

 
32

 
(18
)
 
9,210

Total available-for-sale investments
424,675

 
454

 
(254
)
 
424,875

Less amounts classified as cash equivalents
(62,271
)
 

 

 
(62,271
)
Short-term investments
$
362,404

 
$
454

 
$
(254
)
 
$
362,604


The cost and estimated fair value of available-for-sale securities at September 28, 2014, by contractual maturity, were as follows:
(in thousands)
Amortized
Cost
 
Estimated Fair
Value
Due in 1 year or less
$
163,750

 
$
163,817

Due in 1-2 years
120,888

 
121,127

Due in 2-5 years
166,173

 
166,051

Total investments in available-for-sale securities
$
450,811

 
$
450,995


The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of September 28, 2014, 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
$
73,370

 
$
(166
)
 
$

 
$

 
$
73,370

 
$
(166
)
Asset-backed securities
9,132

 
(10
)
 

 

 
9,132

 
(10
)
U.S. government treasuries and agencies securities
46,944

 
(69
)
 

 

 
46,944

 
(69
)
Municipal bonds
1,999

 
(11
)
 

 

 
1,999

 
(11
)
International government bonds
1,003

 
(9
)
 

 

 
1,003

 
(9
)
Total
$
132,448

 
$
(265
)
 
$

 
$

 
$
132,448

 
$
(265
)


13

Table of Contents

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, as of March 30, 2014, 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
$
52,783

 
$
(127
)
 
$

 
$

 
$
52,783

 
$
(127
)
Asset-backed securities
11,156

 
(9
)
 

 

 
11,156

 
(9
)
U.S. government treasuries and agencies securities
36,403

 
(91
)
 

 

 
36,403

 
(91
)
Municipal bonds
4,000

 
(18
)
 

 

 
4,000

 
(18
)
International government bonds
3,014

 
(9
)
 

 

 
3,014

 
(9
)
Total
$
107,356

 
$
(254
)
 
$

 
$

 
$
107,356

 
$
(254
)

Currently, a significant portion of the Company’s available-for-sale investments that it holds are high grade instruments.  As of September 28, 2014, 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 are primarily driven by declines in interest rates or as a result of 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 September 28, 2014 and March 30, 2014.

Note 7. Stock-Based Employee Compensation
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)
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 September 28, 2014, there were 11.1 million shares available for future grant under the 2004 Plan.
Compensation Expense
The following table summarizes stock-based compensation expense by category appearing in the Company’s Condensed Consolidated Statement of Operations:
 
Three Months Ended
 
Six Months Ended
(in thousands)
September 28,
2014

September 29,
2013
 
September 28,
2014
 
September 29,
2013
Cost of revenue
$
439

 
$
392

 
$
755

 
$
725

Research and development
2,465

 
383

 
4,986

 
2,698

Selling, general and administrative
3,029

 
1,545

 
5,151

 
3,717

Discontinued operations
(281
)
 
172

 
(227
)
 
338

Total stock-based compensation expense
$
5,652

 
$
2,492

 
$
10,665

 
$
7,478

The amount of stock-based compensation expense that was capitalized during the periods presented above was not material.

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Table of Contents

Stock Options
The following is a summary of the Company's stock option activity and related weighted average exercise prices for each category:
 
Six Months Ended September 28, 2014
(shares in thousands)
Shares
 
Price
Beginning stock options outstanding
5,602

 
$
7.21

Granted
407

 
12.03

Exercised (1)
(886
)
 
6.86

Canceled
(401
)
 
8.70

Ending stock options outstanding
4,722

 
$
7.56

Ending stock options exercisable
2,835

 
$
6.76

(1)
Upon exercise, the Company issues new shares of common stock.
As of September 28, 2014, the unrecognized compensation cost related to nonvested stock options, net of estimated forfeitures, was $2.1 million and will be recognized over a weighted-average period of 1.16 years.
As of September 28, 2014, stock options vested and expected to vest totaled approximately 4.4 million with a weighted-average exercise price of $7.40 and a weighted-average remaining contractual life of 3.94 years. The aggregate intrinsic value was approximately $37.4 million.
As of September 28, 2014, fully vested stock options totaled approximately 2.8 million with a weighted-average exercise price of $6.76 and a weighted-average remaining contractual life of 3.18 years. The aggregate intrinsic value was approximately $26.1 million.
Restricted Stock Units
Restricted stock units granted by the Company under the 2004 Plan generally vest over at least a three-year period from the grant date with one-third of restricted stock units vesting on each one-year anniversary. As of September 28, 2014, 3.5 million restricted stock unit awards were outstanding under the 2004 Plan.
The following table summarizes the Company's restricted stock unit activity for each category for the six months ended September 28, 2014:
 
Six Months Ended September 28, 2014
(shares in thousands)
Shares
 
Weighted-average grant date fair value per share
Beginning RSUs outstanding
2,924

 
$
7.44

Granted
1,770

 
12.63

Released
(873
)
 
7.26

Forfeited
(281
)
 
8.52

Ending RSUs outstanding
3,540

 
$
9.99

As of September 28, 2014, restricted stock units vested and expected to vest totaled approximately 2.7 million with a weighted-average remaining contract life of 1.62 years. The aggregate intrinsic value was approximately $43.7 million.
As of September 28, 2014, the unrecognized compensation cost related to restricted stock units granted under the Company’s equity incentive plan was approximately $17.6 million, net of estimated forfeitures, and is expected to be recognized over a weighted-average period of 1.78 years.
Performance-Based Stock Units
Under the 2004 Plan, the Company has granted performance-based stock units which vest and convert into shares of the Company's common stock based on the level of achievement of pre-established performance goals during a specified performance period. The performance period for the Company's performance-based stock units is generally 1 to 3 years. Management evaluates, on a quarterly basis, the likelihood of the Company meeting its performance metrics in determining stock-based compensation expense.

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Table of Contents

The following table summarizes the Company's performance stock unit activity for each category for the six months ended September 28, 2014:
 
Six Months Ended September 28, 2014
(shares in thousands)
Shares

Weighted-average grant date fair value per share
Beginning PSUs outstanding
804


$
7.79

Granted
78


9.98

Released
(186
)

8.03

Forfeited
(114
)

7.88

Ending PSUs outstanding
582


$
8.00

As of September 28, 2014, performance stock units vested and expected to vest totaled approximately 0.4 million with a weighted-average remaining contract life of 1.15 years. The aggregate intrinsic value was approximately $7.1 million.
As of September 28, 2014, the unrecognized compensation cost related to performance stock units granted under the Company’s equity incentive plan was approximately $1.3 million, net of estimated forfeitures, and is expected to be recognized over a weighted-average period of 1.19 years.
Market-Based Stock Units
In June 2014, under the 2004 Plan, the Company granted approximately 0.5 million shares of restricted stock units with a market-based condition to a group of executive-level employees. These equity awards vest and convert into shares of the Company’s common stock based on the achievement of the Company’s relative total shareholder return over the performance period of two years. The earned market-based stock units will vest in two equal installments, with the first installment of vesting to occur on June 15, 2016, and the second on June 15, 2017.
The fair value of each market-based stock unit award was estimated on the date of grant using a Monte Carlo simulation model that uses the assumptions noted in the table below. The Company uses historical data to estimate employee termination within the valuation model. The expected term of 1.80 years was derived from the output of the valuation model and represents the period of time that restricted stock units granted are expected to be outstanding.
The following weighted average assumptions were used to calculate the fair value of the market-based equity award using a Monte Carlo simulation model:
 
June 15, 2014
Estimated fair value
$
21.00

Expected volatility
34.6
%
Expected term (in years)
1.80

Risk-free interest rate
0.38
%
Dividend yield
%

As of September 28, 2014, the total market-based stock units outstanding was approximately 0.5 million.
As of September 28, 2014, market-based stock units vested and expected to vest totaled approximately 0.4 million with a weighted-average remaining contract life of 2.17 years. The aggregate intrinsic value was approximately $6.2 million.
As of September 28, 2014, the unrecognized compensation cost related to market-based stock units granted under the Company’s equity incentive plans was approximately $7.2 million, net of estimated forfeitures, and is expected to be recognized over a weighted-average period of 2.21 years.
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 9.0 million 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

16

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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. At the 2012 annual meeting of stockholders on September 13, 2012, the Company's stockholders approved an additional 5.0 million shares at the 2012 Annual meeting of Stockholders. On July 12, 2013, the Company filed a registration statement on Form S-8 with the SEC to add the shares to the 2009 ESPP. The number of shares of common stock reserved for issuance thereunder increased from 9.0 million shares to 14.0 million shares.
Activity under the Company's ESPP for the six months ended September 28, 2014 is summarized in the following table:
(in thousands, except per share amounts)
 
Number of shares issued
388

Average issuance price
$
11.25

Number of shares available at September 28, 2014
4,631


Note 8. Stockholders' Equity
Stock Repurchase Program. On October 22, 2013, the Company's Board increased the Company's share repurchase authorization to $150.0 million. In the three and six months ended September 28, 2014, the Company repurchased 1.2 million and 3.7 million shares for $18.4 million and $49.2 million, respectively. As of September 28, 2014, approximately $56.8 million was available for future purchases under the share repurchase program. In fiscal 2014, the Company repurchased 4.1 million shares for $44.0 million. Share repurchases were recorded as treasury stock and resulted in a reduction of stockholders’ equity.

Note 9. Balance Sheet Detail
(in thousands)
September 28,
2014
 
March 30,
2014
Inventories, net
 
 
 
Raw materials
$
5,473

 
$
7,745

Work-in-process
14,400

 
18,436

Finished goods
17,766

 
23,441

Total inventories, net
$
37,639

 
$
49,622

 
 
 
 
Property, plant and equipment, net
 

 
 

Land
$
11,716

 
$
11,724

Machinery and equipment
291,566

 
289,393

Building and leasehold improvements
48,362

 
48,558

  Total property, plant and equipment, gross
351,644

 
349,675

Less: accumulated depreciation
(285,879
)
 
(279,848
)
Total property, plant and equipment, net (1)
$
65,765

 
$
69,827

Other accrued liabilities
 
 
 
Short-term portion of supplier obligations (2)
$
248

 
$
762

Accrued severance costs (3)
7,201

 
638

Other (4)
7,156

 
10,125

Total other accrued liabilities
$
14,605

 
$
11,525

Other long-term obligations
 
 
 
Deferred compensation related liabilities
$
13,638

 
$
13,786

Other
4,806

 
4,897

Total other long-term liabilities
$
18,444

 
$
18,683

(1) As of March 30, 2014, total property, plant and equipment, net includes the HSC business assets held for sale of $2.9 million. As of September 28, 2014, the net carrying value of HSC business long-lived assets is zero. See Note 3 for additional information.

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Table of Contents

(2) Supplier obligations represent payments due under various software design tool and technology license agreements.
(3) Includes accrued severance costs related to the HSC business of $6.8 million as of September 28, 2014.
(4) Other current liabilities consist primarily of acquisition related accrued contingent liabilities, accrued royalties and outside commissions and other accrued unbilled expenses.

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 our product has been sold by the distributor to an end customer. The components of deferred income on shipments to distributors as of September 28, 2014 and March 30, 2014 are as follows:
(in thousands)
September 28,
2014
 
March 30,
2014
Gross deferred revenue
$
18,809

 
$
17,261

Gross deferred costs
(3,312
)
 
(3,255
)
Deferred income on shipments to distributors
$
15,497

 
$
14,006


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 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 represents on average approximately 37% of the list price billed to the customer.  The gross deferred costs represent the standard costs (which approximate actual costs) of products the Company sells to the distributors.  Although the Company monitors the levels and quality of inventory in the distribution channel, the Company's experience is that products returned from these distributors may 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. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended September 28, 2014 consisted of the following:
(in thousands)
Cumulative translation adjustments
 
Unrealized gain on available-for-sale investments
 
Pension adjustments
 
Total
Balance as of March 30, 2014
$
1,497

 
$
194

 
$
(82
)
 
$
1,609

Other comprehensive income (loss) before reclassifications
(1,255
)
 
18

 

 
(1,237
)
Amounts reclassified out of accumulated other comprehensive income (loss)

 
(34
)
 
(5
)
 
(39
)
Net current-period other comprehensive loss
(1,255
)
 
(16
)
 
(5
)
 
(1,276
)
Balance as of September 28, 2014
$
242

 
$
178

 
$
(87
)
 
$
333


Comprehensive income components consisted of:
(in thousands)
Six Months Ended September 28, 2014
 
Location
Unrealized holding losses on available-for-sale investments
$
(34
)
 
interest and other, net
Amortization of pension benefits prior service credits
(5
)
 
operating expense
Total amounts reclassified out of accumulated other comprehensive income (loss)
$
(39
)
 
 

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Table of Contents


12. Goodwill and Intangible Assets, Net
Goodwill balances by reportable segment as of September 28, 2014 and March 30, 2014 are as follows:
Reportable Segment
(in thousands)
Communications
$
122,248

Computing and Consumer
13,396

Total
$
135,644

Goodwill balances as of September 28, 2014 and March 30, 2014 are net of $922.5 million in accumulated impairment losses.
Intangible asset balances as of September 28, 2014 and March 30, 2014 are summarized as follows:
 
September 28, 2014
(in thousands)
Gross Assets
 
Accumulated
Amortization
 
Net Assets
Purchased intangible assets:
 
 
 
 
 
Existing technology
$
217,694

 
$
(211,432
)
 
$
6,262

Trademarks
4,411

 
(3,392
)
 
1,019

Customer relationships
131,045

 
(130,444
)
 
601

Non-compete agreements
251

 
(251
)
 

Total purchased intangible assets
$
353,401

 
$
(345,519
)
 
$
7,882


 
March 30, 2014
(in thousands)
Gross Assets
 
Accumulated
Amortization
 
Net Assets (1)
Purchased intangible assets:
 
 
 
 
 
Existing technology
$
217,923

 
$
(203,888
)
 
$
14,035

Trademarks
4,411

 
(2,934
)
 
1,477

Customer relationships
131,093

 
(128,681
)
 
2,412

Non-compete agreements
2,275

 
(1,458
)
 
817

Total purchased intangible assets
$
355,702

 
$
(336,961
)
 
$
18,741

(1) Includes $6.6 million in HSC assets held for sale.
Amortization expense for the three months ended September 28, 2014 and September 29, 2013 was $1.7 million and $4.3 million, respectively. Amortization expense for the six months ended September 28, 2014 and September 29, 2013 was $4.2 million and $8.6 million, respectively.
During the first quarter of fiscal 2015, the Company recorded an impairment charge relating to the HSC assets held for sale of $5.6 million, which consisted of existing technology of $4.6 million, customer relationships of $0.9 million and non-compete agreements of $0.1 million. Refer to Note 3 for additional information.
The intangible assets are being amortized over estimated useful lives of three to seven years.

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Table of Contents

Based on the intangible assets recorded at September 28, 2014, 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
2015 (Remaining 6 months)
$
2,347

2016
3,084

2017
2,185

2018
256

2019 and thereafter
10

Total purchased intangible assets
$
7,882


Note 13. Restructuring
The following table shows the provision of the restructuring charges and the liability remaining as of September 28, 2014:
(in thousands)
Total
Balance as of March 30, 2014
$
638

Provision - HSC Business
6,775

Provision - Other
697

Cash payments - Other
(909
)
Balance as of September 28, 2014
$
7,201

HSC Business
During the second quarter of fiscal 2015, the Company prepared a workforce-reduction plan (the Plan) with respect to employees of its HSC business in France and the Netherlands. The Plan sets forth the general parameters, terms and benefits for employee dismissals. The Plan will require consultation with the Works Council in France. The Plan was submitted to the French Works Council at the end of second quarter of fiscal 2015 and has not yet been approved. No works council consultation is required in the Netherlands. However, as of September 28, 2014, the Plan has not yet been communicated to affected employees in the Netherlands and negotiations with labor union and employee representative group are yet to be conducted. The Company has not historically offered similar termination benefits as defined in the Plan for these locations. However, the local laws in France and the Netherlands require payment of certain minimum statutory termination benefits. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, Compensation - Nonretirement Post Employment Benefits. During the quarter ended September 28, 2014, the Company recorded to discontinued operations in the Condensed Consolidated Statement of Operations, approximately $6.8 million related to minimum statutory termination benefits.
The supplemental benefits to be paid to affected employees upon finalization and approval of the Plan will be recognized to expense in accordance with ASC 420, Exit or Disposal Cost Obligations. Since the criteria for expense recognition under ASC 420 were not all met as of September 28, 2014, the Company did not record an expense for additional benefits to be paid other than the minimum statutory amount as discussed above.
Other
During the first quarter of fiscal 2015, the Company recorded restructuring charges of 0.4 million and reduced headcount by 12 employees. During the second quarter of fiscal 2015, the Company recorded additional restructuring charges of $0.3 million and reduced headcount by 7 employees. During the six months ended September 28, 2014, the Company paid $0.4 million related to these actions. As of September 28, 2014, the total accrued balance for employee severance costs related to these restructuring actions was $0.3 million. The Company expects to complete these restructuring actions by the third quarter of fiscal 2015.
During fiscal 2014, the Company recorded restructuring charges of $5.5 million and reduced headcount by 117 employees for multiple reductions in workforce actions. During fiscal 2014, the Company paid $4.9 million related to these actions. During the six months ended September 28, 2014, the Company paid $0.5 million related to these actions. As of September 28, 2014, the total accrued balance for employee severance costs related to these restructuring actions was $0.1 million.

20

Table of Contents

Note 14. Commitments and Contingencies
Warranty
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 $0.4 million and $0.3 million as of September 28, 2014 and March 30, 2014, respectively.
Litigation
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, 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 alleges with regard to the Company that IDT “…generated, transported, and/or arranged for the transport and/or disposal of hazardous waste to the Property.” The Complaint further alleges that the Defendants are liable for the costs of investigation and remediation of the Property due to the release of hazardous substances, and that Defendants violated their duty to prevent the release of such hazardous substances. In March 2012, the Company was served with the Complaint and filed an answer, denying the various allegations in the Complaint. In April 2012, the Company filed an amended answer to the Complaint, including a counterclaim against the plaintiff. On August 15, 2012, the plaintiff voluntarily dismissed its Complaint against the Company without prejudice. Moyer Products, Inc., another defendant, has counter-claimed against Maxim and cross-claimed against Defendants, including the Company, and thus the Company remains a defendant in this action. In September 2012, the California Department of Toxic Substances Control (DTSC) notified the Company that it identified the Company, along with more than 50 other entities, and included the Company as a respondent to DTSC's Enforcement Order, as “a generator of hazardous waste” that was sent to the Property. In April 2013, the Company, along with the other “respondent” parties, entered into a Corrective Action Consent Agreement (CACA) to conduct the Property investigation and corrective action selection. The CACA supersedes the Enforcement Order. In February 2013, the court stayed the Maxim/Moyer litigation pending the Property investigation under the CACA and DTSC's corrective action selection. The Property investigation phase is expected to conclude sometime in calendar year 2015. The Company will continue to vigorously defend itself against the allegations in the Complaint and evaluate settlement options with Moyer upon completion of the Property investigation and corrective action selection. Because no specific monetary demands have been made, it is not possible for us to estimate the potential loss or range of potential losses.
The Company is also a party to various other non-material legal proceedings and claims arising in the normal course of business. As of September 28, 2014, the Company has not recorded any accrual for contingent liabilities associated with its legal proceedings based on the belief that liabilities, while possible, are not probable. Further, probable losses or ranges of possible losses in these matters 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. Accordingly, pending lawsuits, as well as potential future litigation with other companies, 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 15. 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 $1.3 million and $1.2 million in matching contributions under the plan during the six months ended September 28, 2014 and September 29, 2013, 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 September 28, 2014 and March 30, 2014, obligations under the plan totaled approximately $13.6 million and $13.8 million, respectively. 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 September 28, 2014 and March 30, 2014, the deferred compensation plan assets were approximately $15.8 million and $16.1 million respectively.

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During the first quarter of fiscal 2013, the Company assumed a deferred compensation plan associated with the acquisition of Fox. 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 September 28, 2014 and March 30, 2014, the deferred compensation plan assets under this plan were approximately $0.7 million. As of September 28, 2014 and March 30, 2014, the deferred compensation plan liabilities under this plan were approximately $1.7 million and $1.6 million, respectively.
International Employee Benefit Plans
The Company sponsors defined-benefit pension plans, defined-contribution plans, multi-employer plans and other post-employment benefit plans covering employees in certain of the Company's international locations. As of September 28, 2014 and March 30, 2014, the net liability for all of these international benefit plans totaled $1.4 million.

Note 16. Income Taxes
During the three and six months ended September 28, 2014, the Company recorded an income tax expense from continuing operations of $0.5 million and $0.7 million, respectively. The income tax expense recorded in the three and six months ended September 28, 2014 was primarily due to taxes on earnings in foreign jurisdictions. The Company recorded an income tax expense from continuing operations of $0.2 million and $0.1 million in the three and six months ended September 29, 2013, respectively. The income tax expense recorded in the three and six months ended September 29, 2013 was primarily due to taxes on earnings in foreign jurisdictions. The income tax expense recorded in the six months ended September 29, 2013 was partially offset by a tax benefit from the reversal of uncertain tax positions resulting from statute lapse.
The Company continued to maintain a valuation allowance as a result of uncertainties related to the realization of its net deferred tax assets at September 28, 2014. The valuation allowance was established as a result of weighing all positive and negative evidence. The valuation allowance reflects the conclusion of management that it is more likely than not that benefits from certain deferred tax assets will not be realized. If actual results differ from estimates or the Company's estimates are adjusted in future periods, the valuation allowance may require adjustment which could materially impact the Company’s financial position and results of operations. It is reasonably possible that sometime in the next twelve months, positive evidence will be sufficient to release a material amount of the Company's valuation allowance; however, there is no assurance that this will occur. The required accounting for the potential release would have significant deferred tax consequences and would increase earnings in the quarter in which the allowance is released.
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 holiday which is a full tax exemption on statutory income for a period of 10 years commencing April 4, 2011. This tax holiday is subject to the Company meeting certain financial targets, investments, headcounts and activities in Malaysia.
The Company believes that it is reasonably possible that a decrease of up to $2.0 million in unrecognized tax benefits may occur within the next twelve months due to settlements with tax authorities or statute lapses.
In fiscal 2013, the Internal Revenue Service commenced a tax audit for fiscal years beginning 2011 through 2012. Although the final outcome 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.
As of September 28, 2014 , the Company was subject to examination in various state and foreign jurisdictions for tax years 2009 forward, none of which were individually material.

Note 17. Segment Information
The Chief Operating Decision Maker is the Company’s President and Chief Executive Officer.
Our reportable segments include the following:
Communications segment: includes clock and timing solutions, flow-control management devices including Serial RapidIO® switching solutions, multi-port products, telecommunications products, high-speed static random access memory, first in and first out, digital logic, radio frequency, and MEMS Oscillator solutions.
Computing and Consumer segment: includes clock generation and distribution products, high-performance server memory interfaces, PCI Express switching solutions, power management solutions, signal integrity products and PC audio.

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The tables below provide information about these segments:
 Revenue by segment
Three Months Ended
 
Six Months Ended

(in thousands)
September 28,
2014

September 29,
2013
 
September 28,
2014
 
September 29,
2013
Communications
$
79,771

 
$
72,346

 
$
160,757

 
$
140,033

Computing and Consumer
57,322

 
51,701

 
102,638

 
101,478

Total revenues
$
137,093

 
$
124,047

 
$
263,395

 
$
241,511


Income by segment from continuing operations
Three Months Ended
 
Six Months Ended
 
(in thousands)
September 28,
2014
 
September 29,
2013
 
September 28,
2014

September 29,
2013
Communications
$
30,436

 
$
25,018

 
$
59,548

 
$
44,016

Computing and Consumer
2,010

 
(5,398
)
 
278

 
(13,395
)
Unallocated expenses:
 
 
 
 
 
 
 
Amortization of intangible assets
(1,676
)
 
(3,322
)
 
(4,225
)
 
(6,643
)
Gain from divestiture

 
82,349

 

 
82,349

Assets impairment and recoveries
(401
)
 
(4,080
)
 
(2,703
)
 
(4,044
)
Stock-based compensation expense
(5,933
)
 
(2,320
)
 
(10,895
)
 
(7,140
)
Severance, retention and facility closure costs
(339
)
 
(4,512
)
 
(912
)
 
(5,694
)
Acquisition-related costs and other

 
(240
)
 

 
(708
)
Deferred compensation plan expense, net
(3
)
 
(4
)
 
(17
)
 
(5
)
Interest income and other, net
650

 
137

 
1,032

 
294

Income from continuing operations, before income taxes
$
24,744

 
$
87,628

 
$
42,106

 
$
89,030


The Company does not allocate goodwill and intangible assets impairment charge, intangible assets amortization, severance and retention costs, acquisition-related costs, stock-based compensation, deferred compensation plan expense, 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
 
Six Months Ended
(in thousands)
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Asia Pacific
$
90,059

 
$
78,430

 
$
171,857

 
$
150,711

Americas (1)
19,753

 
18,562

 
36,761

 
37,208

Japan
10,447

 
10,037

 
20,689

 
20,139

Europe
16,834

 
17,018

 
34,088

 
33,453

Total revenues
$
137,093

 
$
124,047

 
$
263,395

 
$
241,511


(1)
The revenues from the customers in the U.S. were $17.4 million and $16.4 million in the three months ended September 28, 2014 and September 29, 2013, respectively. The revenues from the customers in the U.S. were $32.5 million in each of the six months ended September 28, 2014 and September 29, 2013.
The Company utilizes global and regional distributors around the world, who buy product directly from the Company on behalf of their customers. One distributor, Uniquest accounted for 13% and 11% of the Company's revenues in the three and six months ended September 28, 2014, respectively. Two distributors, Avnet and Maxtek and its affiliates represented approximately 12% and 10% of the Company's revenue for the three months ended September 29, 2013. Two distributors, Avnet and Maxtek and its affiliates represented approximately 13% and 11% of the Company’s revenues for the six months ended September 29, 2013.

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At September 28, 2014, two distributors represented approximately 14% and 10% of the Company’s gross accounts receivable. At March 30, 2014, four distributors represented approximately 15%, 15%, 12% and 11% of the Company’s gross accounts receivable.
The Company’s significant operations outside of the United States include a test facility in Malaysia, design centers in Canada and China, and sales subsidiaries in Japan, Asia Pacific and Europe. The Company's property, plant and equipment, net, are summarized below by geographic area: 
 
(in thousands)
September 28,
2014
 
March 30,
2014
United States
$
40,281

 
$
40,561

Canada
4,496

 
4,660

Malaysia
19,304

 
20,972

All other countries
1,684

 
3,634

Total property, plant and equipment, net
$
65,765

 
$
69,827


Note 18. Derivative Financial Instruments
As of September 28, 2014 and March 30, 2014, the Company did not have any outstanding foreign currency contracts that were designated as hedges of forecasted cash flows or capital equipment purchases. The Company does not enter into derivative financial instruments for speculative or trading purposes.

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 Condensed Consolidated Financial Statements and accompanying Notes included in this report and the Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended March 30, 2014 filed with the SEC. Operating results for the three and six months ended September 28, 2014 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.
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 March 30, 2014. 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 three and six months ended September 28,

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2014 to the items that we disclosed as our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended March 30, 2014.
Business Overview
We develop a broad range of low-power, high-performance mixed-signal semiconductor solutions that optimize our customers’ applications in key markets. In addition to our market-leading timing products, we offer semiconductors targeting communications infrastructure - both wired and wireless - high-performance computing and power management. These products are used for next-generation development in areas such as 4G infrastructure, network communications, cloud data centers 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 and consumer applications. Through system-level analog and digital innovation, we consistently deliver extraordinary value to our customers.
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 March 30, 2014.
Recent developments
Discontinued Operations - High-Speed Converter ("HSC") Business
In the third quarter of fiscal 2014, we initiated a project to divest our HSC business. We believe that this divestiture will allow us to strengthen our focus on analog-intensive mixed-signal, timing and synchronization, and interface and connectivity solutions. We envision fully divesting our HSC business before the end of fiscal year 2015 and have classified these assets as held for sale and accordingly these assets are no longer being depreciated or amortized.
The HSC business includes the assets of NXP B.V.’s Data Converter Business and Alvand Technologies, Inc., which we acquired during fiscal 2013. The total purchase consideration we paid to acquire Alvand Technologies, Inc. included a liability representing the fair value of contingent cash consideration which is paid based upon the achievement of future product development milestones to be completed within 3 years following the acquisition date. During the first quarter of fiscal 2015, the Company paid $1.6 million and released the remaining contingent consideration of $0.5 million to discontinued operations, as the remaining future milestones will not be achieved as a result of the asset sale discussed below.
On May 30, 2014, we completed the sale of certain assets related to the Alvand portion of the HSC business pursuant to an Asset Purchase Agreement. Upon the closing of the transaction, the buyer paid the Company $18.0 million in cash consideration, of which $2.7 million will be held in an escrow account for a period of 18 months. During the first quarter of fiscal 2015, we recorded a gain of $16.8 million related to this divestiture.
Following the sale of assets related to the Alvand portion of the HSC business, the business had remaining long-lived assets classified as held for sale amounting to $8.5 million, which consisted of $2.9 million in fixed assets and $5.6 million in intangible assets. We evaluated the carrying value of these assets and determined that it exceeded estimated fair value based on estimated selling price less cost to sell. Accordingly, we recorded total impairment charge of $8.5 million during the first quarter of fiscal 2015.
The HSC business was included in the Company’s Communications reportable segment. For financial statements purposes, the results of operations for the HSC business have been segregated from those of the continuing operations and are presented in the Company's condensed consolidated financial statements as discontinued operations.
Restructuring - HSC Business
During the second quarter of fiscal 2015, we prepared a workforce-reduction plan (the Plan) with respect to employees of our HSC business in France and the Netherlands. The Plan sets forth the general parameters, terms and benefits for employee dismissals. The Plan will require consultation with the Works Council in France. The Plan was submitted to the French Works Council at the end of second quarter of fiscal 2015 and has not yet been approved. No works council consultation is required in the Netherlands. However, as of September 28, 2014, the Plan has not yet been communicated to affected employees in the Netherlands and negotiations with labor union and employee representative group are yet to be conducted. We have not historically offered similar termination benefits as defined in the Plan for these locations. However, the local laws in France and the Netherlands require payment of certain minimum statutory termination benefits. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, Compensation - Nonretirement Post Employment Benefits. During the quarter ended September 28, 2014, we recorded to discontinued operations in the Condensed Consolidated Statement of Operations, approximately $6.8 million related to minimum statutory termination benefits.
The supplemental benefits to be paid to affected employees upon finalization and approval of the Plan will be recognized to expense in accordance with ASC 420, Exit or Disposal Cost Obligations. Since the criteria for expense recognition under ASC 420 were

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not all met as of September 28, 2014, we did not record an expense for additional benefits to be paid other than the minimum statutory amount as discussed above.
Overview
The following table and discussion provides an overview of our operating results from continuing operations for the three and six months ended September 28, 2014 and September 29, 2013
 
Three Months Ended
 
Six Months Ended
 
(in thousands, except for percentage)
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Revenues
$
137,093

 
$
124,047

 
$
263,395

 
$
241,511

Gross profit
$
81,876

 
$
70,761

 
$
155,885

 
$
136,883

As a % of revenues
60
%
 
57
%
 
59
%
 
57
%
Operating income
$
24,339

 
$
4,523

 
$
40,839

 
$
5,868

As a % of revenues
18
%
 
4
%
 
16
%
 
2
%
Net income from continuing operations
$
24,246

 
$
87,411

 
$
41,357

 
$
88,912

As a % of revenues
18
%
 
70
%
 
16
%
 
37
%

Our revenues increased by $13.0 million, or 11%, to $137.1 million in the quarter ended September 28, 2014 compared to the quarter ended September 29, 2013. The increase was primarily due to increased unit shipments in our Communications segment as we continued to experience increased demand for our Rapid I/O switching solutions products. This was partly offset by the loss of revenue from the sale of our Audio business during the quarter ended December 29, 2013. Gross profit percentage improved primarily due to an improved shipment mix of higher margin products, reduced manufacturing costs and improved inventory management. Net income from continuing operations was $24.2 million in the second quarter of fiscal 2015 as compared to $87.4 million in the second quarter of fiscal 2014. The decrease in net income was primarily due to gain of $82.3 million on divestiture related to the former PCI Express enterprise flash controller business in the second quarter of fiscal 2014. This decrease was partly offset by increased revenues and gross margin combined with decreased operating expenses.


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Results of Continuing Operations
Revenues
Revenues by segment:
Three Months Ended

Six Months Ended
(in thousands)
September 28,
2014

September 29,
2013

September 28,
2014

September 29,
2013
Communications
$
79,771

 
$
72,346

 
$
160,757

 
$
140,033

Computing and Consumer
57,322

 
51,701

 
102,638

 
101,478

Total revenues
$
137,093

 
$
124,047

 
$
263,395

 
$
241,511


Product groups representing greater than 10% of net revenues:
Three Months Ended

Six Months Ended
As a percentage of net revenues
September 28,
2014

September 29,
2013

September 28,
2014

September 29,
2013
Communications:
 
 
 
 
 
 
 
Communications timing products
24
%

24
%
 
25
%
 
25
%
Serial RapidIO products
19
%

13
%
 
19
%
 
13
%
All others less than 10% individually
15
%

21
%
 
17
%
 
20
%
     Total communications
58
%

58
%
 
61
%
 
58
%
 
 
 
 
 
 
 
 
Computing and Consumer:
 
 
 
 
 
 
 
Consumer and computing timing products
16
%
 
18
%
 
16
%
 
18
%
Memory interface products
19
%
 
15
%
 
17
%
 
15
%
All others less than 10% individually
7
%
 
9
%
 
6
%
 
9
%
Total computing and consumer
42
%
 
42
%
 
39
%
 
42
%