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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
(Mark One)
/x/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018 OR
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                            to                             .
Commission File No. 0-12695
INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
94-2669985
(I.R.S. Employer Identification No.)
6024 SILVER CREEK VALLEY ROAD, SAN JOSE, CALIFORNIA
(Address of Principal Executive Offices)
95138
(Zip Code)

Registrant's Telephone Number, Including Area Code: (408) 284-8200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý No o 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ý No ¨ 

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No ý 
The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of November 2, 2018 was approximately 129,020,313.



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 30, 2018
 
April 1, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
200,645

 
$
136,873

Short-term investments
192,032

 
222,026

Accounts receivable, net
129,405

 
108,779

Inventories
61,078

 
68,702

Prepayments and other current assets
12,358

 
12,734

Total current assets
595,518

 
549,114

Property, plant and equipment, net
88,986

 
86,845

Goodwill
420,117

 
420,117

Intangible assets, net
174,886

 
180,781

Deferred tax assets
8,453

 
11,764

Other assets
50,202

 
61,910

Total assets
$
1,338,162

 
$
1,310,531

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
42,106

 
$
41,070

Accrued compensation and related expenses
39,900

 
44,002

Current portion of bank loan
1,980

 
2,000

Other accrued liabilities
44,091

 
26,524

Total current liabilities
128,077

 
113,596

Deferred tax liabilities
11,362

 
10,221

Long-term income tax payable
23,539

 
25,034

Convertible notes
306,827

 
299,551

Long-term bank loan, net
190,513

 
191,073

Other long-term liabilities
30,286

 
25,684

Total liabilities
690,604

 
665,159

Commitments and contingencies (Note 13)


 


Stockholders' equity:
 

 
 

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

 

Common stock: $0.001 par value: 350,000 shares authorized; 128,999 and 129,531 shares outstanding as of September 30, 2018 and April 1, 2018, respectively
129

 
130

Additional paid-in capital
2,792,906

 
2,752,784

Treasury stock at cost: 131,140 and 128,518 shares as of September 30, 2018 and April 1, 2018, respectively
(1,889,110
)
 
(1,801,624
)
Accumulated deficit
(248,906
)
 
(301,155
)
Accumulated other comprehensive loss
(7,461
)
 
(4,763
)
Total stockholders' equity
647,558

 
645,372

Total liabilities and stockholders' equity
$
1,338,162

 
$
1,310,531

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

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INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Six Months Ended
(Unaudited, in thousands, except per share data)
September 30, 2018
 
October 1, 2017
 
September 30,
2018
 
October 1,
2017
Revenues
$
235,484

 
$
204,398

 
$
464,000

 
$
401,111

Cost of revenues
91,900

 
87,636

 
183,809

 
174,311

Gross profit
143,584

 
116,762

 
280,191

 
226,800

Operating expenses:
 

 
 

 
 
 
 
Research and development
55,509

 
48,742

 
107,743

 
97,191

Selling, general and administrative
46,753

 
44,485

 
89,748

 
86,427

Total operating expenses
102,262

 
93,227

 
197,491

 
183,618

Operating income
41,322

 
23,535

 
82,700

 
43,182

Other-than-temporary impairment loss on investment

 

 
(2,000
)
 

Interest expense
(7,045
)
 
(6,834
)
 
(14,230
)
 
(13,731
)
Interest income and other, net
2,437

 
1,948

 
4,108

 
4,930

Income before income taxes
36,714

 
18,649

 
70,578

 
34,381

Benefit from (provision for) income taxes
(1,214
)
 
31

 
(4,358
)
 
1,013

Net income
$
35,500

 
$
18,680

 
$
66,220

 
$
35,394

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.14

 
$
0.51

 
$
0.27

Diluted
$
0.26

 
$
0.14

 
$
0.49

 
$
0.26

Weighted average shares:
 

 
 

 
 

 
 

Basic
129,155

 
133,269

 
129,357

 
133,286

Diluted
134,755

 
136,059

 
133,957

 
136,434


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

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

 
Three Months Ended
 
Six Months Ended
(Unaudited, in thousands)
September 30, 2018
 
October 1, 2017
 
September 30,
2018
 
October 1,
2017
Net income
$
35,500

 
$
18,680

 
$
66,220

 
$
35,394

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Currency translation adjustments
(291
)
 
1,228

 
(2,999
)
 
2,631

Change in net unrealized gain on investments, net of tax
272

 
78

 
301

 
212

Total other comprehensive income (loss)
(19
)
 
1,306

 
(2,698
)
 
2,843

Comprehensive income
$
35,481

 
$
19,986

 
$
63,522

 
$
38,237


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 30, 2018
 
October 1, 2017
Cash flows from operating activities:
 
 
 
Net income
$
66,220

 
$
35,394

Adjustments:
 

 
 

Depreciation
13,506

 
13,173

Amortization of intangible assets
20,767

 
21,626

Amortization of debt issuance costs and debt discount
7,686

 
7,326

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

 

Stock-based compensation expense, net of amounts capitalized in inventory
30,700

 
24,769

Deferred income tax
4,452

 
(7,550
)
Changes in assets and liabilities, net of acquisitions:
 

 
 

   Accounts receivable, net
(9,662
)
 
(1,569
)
   Inventories
7,656

 
7,111

   Prepayments and other assets
(2,831
)
 
1,112

   Accounts payable
1,889

 
(7,633
)
   Accrued compensation and related expenses
(4,103
)
 
852

   Deferred income on shipments to distributors

 
838

   Income taxes payable and receivable
(3,432
)
 
4,573

   Other accrued liabilities and long-term liabilities
4,774

 
(1,413
)
   Net cash provided by operating activities
139,622

 
98,609

Cash flows from investing activities:
 

 
 

Business acquisitions, net of cash acquired

 
(237,716
)
Asset acquisition

 
(12,956
)
Purchases of property, plant and equipment, net
(17,294
)
 
(15,531
)
Purchases of intangible assets
(3,045
)
 
(259
)
Purchase of non-marketable equity securities
(950
)
 
(10,000
)
Purchases of short-term investments
(13,096
)
 
(128,718
)
Proceeds from sales of short-term investments
4,455

 
77,287

Proceeds from maturities of short-term investments
38,436

 
21,292

 Net cash provided by (used in) investing activities
8,506

 
(306,601
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
9,389

 
5,154

Repurchases of common stock
(87,486
)
 
(58,312
)
Payment of capital lease obligations
(581
)
 
(587
)
Proceeds of Initial Term B Loan, net of discount and issuance costs

 
194,252

Principal payments of long-term bank loan
(990
)
 
(1,000
)
Payment of contingent consideration
(2,790
)
 

 Net cash provided by (used in) financing activities
(82,458
)
 
139,507

Effect of exchange rates on cash and cash equivalents 
(1,898
)
 
1,828

Net increase (decrease) in cash and cash equivalents
63,772

 
(66,657
)
Cash and cash equivalents at beginning of period
136,873

 
214,554

Cash and cash equivalents at end of period
$
200,645

 
$
147,897




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Supplemental disclosure of cash flow information
Six Months Ended
(Unaudited, in thousands)
September 30, 2018
 
October 1, 2017
Non-cash investing and financing activities:
 
 
 
Additions to property, plant and equipment included in accounts payable
$
661

 
$
1,109

Additions to intangible assets included in accounts payable and other accrued liabilities
$
12,605

 
$
4,768

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

 
$
3,400

Contingent consideration in connection with the asset acquisition included in other accrued liabilities and other long-term liabilities
$

 
$
4,080


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, consumer and automotive industries.
Pending Merger with Renesas Electronics Corporation. On September 10, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Renesas Electronics Corporation, a Japanese corporation (“Renesas”). The Merger Agreement and the Merger (as defined below) have been approved by the boards of directors of both companies.
The Merger Agreement provides that a wholly owned direct subsidiary of Renesas (“Merger Sub”) will be merged with and into IDT (the “Merger”), with IDT continuing as the surviving corporation and a direct wholly owned subsidiary of Renesas.
At the effective time of the Merger, each outstanding share of common stock, par value $0.001 per share, of IDT (a “Company Share”), other than shares held by stockholders who have validly exercised their appraisal rights under Delaware law, and certain shares owned by IDT, Renesas and their subsidiaries, will be automatically converted into the right to receive $49.00 in cash, without interest.
The Merger Agreement contains customary representations, warranties and covenants. The consummation of the Merger is conditioned on the receipt of the approval of IDT's stockholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. Consummation of the Merger is not subject to a financing condition. Closing of the Merger is expected in the first half of calendar 2019 subject to two three-month extensions in order to obtain required regulatory approvals.
The Merger Agreement contains certain termination rights for IDT and Renesas, including if a governmental body prohibits the Merger or if the Merger is not consummated before June 10, 2019, subject to the two three-month extensions mentioned above. Upon termination of the Merger Agreement under specified circumstances, IDT or Renesas will be required to pay the other party a termination fee of $166.4 million.
The Company recorded transaction-related costs of $3.9 million, principally for outside financial advisory, legal and related fees and expenses associated with the pending acquisition in the three months ended September 30, 2018. These costs are recorded in selling, general and administrative expense included in the Condensed Consolidated Statement of Operations for the three and six months ended September 30, 2018. Additional transaction-related costs are expected to be incurred through the closing of the Merger.
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 2019 and fiscal 2018 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 April 1, 2018. There have been no material changes to the Company's significant accounting policies since the filing of the annual report on Form 10-K other than Revenue Recognition Policy detailed below.
Revenue Recognition Policy Effective April 2, 2018
Effective April 2, 2018, the Company adopted Financial Accounting Standards Board or FASB ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606) using the modified retrospective method applied to those contracts which were not completed as of April 2, 2018.
The Company recognizes revenue when control of its goods and services is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for its services. Sales taxes are excluded from revenue. The Company determines revenue recognition through the following steps:
Identification of the contract or contracts with a customer
Identification of the performance obligation in the contract
Determination of the transaction price

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Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company’s revenue results from semiconductor products sold through three channels: direct sales to original equipment manufacturers (OEMs) and electronic manufacturing service providers (EMSs), consignment sales to OEMs and EMSs, and sales through distributors. Revenue for semiconductor products is recognized when the control is transferred to the customer, which is typically upon shipment to customers. Distributors have rights to price protection, ship from stock pricing credits and stock rotation. The Company accounts for the right of returns, rebates and other pricing adjustments as variable consideration and uses the portfolio approach to estimate these amounts based on the expected amount to be provided to customers and reduce the revenue recognized. The Company utilizes historical experience and market trends to estimate the reserves. Historically, differences between actual and estimated credits have not been material.
For proprietary software licenses that constitute functional intellectual properties, revenue is recognized at the later of when (i) the license term starts and (ii) the software is made available to customers.
The Company recognizes revenue from per-unit royalty-based IP licenses in the period the licensee consumes the licenses. The revenues from fixed-price support or maintenance performance obligations are recognized ratably over the support period consistently with the stand-ready nature of these performance obligations.
The Company’s non-recurring engineering (“NRE”) contracts with customers may include multiple performance obligations. For NRE arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Revenue is recognized over time in the amount to which the Company has a right to invoice, if the right to consideration from the customer is in an amount that corresponds reasonably with the value to the customer of the entity’s performance completed to date.
Practical Expedients and Elections
The Company recognizes commission costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. As a result, no commission costs are capitalized.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed. The Company does not disclose the nature of the performance obligations and the remaining duration of the performance obligations.
The Company has elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.
The Company also elects to exclude amounts collected from customers for all sales taxes from the transaction price.
The Company has adopted the practical expedient which states an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less.
In the opinion of management, these condensed consolidated financial statements, consisting only of normal recurring adjustments, reflect all adjustments which are necessary for the fair statement of the condensed consolidated financial statements for the interim period.
Accounting Pronouncements Recently Adopted
Adoption of ASC Topic 606:
On May 28, 2014, FASB issued ASC Topic 606, which creates a single source of revenue guidance under US generally accepted accounting principles for all companies, in all industries, effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Under the new standard, an entity is required to recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration received in exchange for goods and services. The FASB also issued additional guidance that defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates, and also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. This new guidance supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the standard.
Effective April 2, 2018, the Company adopted ASC Topic 606 using the modified retrospective method applied to those contracts which were not completed as of April 2, 2018. Results for reporting periods beginning after April 2, 2018 are presented under ASC Topic 606. Prior period amounts are not adjusted and continue to be reported in accordance with its historic accounting under ASC Topic 605. The sale of semiconductor products accounts for the substantial majority of the Company’s consolidated revenue

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and recognition for such product sales has remained the same under ASC Topic 606 as that under Topic 605. Additionally, other revenue streams remain substantially unchanged. Hence, there was no impact on the opening accumulated deficit as of April 2, 2018 due to the adoption of Topic 606. The Company expects the ongoing impact of the new revenue standard to be immaterial to the consolidated financial statements. Additionally, the balance sheet presentation of certain reserve balances previously shown net within accounts receivable are now presented as refund liabilities within “Other Accrued Liabilities” on the Condensed Consolidated Balance Sheets. Refer to Significant Accounting Policies section above for the Company’s practical expedients and elections.
Other recently adopted pronouncements:
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes the current accounting related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. Most notably, ASU 2016-01 requires that equity investments, with certain exemptions, be measured at fair value with changes in fair value recognized in net income as opposed to other comprehensive income. The guidance further clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Company adopted this guidance in the first quarter of fiscal 2019 on a retrospective basis and concluded that there is no cumulative effect adjustment. The Company has elected to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (referred to as the measurement alternative). See Note 6 for details.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to a third party or otherwise recovered through use. The Company adopted the new guidance in the first quarter of fiscal 2019. Upon adoption, the Company applied a modified retrospective transition approach and recognized the unamortized portion of the deferred tax charge of $13.9 million through a cumulative-effect adjustment to accumulated deficit.
In March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments allow companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. As of April 1, 2018, the Company has made reasonable estimates of the effects on its existing deferred tax balances and the one-time repatriation tax recording provisional charges as a component of income tax expense from continuing operations. As of September 30, 2018, the Company had not fully completed its accounting for the tax effects of the enactment of the TCJA. The Company’s provision for income taxes is based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances. The Company will continue to assess the impact of the recently enacted tax law and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting on its business and consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which clarifies the definition of business. The update provides a more robust framework to use in determining when a set of assets and activities is a business. The new guidance provides a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new guidance becomes effective in fiscal years beginning after December 15, 2017, though early adoption is permitted. The Company adopted the new guidance prospectively in the first quarter of fiscal 2019. There was no material impact in the period of adoption.
In May 2017, the FASB issued ASU No. 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the requirements related to accounting in changes to stock compensation awards. The guidance in ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the new guidance in the first quarter of fiscal 2019. There was no material impact in the period of adoption.
Accounting Pronouncements Not Yet Effective for Fiscal 2019
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows an entity to elect to reclassify the stranded tax effects resulting from the change in income tax rate from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.  The amendments in this update are effective for periods beginning after December 15, 2018. The Company plans to adopt the new standard effective the first quarter of fiscal 2020. The Company does not believe that the adoption of this new accounting guidance will have any material impact on its consolidated financial statements.

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In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350), which simplifies the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted. The Company does not believe that the adoption of this new accounting guidance will have any material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The new guidance will be effective for the Company starting in the first quarter of fiscal 2021. Early adoption is permitted starting in the first quarter of fiscal 2020. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.
In February 2016, the FASB issued an ASU 2016-02, Leases (Topic 842). In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases which clarifies, corrects or consolidates authoritative guidance issued in ASU 2016-02 and is effective upon adoption of ASU 2016-02. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create a right-of-use asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The new guidance is effective for annual and interim periods beginning after December 15, 2018 and must be applied using a modified retrospective approach, with certain practical expedients available. The Company plans to adopt the new standard effective the first quarter of fiscal 2020 and expects to elect certain available transitional practical expedients. The Company is currently assessing the impact that the new standard will have on its consolidated financial statements, which will consist primarily of a balance sheet gross up of right-of-use assets and lease liabilities on the Condensed Consolidated Balance Sheets upon adoption, which will increase the Company's total assets and liabilities.
Note 2. Net Income Per Share
Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive potential common shares outstanding during the period. Potential common shares include employee stock options, restricted stock units, performance-based stock units and convertible notes. 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.

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The following table sets forth the computation of basic and diluted net income per share: 
 
Three Months Ended
 
Six Months Ended
 (in thousands, except per share amounts)
September 30, 2018
 
October 1, 2017
 
September 30,
2018
 
October 1,
2017
Numerator (basic and diluted):
 
 
 
 
 
 
 
Net income
$
35,500

 
$
18,680

 
$
66,220

 
$
35,394

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
129,155

 
133,269

 
129,357

 
133,286

Dilutive effect of employee stock options, restricted stock units and performance stock units
4,100

 
2,790

 
4,052

 
3,148

Dilutive effect of convertible notes
1,500

 

 
548

 

Weighted average common shares outstanding, diluted
134,755

 
136,059

 
133,957

 
136,434

Basic net income per share
$
0.27

 
$
0.14

 
$
0.51

 
$
0.27

Diluted net income per share
$
0.26

 
$
0.14

 
$
0.49

 
$
0.26

Potential dilutive common shares of seven thousand and 18 thousand pertaining to employee stock options, restricted stock units and performance-based stock units were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2018 and October 1, 2017, respectively, because the effect would have been anti-dilutive. Potential dilutive common shares of 11 thousand and 55 thousand pertaining to employee stock options, restricted stock units and performance stock units were excluded from the calculation of diluted earnings per share for the six months ended September 30, 2018 and October 1, 2017, respectively, because the effect would have been anti-dilutive.
In accordance with ASC 260, Earnings per Share, the Convertible Notes will not impact the denominator for diluted net income per share unless the average price of the Company's common stock, as calculated under the terms of the Convertible Notes, exceeds the conversion price of $33.45 per share. Likewise, the denominator for diluted net income per share will not include any effect from the warrants unless the average price of the Company's common stock, as calculated under the terms of the warrants, exceeds $48.66 per share. For the three and six months ended September 30, 2018, the Company included the Convertible Notes in the calculation of diluted earnings per share of common stock because the average market price of the Company's stock was above the conversion price. The Company could potentially exclude the Convertible Notes in the future if the average market price is below the conversion price. The denominator for diluted net income per share for the three and six months ended October 1, 2017 does not include any effect from the Convertible Notes.
The denominator for diluted net income per share for each of the three and six months ended September 30, 2018 and October 1, 2017 also does not include any effect from the convertible note hedge transaction, or the Note Hedges. In future periods, the denominator for diluted net income per share will exclude any effect of the Note Hedges, as their effect would be anti-dilutive. In the event an actual conversion of any or all of the Convertible Notes occurs, the shares that will be delivered to us under the Note Hedges are designed to neutralize the dilutive effect of the shares that the Company will issue under the Convertible Notes. Refer to Note 15 for further discussion regarding the Convertible Notes.


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Note 3. Revenue
Disaggregated Revenue by Timing of Recognition*
Three Months Ended
 
Six Months Ended
(in thousands)
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
Goods/services transferred at a point in time
$
233,630

 
$
204,159

 
$
460,221

 
$
400,647

Goods/services transferred over time
1,854

 
239

 
3,779

 
464

Total Revenue
$
235,484

 
$
204,398

 
$
464,000

 
$
401,111

* For other disaggregated revenue information, refer to Note 18.
Contract Balances and Refund Liabilities
 
 
 
The following table provides information about contract assets, refund liabilities and contract liabilities on the condensed consolidated balance sheets:
 
 
 
April 2, 2018
(in thousands)
September 30, 2018
 
(as adjusted**)
Contract assets - unbilled revenue
$
751

 
$
1,595

Refund liabilities - price adjustment and other revenue reserves
$
(11,448
)
 
$
(10,964
)
Contract Liabilities - short-term
$
(774
)
 
$
(778
)
Contract Liabilities - long-term
$
(967
)
 
$
(1,354
)
** The "as adjusted" balances at April 2, 2018 reflect the comparative amounts under ASC Topic 606.
Contract assets consist of the Company’s unbilled revenue to transfer goods or services to a customer for which the Company has yet to receive consideration or the amount is due from the customer. Contract assets are included in “Accounts Receivable, Net” on the Condensed Consolidated Balance Sheets.
The beginning and ending balances of contract assets in the second quarter of fiscal 2019 were $2.1 million and $0.8 million, respectively. During the three and six months ended September 30, 2018, contract assets increased by $0.8 million and $2.8 million, respectively, associated with unbilled revenue for additional goods and services transferred to customers, which was offset by decreases of $2.1 million and $3.6 million, respectively, primarily due to invoices issued to customers.
Refund liabilities consist of variable consideration estimates for returns, rebates, price protection, ship from stock pricing credits and stock rotation. Such reserves were previously shown net within “Accounts Receivable, Net” and are now presented within “Other Accrued Liabilities” on the Condensed Consolidated Balance Sheets effective April 2, 2018.
Contract liabilities consist of the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration or the amount is due from the customer. Contract liabilities are classified as short-term or long-term within “Other Accrued Liabilities” or “Other Long-term Liabilities”, respectively, on the Condensed Consolidated Balance Sheets.
Remaining Performance Obligations
As of the end of a reporting period, some of the performance obligations associated with contracts will have been unsatisfied or only partially satisfied. In accordance with the practical expedients available in the guidance, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less, and the remaining duration of the performance obligations for contracts with an original expected duration of greater than one year. As of September 30, 2018, the Company’s remaining performance obligations from contracts with an original expected duration of greater than one year is $7.9 million.
Practical Expedients
The Company has elected to apply the practical expedient to expense commission costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. As a result, no commission costs are capitalized. The Company records these costs within selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
The Company has adopted the practical expedient which states an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less. The Company does not have payments associated with performance obligations outside this one-year time frame.


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Note 4. Acquisitions
GigPeak, Inc.
On April 4, 2017, the Company completed its purchase all of the outstanding shares of GigPeak, Inc, a publicly held company mainly operating in the United States, for approximately $250.1 million (the "Acquisition"). GigPeak was a global supplier of semiconductor integrated circuits and software solutions for high-speed connectivity and high-quality video compression over the network and the cloud. The Company funded the Acquisition from its available cash on hand and net proceeds from borrowings under its credit facility entered into on April 4, 2017 with JP Morgan Chase Bank, N.A. as administrative agent and the various lenders signatory thereto (the "Credit Agreement"). The Credit Agreement provides for a $200.0 million term loan facility (the "Initial Term B Loan"). Refer to Note 16 for details.
Total consideration consisted of the following:
(in thousands)
 
Cash paid to GigPeak shareholders
$
246,717

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

Total purchase price
250,117

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

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

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Table of Contents

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

Accounts receivable
14,806

Inventories
18,399

Prepayments and other current assets
2,641

Property, plant and equipment
2,434

Goodwill
113,192

Intangible assets
97,860

Deferred tax assets
7,610

Other assets
1,501

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

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

 
5 years
Customer contracts and related relationships
28,900

 
5 years
Order backlog
200

 
1 year
Software licenses
2,560

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

 
 
Total
$
97,860

 
 
IPR&D represents the fair value of incomplete research and development projects that had not reached technological feasibility as of the date of acquisition. IPR&D consisted of various projects. As of the acquisition date, the estimated remaining costs to complete and the estimated fair value of the IPR&D projects were approximately $7.5 million and $10.2 million, respectively. The IPR&D projects will either be amortized or impaired depending upon whether the project is completed or abandoned. The fair value of IPR&D was determined using the MPEE method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. A discount rate of 17% was used to discount the cash flows to the present value. The acquired IPR&D will not be amortized until completion of the related products which is determined by when the underlying projects reach technological feasibility and commence commercial production. In fiscal 2018, $1.2 million of purchased IPR&D projects reached technological feasibility and was reclassified as core and developed technology and began being amortized over its estimated useful life. In addition, in fiscal 2018, the Company recognized a total of $2.0 million impairment charge related to certain IPR&D projects, which was recorded in Research and Development Expense in the Condensed Consolidated Statements of Operations. During the three and six months ended September 30, 2018, $1.2 million and $3.1 million of purchased IPR&D projects, respectively, reached technological feasibility and were reclassified as core and developed technology and began being amortized over its estimated useful life. The Company expects to complete the remaining projects within fiscal 2019. Refer to Note 11 for additional information.


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Table of Contents

Note 5. Fair Value Measurements
Financial Assets Measured at Fair Value on a Recurring Basis:
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2018:
 
Fair Value at Reporting Date Using
(in thousands)
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Total
Assets
 
 
 
 
 
Cash Equivalents and Short-Term Investments:
 
 
 
 
 
US government treasuries and agencies securities
$
60,358

 
$

 
$
60,358

Money market funds
101,034

 

 
101,034

Asset-backed securities

 
13,863

 
13,863

Corporate bonds

 
107,864

 
107,864

International government bonds

 

 

Corporate commercial paper

 
17,402

 
17,402

Bank deposits

 
17,216

 
17,216

Repurchase agreement

 
103

 
103

Total assets measured at fair value
$
161,392

 
$
156,448

 
$
317,840

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

 
$

 
$
60,272

Money market funds
48,847

 

 
48,847

Asset-backed securities

 
16,687

 
16,687

Corporate bonds

 
109,605

 
109,605

International government bonds

 
2,638

 
2,638

Corporate commercial paper

 
9,034

 
9,034

Bank deposits

 
45,080

 
45,080

Repurchase agreements

 
142

 
142

Total assets measured at fair value
$
109,119

 
$
183,186

 
$
292,305

U.S. government treasuries and U.S. government agency securities as of September 30, 2018 and April 1, 2018 do not include any U.S. government guaranteed bank issued paper.
The securities in Level 1 are highly liquid and actively traded in exchange markets or over-the-counter markets. Level 2 fixed income securities are priced using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data. There were no transfers into or out of Level 1 or Level 2 financial assets during the three and six months ended September 30, 2018.

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Table of Contents

Deferred Compensation Plan:
The deferred compensation plan assets of $18.7 million and $16.9 million as of September 30, 2018 and April 1, 2018, respectively, are carried on the Condensed Consolidated Balance Sheets at their fair value which were determined on the basis of market prices observable for similar instruments and are considered Level 2 in the fair value hierarchy. See Note 14 for additional information on the Employee Benefit Plans.
Convertible Notes:
The Convertible Notes are carried on the Condensed Consolidated Balance Sheets at their original issuance value including accreted interest, net of unamortized debt discount and issuance cost. The Convertible Notes are not marked to fair value at the end of each reporting period. The fair value of Convertible Notes was $561.7 million and $422.0 million as of September 30, 2018 and April 1, 2018, respectively, which was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. See Note 15 for additional information on the Convertible Notes.
Bank Loan:
The Term B-1 Loan is carried on the Condensed Consolidated Balance Sheets at its outstanding principal balance including accreted interest, net of unamortized debt discount and issuance cost. The fair value of the Term B-1 Loan and the Initial Term B Loan was $198.5 million and $199.6 million as of September 30, 2018 and April 1, 2018, respectively. The Company classified the Term B-1 Loan as Level 2 fair value measurement hierarchy as the debt is not actively traded and has variable interest structure based upon market rates currently available to the Company for debt with similar terms and maturities. Refer to Note 16 for additional information.
Others:
In fiscal 2017, IDT purchased substantially all of the assets and liabilities of Synkera Technologies, Inc. (Synkera) for total purchase consideration of approximately $2.8 million, of which $1.5 million was paid in cash at closing and $1.3 million was recorded as a liability representing the fair value of contingent cash consideration of up to $1.5 million. The liability was recognized for the Company’s estimate of the fair value of contingent consideration on the acquisition date based on probability-based attainment of certain milestones. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement, which reflects the Company’s own assumptions concerning the milestones related to the acquired business in measuring fair value. During the six months ended September 30, 2018, the Company paid $0.7 million upon the achievement of certain milestones. The fair value of the liability measured using significant unobservable inputs (Level 3) was approximately $0.6 million and $1.3 million as of September 30, 2018 and April 1, 2018, respectively.
In fiscal 2018, the Company purchased certain assets of SpectraBeam, LLC ("SpectraBeam") for a total purchase consideration of $17.0 million, of which $12.9 million was paid in cash at closing and $4.1 million was recorded as a liability representing the contingent cash consideration. The liability was recognized for the Company’s estimate of the fair value of contingent consideration on the acquisition date based on probability-based attainment of certain milestones. The fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement, which reflects the Company’s own assumptions concerning the milestones related to the asset acquisition in measuring fair value. During the six months ended September 30, 2018, the Company paid $2.1 million upon the achievement of certain milestones. The fair value of the liability measured using significant unobservable inputs (Level 3) was approximately $2.0 million and $4.1 million as of September 30, 2018 and April 1, 2018, respectively.

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Table of Contents

Note 6. Investments
Available-for-Sale Securities
The amortized cost and fair value of available-for-sale investments as of September 30, 2018 were as follows:
 
(in thousands)
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Estimated Fair
 Value
U.S. government treasuries and agencies securities
$
61,203

 
$

 
$
(845
)
 
$
60,358

Money market funds
101,034

 

 

 
101,034

Asset-backed securities
13,931

 

 
(68
)
 
13,863

Corporate bonds
109,327

 
41

 
(1,504
)
 
107,864

International government bonds

 

 

 

Corporate commercial paper
17,402

 

 

 
17,402

Bank deposits
17,216

 

 

 
17,216

Repurchase agreements
103

 

 

 
103

Total available-for-sale investments
320,216

 
41

 
(2,417
)
 
317,840

Less amounts classified as cash equivalents
(125,808
)
 

 

 
(125,808
)
Short-term investments
$
194,408

 
$
41

 
$
(2,417
)
 
$
192,032

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

 
$

 
$
(894
)
 
$
60,272

Money market funds
48,847

 

 

 
48,847

Asset-backed securities
16,797

 

 
(110
)
 
16,687

Corporate bonds
111,266

 
43

 
(1,704
)
 
109,605

International government bonds
2,650

 

 
(12
)
 
2,638

Corporate commercial paper
9,034

 

 

 
9,034

Bank deposits
45,080

 

 

 
45,080

Repurchase agreements
142

 

 

 
142

Total available-for-sale investments
294,982

 
43

 
(2,720
)
 
292,305

Less amounts classified as cash equivalents
(70,279
)
 

 

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

 
$
43

 
$
(2,720
)
 
$
222,026

The cost and estimated fair value of available-for-sale securities as of September 30, 2018, by contractual maturity, were as follows:
(in thousands)
Amortized
Cost
 
Estimated Fair
Value
Due in 1 year or less
$
200,786

 
$
200,171

Due in 1-2 years
83,229

 
82,094

Due in 2-5 years
36,201

 
35,575

Total investments in available-for-sale securities
$
320,216

 
$
317,840


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Table of Contents


The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of September 30, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position.
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in thousands)
Fair
Value
 
Unrealized
 Loss
 
Fair
 Value
 
Unrealized
 Loss
 
Fair
Value
 
Unrealized
 Loss
Corporate bonds
$
48,989

 
$
(814
)
 
$
51,168

 
$
(690
)
 
$
100,157

 
$
(1,504
)
Asset-backed securities
9,546

 
(45
)
 
3,929

 
(23
)
 
13,475

 
(68
)
U.S. government treasuries and agencies securities
15,522

 
(155
)
 
44,836

 
(690
)
 
60,358

 
(845
)
Total
$
74,057

 
$
(1,014
)
 
$
99,933

 
$
(1,403
)
 
$
173,990

 
$
(2,417
)

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, as of April 1, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
(in thousands)
Fair
 Value
 
Unrealized
 Loss
 
Fair
 Value
 
Unrealized
 Loss
 
Fair
 Value
 
Unrealized
 Loss
Corporate bonds
$
78,726

 
$
(1,324
)
 
$
23,286

 
$
(380
)
 
$
102,012

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

 
(90
)
 
2,540

 
(20
)
 
16,687

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

 
(221
)
 
34,920

 
(673
)
 
60,272

 
(894
)
International government bonds

 

 
2,638

 
(12
)
 
2,638

 
(12
)
Total
$
118,225

 
$
(1,635
)
 
$
63,384

 
$
(1,085
)
 
$
181,609

 
$
(2,720
)
Currently, a significant portion of the Company’s available-for-sale investments that it holds are high grade instruments. As of September 30, 2018, the unrealized losses on the Company’s available-for-sale investments represented an insignificant amount in relation to its total available-for-sale portfolio. Substantially all of the Company’s unrealized losses on its available-for-sale marketable debt instruments can be attributed to fair value fluctuations in an unstable credit environment that resulted in a decrease in the market liquidity for debt instruments. Because the Company has the ability to hold these investments until a recovery of fair value, which maybe maturity, the Company did not consider these investments to be other-than-temporarily impaired as of September 30, 2018 and April 1, 2018.
Non-marketable Equity Securities
As of September 30, 2018 and April 1, 2018, the Company holds capital stock of privately-held companies with total amount of $26.2 million and $27.3 million, respectively. During the three months ended September 30, 2018, the Company purchased preferred shares of a privately-held company for $1.0 million. These investments in stocks (included in Other Assets on the Condensed Consolidated Balance Sheets) are accounted for as cost-method investments, as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of each entity. The Company measures equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (referred to as the measurement alternative). The Company recorded an impairment charge of $2.0 million for certain investment during the first quarter of fiscal 2019. There was no impairment charge during the three months ended September 30, 2018 and the three and six months ended October 1, 2017.


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Table of Contents

Note 7. Stock-Based Employee Compensation

Total stock-based compensation expense, related to all of the Company’s share-based awards, was comprised as follows:
 
Three Months Ended
 
Six Months Ended
(in thousands)
September 30, 2018

October 1, 2017
 
September 30,
2018
 
October 1,
2017
Cost of revenues
$
829

 
$
763

 
$
1,857

 
$
1,396

Research and development
7,829

 
6,094

 
14,965

 
12,056

Selling, general and administrative
6,979

 
6,092

 
13,878

 
11,317

Total stock-based compensation expense
$
15,637

 
$
12,949

 
$
30,700

 
$
24,769


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

Note 8. Stockholders' Equity
Stock Repurchase Program. On April 24, 2018, the Company's Board of Directors approved an increase to the share repurchase authorization of $400 million. In the three and six months ended September 30, 2018, the Company repurchased 1.1 million shares for $38.1 million and 2.6 million shares for $87.5 million, respectively. As of September 30, 2018, approximately $419.3 million was available for future purchase under the share repurchase program. Shares repurchased were recorded as treasury stock and resulted in a reduction of stockholder's equity. Due to the pending merger with Renesas, the Company suspended further repurchases under its repurchase program effective September 11, 2018.


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Table of Contents

Note 9. Balance Sheet Detail
(in thousands)
September 30, 2018
 
April 1, 2018
Inventories, net
 
 
 
Raw materials
$
4,264

 
$
4,345

Work-in-process
36,017

 
45,713

Finished goods
20,797

 
18,644

Total inventories, net
$
61,078

 
$
68,702

Accounts receivable, net
 
 
 
Accounts receivable, gross
$
131,283

 
$
120,953

Allowance for returns, price credits and doubtful accounts (1)
(1,878
)
 
(12,174
)
Total accounts receivable, net
$
129,405

 
$
108,779

Property, plant and equipment, net
 

 
 

Land
$
11,535

 
$
11,535

Machinery and equipment
298,818

 
285,784

Building and leasehold improvements
51,134

 
50,722

  Total property, plant and equipment, gross
361,487

 
348,041

Less: accumulated depreciation (2)
(272,501
)
 
(261,196
)
Total property, plant and equipment, net
$
88,986

 
$
86,845

Other accrued liabilities
 
 
 
Accrued restructuring costs (3)
$
2,340

 
$
4,637

Current income tax payable
4,736

 
6,281

Refund liabilities (1)
11,448

 

Other (4)
25,567

 
15,606

Total other accrued liabilities
$
44,091

 
$
26,524

Other long-term obligations
 
 
 
Deferred compensation related liabilities
$
18,207

 
$
16,310

Other (5)
12,079

 
9,374

Total other long-term liabilities
$
30,286

 
$
25,684

(1) Upon adoption of ASC Topic 606 under the modified retrospective method, price adjustment and other revenue reserves were presented in “Other Accrued Liabilities” effective April 2, 2018. Those reserves were previously included in “Accounts Receivable, Net”. Refer to Note 3 for additional information.
(2) Depreciation expense was $6.9 million and $7.1 million for the three months ended September 30, 2018 and October 1, 2017, respectively. Depreciation expense was $13.5 million and $13.2 million for the six months ended September 30, 2018 and October 1, 2017, respectively.
(3) Includes accrued severance costs related to various restructuring actions. Refer to Note 12 for additional information.
(4) Other current liabilities consist primarily of current portion of liability for contingent consideration, merger-related expenses associated with the pending merger with Renesas, current portion of deferred revenue and other accrued unbilled expenses.
(5) Other long-term obligations consist primarily of non-current portion of deferred revenue and other long-term accrued liabilities.

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Note 10. Accumulated Other Comprehensive Income (Loss)
Changes in the balance of accumulated other comprehensive income (loss) by component, net of tax, for the six months ended September 30, 2018 consisted of the following:
(in thousands)
Cumulative translation adjustments
 
Unrealized gain (loss) on available-for-sale investments
 
Pension adjustments
 
Total
Balance as of April 1, 2018
$
(2,151
)
 
$
(2,677
)
 
$
65

 
$
(4,763
)
Other comprehensive income (loss) before reclassifications
(2,999
)
 
301

 

 
(2,698
)
Net current-period other comprehensive income (loss)
(2,999
)
 
301

 

 
(2,698
)
Balance as of September 30, 2018
$
(5,150
)
 
$
(2,376
)
 
$
65

 
$
(7,461
)

There was no reclassification out of accumulated other comprehensive income or loss during the six months ended September 30, 2018.

Note 11. Goodwill and Intangible Assets, Net
During the first quarter of fiscal 2019, the Company revised the composition of its reportable segments as a result of certain organizational changes (Refer to Note 18 for details). Goodwill was reallocated between the two reportable segments using a relative fair value approach. As a result, the Company completed assessments of any potential goodwill impairment for all reportable segments immediately prior to and after the reallocation and determined that no impairment existed.
Goodwill balances by reportable segment as of September 30, 2018 and April 1, 2018 are as follows:
 
Reportable Segments
(in thousands)
Communications
 
Computing, Consumer and Industrial
 
Total
Balance as of April 1, 2018
$
141,300

 
$
278,817

 
$
420,117

Reallocation of goodwill
(21,206
)
 
21,206

 

Balance as of September 30, 2018
$
120,094

 
$
300,023

 
$
420,117

Goodwill balances as of September 30, 2018 and April 1, 2018 were net of $920.3 million in accumulated impairment losses. Intangible asset balances as of September 30, 2018 and April 1, 2018 are summarized as follows:
 
September 30, 2018
(in thousands)
Gross Assets
 
Accumulated
Amortization
 
Net Assets
Purchased intangible assets:
 
 
 
 
 
Developed technology
$
339,521

 
$
(236,496
)
 
$
103,025

Trademarks
5,391

 
(5,391
)
 

Customer relationships
201,997

 
(155,501
)
 
46,496

Intellectual property licenses
7,500

 
(4,500
)
 
3,000

Software licenses
20,894

 
(2,411
)
 
18,483

Total amortizable purchased intangible assets
575,303

 
(404,299
)
 
171,004

In-process research and development (IPR&D)
3,882

 

 
3,882

Total purchased intangible assets
$
579,185

 
$
(404,299
)
 
$
174,886


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

 
$

 
$
(223,882
)
 
$
112,520

Trademarks
5,391

 

 
(5,391
)
 

Customer relationships
201,997

 

 
(149,416
)
 
52,581

Intellectual property licenses
7,500

 

 
(3,901
)
 
3,599

Software licenses
6,023

 

 
(943
)
 
5,080

Total amortizable purchased intangible assets
557,313

 

 
(383,533
)
 
173,780

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

 
(2,016
)
 

 
7,001

Total purchased intangible assets
$
566,330

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

During the three months ended September 30, 2018, the Company purchased $14.7 million of software licenses.
Amortization expense for the three months ended September 30, 2018 and October 1, 2017 was $10.7 million and $9.9 million, respectively. Amortization expense for the six months ended September 30, 2018 and October 1, 2017 was $20.8 million and $21.6 million, respectively. In the six months ended October 1, 2017, the Company recorded an accelerated amortization charge of $2.0 million related to certain software licenses as the estimated future cash flows expected resulting from the use of the assets were less than the carrying amount.
The intangible assets are being amortized over estimated useful lives of 1 to 7 years.
Based on the intangible assets recorded as of September 30, 2018, the expected future amortization expense for intangible assets is as follows (in thousands):
Fiscal Year
Amount
2019 (Remaining 6 months)
$
22,585

2020
45,812

2021
44,856

2022
39,595

2023 and thereafter
18,156

Total amortizable purchased intangible assets
171,004

IPR&D
3,882

Total intangible assets
$
174,886


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Note 12. Restructuring
The following table shows the provision of the restructuring charges and the liability remaining as of September 30, 2018:
(in thousands)
Amount
Severance and related charges:
 
Balance as of April 1, 2018
$
4,637

Provision
1,891

Payments and other adjustments
(4,188
)
Balance as of September 30, 2018
$
2,340

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

Provision
315

Payments and other adjustments
(2,113
)
Balance as of September 30, 2018
$
483

As part of an effort to streamline operations with changing market conditions and to create a more efficient organization, the Company has undertaken restructuring actions to reduce its workforce and consolidate facilities. The Company’s restructuring expenses consist primarily of severance and termination benefit costs related to the reduction of its workforce, asset impairment charges and lease obligation charges related to a facility that is no longer used.
Integration-related Restructuring Plans
In fiscal 2018, the Company implemented planned cost reduction and restructuring activities in connection with the acquisition of GigPeak. Accordingly, the Company reduced headcount by 46 and recorded severance costs of approximately $2.7 million, of which $2.1 million was paid during fiscal 2018 and $0.6 million was paid in the six months ended September 30, 2018.
In connection with the GigPeak integration, the Company recorded $2.8 million in fiscal 2018 for lease obligation charges related to a facility that the Company had determined to meet the cease-use date criteria. The fair value of this liability at the cease-use date was determined based on the remaining cash flows for lease rentals, and minimum lease payments, reduced by estimated sublease rentals, discounted using a credit adjusted risk free rate in accordance with ASC 420, Exit or Disposal Cost Obligations. During the three months ended September 30, 2018, the Company entered into a lease termination agreement and paid a lease termination fee of $1.5 million for the early termination of the lease. No penalties were incurred as a result of the early termination. As of September 30, 2018, the total accrued balance was $0.2 million, which is expected to be paid by the fourth quarter of fiscal 2019.
Other Restructuring Plans
In fiscal 2018, the Company exited certain non-strategic businesses and reduced headcount by 63. The Company recorded employee severance costs of approximately $5.1 million, of which $2.3 million was paid during fiscal 2018. The Company recorded additional accruals of $0.5 million and paid $3.3 million in the six months ended September 30, 2018. During the three months ended September 30, 2018, the Company reduced headcount by 18 and recorded an accrual of $1.4 million related to this action. As of September 30, 2018, the total accrued balance for employee severance costs related to those actions was $1.4 million, which is expected to be paid by the first quarter of fiscal 2020. The balance of facility and related charges also included a $0.3 million lease liability related to the cease-use of a design center, which is expected to be fully paid in fiscal 2022.
In fiscal 2017, the Company prepared a workforce-reduction plan with respect to employees and closed its remaining business in France. The Company has substantially completed payments of termination benefits and the total accrued balance related to this action was $0.8 million as of April 1, 2018. The Company paid $0.5 million during the first quarter of fiscal 2019. Accordingly, the total accrued balance for employee severance costs related to this action was $0.3 million as of September 30, 2018. The Company expects to complete this action by the fourth quarter of fiscal 2019.
In fiscal 2015, the Company prepared a workforce-reduction plan with respect to employees of its HSC business in France and the Netherlands. The Company has substantially completed payments of termination benefits and the total accrued balance related to this action was $0.6 million as of April 1, 2018 and September 30, 2018. The Company expects to complete this action by the fourth quarter of fiscal 2019.

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Note 13. 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 $0.3 million as of both September 30, 2018 and April 1, 2018.
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 ("Defendants"), alleging various environmental violations of the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Resource Conservation and Recovery Act (RCRA), the California Hazardous Substance Account Act (HSAA), and other common law claims (the Complaint). The Complaint alleged that Defendants including the Company “…generated, transported, and/or arranged for the transport and/or disposal of hazardous waste to the Property.” On August 15, 2012, Maxim I Properties voluntarily dismissed its Complaint without prejudice. However, another defendant, Moyer Products, Inc., counter-claimed against the plaintiff, Maxim, and cross-claimed against the remaining co-Defendants, including the Company. Thus, the Company remains a cross-defendant in this action.
In a related, but independent action, the California Department of Toxic Substances Control (DTSC) notified the Company in September 2012 that the Company, and more than 50 other entities, were being named as respondents to DTSC's Enforcement Order, as “a generator of hazardous waste.” In April 2013, the Company, along with the other “respondent” parties, entered into a Corrective Action Consent Agreement (CACA) with the DTSC, agreeing to conduct the Property investigation and corrective action selection. The CACA supersedes the DTSC's Enforcement Order. The District Court for the Northern District of California stayed the Maxim/Moyer litigation pending the Property investigation under the CACA and DTSC's corrective action selection.
Property investigation activity took place between April 2013 and June 2015. On June 23, 2015, the DTSC deemed the Property investigation complete. The DTSC continues to evaluate corrective action alternatives. The Company will continue to vigorously defend itself against the allegations in the Complaint and evaluate settlement options with Moyer upon notification from DTSC of its corrective action selection. No specific corrective action has been selected yet, and thus no specific monetary demands have been made.
The Company may also be a party to various other legal proceedings and claims arising in the normal course of business from time to time. With regard to the matters listed above, along with various other legal proceedings and claims and future matters that may arise, potential liability and probable losses or ranges of possible losses due to an unfavorable litigation outcome cannot be reasonably estimated at this time. Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in any particular lawsuit or claim. Pending lawsuits, claims as well as potential future litigation, could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Note 14. Employee Benefit Plans
401(k) Plan
The Company sponsors a 401(k) retirement matching plan for qualified domestic employees. The Company recorded expenses of approximately $1.8 million and $1.4 million in matching contributions under the plan during the six months ended September 30, 2018 and October 1, 2017, respectively.
Deferred Compensation Plans
Effective November 1, 2000, the Company established an unfunded deferred compensation plan to provide benefits to executive officers and other key employees. Under the plan, participants can defer any portion of their salary and bonus compensation into the plan and may choose from a portfolio of funds from which earnings are measured. Participant balances are always 100% vested. As of September 30, 2018 and April 1, 2018, obligations under the plan totaled approximately $18.2 million and $16.3 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 30, 2018 and April 1, 2018, the deferred compensation plan assets were approximately $18.7 million and $16.9 million, respectively.
During the first quarter of fiscal 2013, the Company assumed a deferred compensation plan associated with the acquisition of Fox Enterprises, Inc. Under this plan, participants in retirement are entitled to receive a fixed amount from the Company on a monthly

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basis. The Company has purchased life insurance policies with the intention of funding the liability under this plan. As of both September 30, 2018 and April 1, 2018, the deferred compensation plan assets were approximately $0.4 million. As of both September 30, 2018 and April 1, 2018, the liabilities under this plan were approximately $0.8 million.
Note 15. Convertible Senior Notes, Warrants and Hedges
Convertible Notes Offering
On October 29, 2015, the Company priced its private offering of $325.0 million in aggregate principal amount of 0.875% Convertible Senior Notes due 2022 ("Initial Convertible Notes"). On November 3, 2015, the initial purchasers in such offering exercised in full the over-allotment option to purchase an additional $48.8 million in aggregate principal amount of Convertible Notes (“Additional Convertible Notes”, and together “Convertible Notes”). The aggregate principal amount of Convertible Notes is $373.8 million. The net proceeds from this offering were approximately $363.4 million, after deducting the initial purchasers’ discounts and commissions and the offering expenses.
The Convertible Notes are governed by the terms of an indenture, dated November 4, 2015 (“Indenture”), between the Company and a trustee. The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of 0.875% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, commencing May 15, 2016. The Convertible Notes will mature on November 15, 2022, unless earlier repurchased or converted. At any time prior to the close of business on the business day immediately preceding August 15, 2022, holders may convert their Convertible Notes at their option only under the certain circumstances as defined in the Indenture. On or after August 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of such circumstances.
The conversion rate for the Convertible Notes will initially be 29.8920 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to an initial conversion price of approximately $33.45 per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers.
As of September 30, 2018, none of the conditions allowing holders of the Notes to convert had been met.
At the debt issuance date, the Convertible Notes, net of issuance costs, consisted of the following:
(in thousands)
November 3, 2015

Liability component
 
    Principal
$
274,435

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

Equity component *


    Allocated amount
99,316

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

Convertible Notes, net
$
363,445

* Recorded on the Condensed Consolidated Balance Sheets within additional paid-in capital.

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The following table includes total interest expense recognized related to the Convertible Notes during the three and six months ended September 30, 2018 and October 1, 2017:
 
Three Months Ended
 
Six Months Ended
(in thousands)
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
Contractual interest expense
$
827

 
$
827

 
$
1,654

 
$
1,653

Amortization of debt discount
3,391

 
3,210

 
6,736

 
6,377

Amortization of debt issuance costs
270

 
270

 
540

 
540

 
$
4,488

 
$
4,307

 
$
8,930

 
$
8,570

The net liability component of Convertible Notes is comprised of the following as of September 30, 2018:
(in thousands)
September 30, 2018
Net carrying amount as of April 1, 2018
$
299,551

Amortization of debt issuance costs during the period
540

Amortization of debt discount during the period
6,736

Net carrying amount as of September 30, 2018
$
306,827

During both the six months ended September 30, 2018 and October 1, 2017, the Company paid contractual interest on the Convertible Notes of approximately $1.6 million. See Note 5 to the Company's condensed consolidated financial statements for fair value disclosures related to the Company's Convertible Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, on October 29, 2015, the Company entered into convertible note hedge transaction (the "Initial Bond Hedge"), with JPMorgan Chase Bank, National Association (the “Option Counterparty”) and paid $81.9 million.
On October 29, 2015, the Company also entered into separate warrant transaction (the "Initial Warrant Transaction") with the Option Counterparty and received $49.4 million.
In connection with the exercise of the Over-Allotment Option, on November 3, 2015, the Company entered into a convertible note hedge transaction (the “Additional Bond Hedge”, and together with the Initial Bond Hedges, the “Bond Hedge”) with the Option Counterparty and paid $12.3 million. On November 3, 2015, the Company also entered into separate additional warrant transaction (the “Additional Warrant Transaction”, and together with the Initial Warrant Transaction, the “Warrant Transactions”) with the Option Counterparty and received $7.4 million. Total amount paid for the purchase of bond hedge and total amount received for the sale of warrants were $94.2 million and $56.8 million, respectively.
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price $33.45 of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is $48.66 per share. The Bond Hedges and Warrants are not marked to market. The value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified as stockholders' equity in accordance with ASC 815-40, Derivatives and HedgingContracts in Entity's Own Equity. As of September 30, 2018 and April 1, 2018, no warrants have been exercised.
Note 16. Term B Loan
On April 4, 2017, the Company, JP Morgan Chase bank, N.A.("JP Morgan") as administrative agent and a group of lenders entered into a credit agreement that provides for variable rate term loans in aggregate principal amount of $200.0 million, with an original term of 7 years (the "Initial Term B Loan"). After payment of transaction costs associated with the Credit Agreement, the Company received net proceeds from the Initial Term B Loan of approximately $194.3 million, which was used to partially finance the acquisition of GigPeak and other payments related to such transaction.

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On May 29, 2018 (the "Closing Date"), the Company entered into Amendment No. 1 (the “Amendment”) to its Credit Agreement, for the purpose of, among other things, reducing the interest margin applicable to loans under the Credit Agreement by 0.50%, all of which was treated as a debt modification. On the Closing Date, the aggregate principal amount of the term loans outstanding under the Credit Agreement was approximately $198.0 million. Under the Amendment, the lenders agreed to provide to IDT new term loans (the “Term B-1 Loan”) in the same aggregate principal amount as the outstanding Initial Term B Loan. Such Term B-1 Loan was used to refinance the outstanding Initial Term B Loan in full. The maturity date of the Term B-1 Loan is April 4, 2024; provided that if any of the Company's Convertible Notes are outstanding on August 16, 2022, the maturity date of which had not otherwise been extended to a date that is no earlier than 91 days after April 4, 2024, the Term B-1 Loan maturity date shall instead be August 16, 2022, unless the Company and its guarantors shall have cash, permitted investments and/or unwithdrawn revolving credit commitments in an aggregate amount not less than the aggregate principal amount of then outstanding Convertible Notes.
The Company will repay the principal amount of the Term B-1 Loan on the last day of each March 31, June 30, September 30 and December 31, in an amount equal to 0.25% of the principal amount of the Term B-1 Loan; and on the maturity date, as described above, in an amount equal to the remainder of the outstanding principal amount of the Term B-1 Loan. The Company may prepay the Term B-1 Loan, in whole or in part, at any time without premium or penalty, subject to certain conditions, and amounts repaid or prepaid may not be reborrowed. The interest rate of the Term B-1 Loan is based on adjusted LIBO rate which is equal to the LIBO rate for such interest period multiplied by statutory reserve rate, plus an applicable margin of 2.5% (3.0% prior to the Amendment. For the three-month periods ended September 30, 2018 and October 1, 2017, the interest rate on the Term B-1 Loan and the Initial Term B Loan was approximately 4.59% and 4.15%, respectively.
The following table summarizes the outstanding borrowings as of September 30, 2018 and April 1, 2018:
(in thousands)
September 30, 2018
 
April 1, 2018
Outstanding principal balance
$
197,010

 
$
198,000

Unamortized debt issuance costs and debt discount
(4,517
)
 
(4,927
)
Outstanding principal, net of unamortized debt issuance costs and debt discount
$
192,493

 
$
193,073

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

 
$
2,000

Long-term bank loan
$
190,513

 
$
191,073

The Company made payments totaling $0.5 million and $1.0 million towards the outstanding principal balance of the long-term bank loan during the three and six months ended September 30, 2018, respectively. The following table includes the total interest expense recognized during the three and six months ended September 30, 2018 and October 1, 2017, respectively:
 
Three Months Ended
 
Six Months Ended
(in thousands)
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
Contractual interest expense
$
2,314

 
$
2,275

 
$
4,659

 
$
4,381

Amortization of debt issuance costs and debt discount
205

 
205

 
410

 
409

Total
$
2,519

 
$
2,480

 
$
5,069

 
$
4,790

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions and repurchase stock. The Credit Agreement includes customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with covenants. Under certain circumstances, a default interest rate will apply on all overdue obligations under the Credit Agreement at a per annum rate equal to 2.00% above the applicable interest rate for any overdue principal and 2.00% above the rate applicable for base rate loans for any other overdue amounts. The occurrence of an event of default could result in the acceleration of obligations. The Company is in compliance with the covenants as of September 30, 2018.
See Note 5 to the Company's consolidated financial statements for fair value determination.
Note 17. Income Taxes
During the three and six months ended September 30, 2018, the Company recorded an income tax expense of $1.2 million and $4.4 million, respectively. The Company recorded an income tax benefit of $31 thousand and $1.0 million during the three and six months ended October 1, 2017, respectively.

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The income tax expense recorded in the three and six months ended September 30, 2018 was primarily due to the impacts of the current year U.S. taxation of certain income of the Company’s foreign subsidiaries and an increase in higher-taxed earnings in foreign jurisdictions, partially offset by tax benefits from U.S. research and development and future foreign tax credit arising from withholding taxes on unrepatriated foreign earnings. The income tax benefit recorded in the six months ended October 1, 2017 was primarily due to the reduction of the deferred tax liability related to amortization of acquired intangible assets as well as the tax benefit from excess tax benefits on stock-based compensation.
The Company’s effective tax rate was significantly less than the U.S. federal statutory rate of 21% in all periods primarily due to the benefits of lower-taxed earnings in foreign jurisdictions, including Malaysia, where a tax holiday is in effect through fiscal 2021.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). The TCJA provides for numerous significant tax law changes and modifications including, among other things, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; and creating a new limitation on deductible interest expense. Certain provisions of the TCJA began to impact the Company fiscal year 2018, while other provisions began to impact the Company beginning in fiscal year 2019.
The SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. As of April 1, 2018, the Company has made reasonable estimates of the effects on its existing deferred tax balances and the one-time repatriation tax recording provisional charges of $10.3 million and $103.9 million, respectively, as a component of income tax expense from continuing operations.
The $10.3 million charge for the effect on the Companies deferred tax balances resulted from the reduction of the corporate income tax rate to 21%. U.S. GAAP requires companies to remeasure their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment. The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future.
The $103.9 million charge for the one-time repatriation tax increased other accrued liabilities by $1.5 million, increased long-term income taxes payable by $24.1 million, and reduced deferred tax assets, for the utilization of tax attributes, by $78.3 million. The liabilities resulting from the repatriation tax are payable over a period of up to eight years. The provisional amount was based on the Company’s total post-1986 earnings and profits (“E&P”) of its foreign subsidiaries. The majority of these earnings were historically permanently reinvested outside the United States, thus no taxes had previously been provided for these earnings. In addition, the one-time repatriation tax is based in part on the amount of those earnings held in cash and other specified assets either as of the end of fiscal year 2018 or the average of the year-end balances for fiscal years 2016 and 2017.
The TCJA creates a new Global Intangible Low-Taxed Income (“GILTI”) requirement under which certain income earned by controlled foreign corporations (“CFC”s) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.
Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing the Company’s global income to determine what the impact is expected to be. The Company is not yet able to reasonably estimate the effect of this provision of the TCJA. Therefore, the Company has not made a policy decision regarding whether to record deferred taxes on GILTI. As a result, for the period ended September 30, 2018, the Company has treated GILTI as a period cost and will continue to refine the calculations as additional analysis is completed.
As of September 30, 2018, the Company had not fully completed its accounting for the tax effects of the enactment of the TCJA. The Company’s provision for fiscal year 2018 was based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances. The Company will continue to assess the impact of the recently enacted tax law and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting on its business and consolidated financial statements.

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In fiscal year 2018, in connection with the TCJA and review of the Company’s projected offshore cash flows, and global cash requirements, the Company determined that historical foreign earnings would no longer be permanently reinvested. The Company plans to continue to repatriate its offshore earnings to the U.S. for domestic operations, and has accrued for the related tax impacts accordingly.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to a third party or otherwise recovered through use. The Company adopted the new guidance in the first quarter of fiscal 2019. Upon adoption, the Company applied a modified retrospective transition approach and recognized the unamortized portion of the deferred tax charge of $13.9 million through a cumulative-effect adjustment to accumulated deficit.
As of September 30, 2018, the Company continues to maintain a valuation allowance against the Company's net deferred tax assets in certain foreign and state jurisdictions, as the Company is not able to conclude that it is more likely than not that these deferred tax assets will be realized. The Company reached this decision based on judgment, which included consideration of historical operating results and projections of future profits. The Company will continue to monitor the need for the valuation allowance on a quarterly basis.
The Company benefits from tax incentives granted by local tax authorities in certain foreign jurisdictions. In the fourth quarter of fiscal 2011, the Company agreed with the Malaysia Industrial Development Board to enter into a new tax incentive agreement which is a full tax exemption on statutory income for a period of 10 years commencing April 4, 2011. This tax incentive agreement is subject to the Company meeting certain financial targets, investments, headcounts and activities in Malaysia.
As of September 30, 2018, the Company is under examination in Malaysia for fiscal years 2012 through 2015, in Canada for fiscal years 2016 through 2017, in France for calendar year 2013 through 2014, and in India for fiscal years 2017 through 2018. Although the final outcome of each examination is uncertain, based on currently available information, the Company believes that the ultimate outcome will not have a material adverse effect on its financial position, cash flows or results of operations.
The Company's open years in the U.S. federal jurisdiction are fiscal year 2015 and later years. In addition, the Company is effectively subject to federal tax examination adjustments for tax years ended on or after fiscal year 2000, in that the Company has tax attribute carryforwards from these years that could be subject to adjustments, if and when utilized. The Company's open years in various state and foreign jurisdictions are fiscal years 2011 and later.
The Company does not expect a material change in unrecognized tax benefits within the next twelve months.
Note 18. Segment Information
The Chief Operating Decision Maker is the Company’s President and Chief Executive Officer.
During the first quarter of fiscal 2019, the Company reorganized its operating segment structure resulting in a change to the composition of its reportable segments. Prior to the reorganization, some product groups of the acquired GigPeak business were aggregated into the Communications segment while the rest were included in the Computing, Consumer and Industrial segment. As a result of the reorganization, the entire GigPeak business was aggregated to the Computing, Consumer and Industrial segment. The segment financial results for the three and six months ended October 1, 2017 have been adjusted to conform to the new reportable segment structure effective April 2, 2018.
The Company's reportable segments include the following:
Communications segment: includes clock and timing solutions, radio frequency (RF), flow-control management such as multi-port products, telecommunication interface, high-speed static random access memory, first in and first out memory, digital logic and frequency control solutions and Serial RapidIO® switching solutions.
Computing, Consumer and Industrial segment: includes clock generation and distribution products, high-performance server memory interfaces, wireless power, PCI Express®, signal integrity, power management solutions, signal integrity products, optical interconnect, video distribution and contribution solutions and sensing products for mobile, automotive and industrial solutions.

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The tables below provide information about these segments:
 Revenues by segment
Three Months Ended
 
Six Months Ended
 
September 30, 2018

October 1, 2017
 
September 30, 2018
 
October 1, 2017
(in thousands)
 
 
(1)
 
 
 
(1)
Communications
$
73,384

 
$
61,957

 
$
140,470

 
$
118,505

Computing, Consumer and Industrial
162,100

 
142,441

 
323,530

 
282,606

Total revenues
$
235,484

 
$
204,398

 
$
464,000

 
$
401,111

Income by segment
Three Months Ended
 
Six Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018

October 1, 2017
(in thousands)
 
 
(1)
 
 
 
(1)
Communications
$
35,118

 
$
24,284

 
$
66,495

 
$
44,920

Computing, Consumer and Industrial
36,974

 
28,782

 
73,359

 
57,829

Unallocated expenses:
 
 
 
 
 
 
 
Amortization of intangible assets
(9,365
)
 
(8,963
)
 
(18,699
)
 
(19,804
)
Inventory fair market value adjustment

 
(2,011
)
 
(790
)
 
(6,092
)
Assets impairment and other

 
(917
)
 

 
(917
)
Stock-based compensation
(15,637
)
 
(12,949
)
 
(30,700
)
 
(24,769
)
Severance, retention and facility closure costs
(1,226
)
 
(4,179
)
 
(1,714
)
 
(4,832
)
Acquisition-related costs and other

 

 

 
(2,225
)
Merger-related expenses
(3,884
)
 

 
(3,884
)
 

Other-than-temporary impairment loss on investment

 

 
(2,000
)
 

Interest expense and other, net
(5,266
)
 
(5,398
)
 
(11,489
)
 
(9,729
)
Income before income taxes
$
36,714

 
$
18,649

 
$
70,578

 
$
34,381

(1) Prior period numbers have been adjusted to conform to the current organizational structure.
The Company does not allocate goodwill and intangible assets impairment charge, IPR&D, severance, acquisition-related costs, stock-based compensation, interest income and other, and interest expense to its segments. In addition, the Company does not allocate assets to its segments. The Company excludes these items consistent with the manner in which it internally evaluates its results of operations.
Revenues from unaffiliated customers by geographic area, based on the customers' shipment locations, were as follows:
 
Three Months Ended
 
Six Months Ended
(in thousands)
September 30, 2018
 
October 1, 2017
 
September 30,
2018
 
October 1,
2017
Hong Kong
$
89,796

 
$
70,810

 
$
170,471

 
$
134,698

Rest of Asia Pacific
64,458

 
62,781

 
131,750

 
127,317

Europe
31,219

 
32,024

 
60,973

 
56,356

Korea
25,246

 
21,275

 
52,773

 
39,437

Americas (2)
24,765

 
17,508

 
48,033

 
43,303

Total revenues
$
235,484

 
$
204,398

 
$
464,000

 
$
401,111

(2) The revenues from the customers in the U.S. were $20.3 million and $14.8 million in the three months ended September 30, 2018 and October 1, 2017, respectively. The revenues from the customers in the U.S. were $40.6 million and $36.9 million in the six months ended September 30, 2018 and October 1, 2017, respectively.

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The Company utilizes global and regional distributors around the world, that buy products directly from the Company on behalf of their customers. Two distributors, Uniquest and its affiliates and Avnet and its affiliates, accounted for 12% and 16%, respectively, of the Company's revenues in the three months ended September 30, 2018. Two distributors, Uniquest and its affiliates and Avnet and its affiliates, accounted for 13% and 15%, respectively, of the Company's revenues in the six months ended September 30, 2018. One distributor, Avnet and its affiliates accounted for 15% of the Company's revenues in the three months ended October 1, 2017. One distributor, Avnet and its affiliates accounted for 14% of the Company's revenues in the six months ended October 1, 2017.
One direct original equipment manufacturer (OEM) customer, SK Hynix, accounted for 10% of the Company's revenues in the six months ended September 30, 2018. One direct original equipment manufacturer (OEM) customer, Samsung Electronics, accounted for 10% of the Company's revenues in the three and six months ended October 1, 2017.
As of September 30, 2018, one distributor represented approximately 20% of the Company’s gross accounts receivable. As of April 1, 2018, one distributor represented approximately 15% of the Company’s gross accounts receivable.
The Company’s significant operations outside of the United States include test facilities in each of Malaysia and Germany, design centers in the U.S., Canada and China, and sales subsidiaries in APAC and Europe. The Company's net property, plant and equipment are summarized below by geographic area: 
(in thousands)
September 30, 2018
 
April 1, 2018
United States
$
40,224

 
$
41,230

Malaysia
32,430

 
28,264

Germany
9,233

 
10,210

All other countries
7,099

 
7,141

Total property, plant and equipment, net
$
88,986

 
$
86,845

Note 19. Interest Income and Other, Net 
The components of interest income and other, net are summarized as follows:
 
Three Months Ended
 
Six Months Ended
(in thousands)
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
Interest income
$
1,170

 
$
836

 
$
2,345

 
$
1,593

Other income, net
1,267

 
1,112

 
1,763

 
3,337

Interest income and other, net
$
2,437

 
$
1,948

 
$
4,108

 
$
4,930

Interest income is derived from earnings on cash and short-term investments. Other income, net primarily consists of gains or losses in the value of deferred compensation plan assets, foreign currency gains or losses and other non-operating gains or losses.


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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking. Forward-looking statements, which are generally identified by words such as “anticipates,” “expects,” “plans,” “intends,” “seeks,” “targets,” “believes,” “can,” “may,” “might,” “could,” “should,” “would,” “will” and similar terms, include statements related to, among others, revenues and gross profit, research and development activities, selling, general and administrative expenses, restructuring costs, intangible expenses, interest income and other, taxes, capital spending and financing transactions, as well as statements regarding successful development and market acceptance of new products, industry and overall economic conditions and demand, and capacity utilization. Forward-looking statements are based upon current expectations, estimates, forecasts and projections that involve a number of risks and uncertainties. These risks and uncertainties include, but are not limited to: global business and economic conditions; operating results; new product introductions and sales; competitive conditions; capital expenditures and resources; manufacturing capacity utilization; customer demand and inventory levels; product performance; intellectual property matters; mergers and acquisitions and integration activities; and the risk factors set forth in Part II, Item 1A, “Risk Factors” to this Quarterly Report on Form 10-Q. As a result of these risks and uncertainties, actual results could differ significantly from those expressed or implied in the forward-looking statements. Unless otherwise required by law, we undertake no obligation to publicly revise these statements for future events or new information after the date of this Quarterly Report on Form 10-Q.
This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in this report and the Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended April 1, 2018 filed with the SEC on May 18, 2018. Operating results for the three and six months ended September 30, 2018 are not necessarily indicative of operating results for an entire fiscal year.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates and assumptions are based on historical experience and other factors that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates and assumptions.
For a discussion of our critical accounting policies, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended April 1, 2018 and our Condensed Consolidated Financial Statements and accompanying Notes included in this report. We believe that these accounting policies are "critical," as defined by the SEC, in that they are both highly important to the portrayal of our financial condition and results, and they require difficult management judgments, estimates and assumptions about matters that are inherently uncertain. Except for the adoption of ASC Topic 606 and other newly adopted accounting policies discussed in Note 1 to the Condensed Consolidated Financial Statements included in this report, we believe that there have been no other significant changes during the three and six months ended September 30, 2018 to the items that we disclosed as our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended April 1, 2018.
Business Overview
We develop system-level solutions that optimize our customers’ applications in key markets. IDT’s market-leading products in radio frequency (RF), timing, real-time interconnect, wireless power transfer, serial switching, memory interfaces, automotive application-specific integrated circuits (ASICs), optical interconnect, video distribution and contribution, sensor signal conditioner integrated circuits (ICs) and environmental sensors are among our broad array of complete mixed-signal solutions for the communications, computing, consumer, automotive and industrial segments. These products are used for development in areas such as 4G/5G infrastructure, network communications, cloud datacenters, autonomous driving, connected homes, smart appliances and power management for computing and mobile devices.
Our top talent and technology, paired with an innovative product-development philosophy, allows us to solve complex customer problems when designing communications, computing, consumer, automotive and industrial applications.
On a worldwide basis, we primarily market our products to original equipment manufacturers (OEMs) through a variety of channels, including direct sales, distributors, electronic manufacturing suppliers (EMSs) and independent sales representatives.
For more information on our business, please see Part I, Item 1, “Business,” in our Annual Report on Form 10-K for the fiscal year ended April 1, 2018.

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Recent developments
Pending Merger with Renesas Electronics Corporation
On September 10, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Renesas Electronics Corporation, a Japanese corporation (“Renesas”). The Merger Agreement and the Merger (as defined below) have been approved by the boards of directors of both companies.
The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, a wholly owned direct subsidiary of Renesas (“Merger Sub”) will be merged with and into IDT (the “Merger”), with IDT continuing as the surviving corporation and a direct wholly owned subsidiary of Renesas.
At the effective time of the Merger, each outstanding share of common stock, par value $0.001 per share, of IDT (a “Company Share”), other than shares held by stockholders who have validly exercised their appraisal rights under Delaware law, and certain shares owned by IDT, Renesas and their subsidiaries, will be automatically converted into the right to receive $49.00 in cash, without interest.
The consummation of the Merger is conditioned on the receipt of the approval of our stockholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. Consummation of the Merger is not subject to a financing condition. Closing of the Merger is expected in the first half of 2019, subject to two three-month extensions in order to obtain required regulatory approvals.
The Merger Agreement contains certain termination rights for us and Renesas, including if a governmental body prohibits the Merger or if the Merger is not consummated before June 10, 2019 subject to the two three-month extensions mentioned above. Upon termination of the Merger Agreement under specified circumstances, we or Renesas will be required to pay the other party a termination fee of $166.4 million. The foregoing description of the Merger Agreement and the Merger does not purport to be complete and is subject to, and qualified in its entirety by the full text of the Merger Agreement. For additional details on the transaction, refer to the copy of the Merger Agreement attached as an Exhibit 2.1 to the Form 8-K filed with the U.S. Securities and Exchange Commission on September 10, 2018.
We recorded transaction-related costs of $3.9 million, principally for outside financial advisory, legal and related fees and expenses associated with the pending acquisition, in the three months ended September 30, 2018. Additional transaction-related costs are expected to be incurred through the closing of the Merger.
The pending transaction with Renesas may have significant effects on us, including, among others, deferrals, delays or cancellation of purchase orders by our customers and the significant diversion of management and employee attention from ordinary course matters. For a more extensive discussion of those and other possible effects, refer to “Risk Factors.”
Refinancing of Term B Loan
On May 29, 2018 (the "Closing Date"), we entered into Amendment No. 1 (the “Amendment”) to our Credit Agreement dated April 4, 2017, for the purpose of, among other things, reducing the interest margin applicable to loans under the Credit Agreement by 0.50%, all of which was treated as a debt modification. On the Closing Date, the aggregate principal amount of the term loans outstanding under the Credit Agreement was approximately $198.0 million. Under the Amendment, the lenders agreed to provide to IDT new term loans (the “Term B-1 Loan”) in the same aggregate principal amount as the outstanding Initial Term B Loan. Such Term B-1 Loan was used to refinance the outstanding Initial Term B Loan in full. Refer to Note 16 for details.
Asset Acquisition
On August 10, 2017, we purchased certain assets of SpectraBeam for a total purchase consideration of $17.0 million, of which $12.9 million was paid in cash at closing and $4.1 million was recorded as a liability representing the fair value of contingent cash consideration. The acquisition did not meet the criteria for a business combination in accordance with ASC 805, Business Combinations, and accordingly, was accounted for as an asset acquisition. Aside from developed technology classified as an intangible asset, there was no other asset or liability that was allocated value in the purchase price allocation. The contingent cash consideration will be paid based upon achievement of certain milestones to be completed within two years from the closing date. Given that the milestones are probable of being achieved and the related amounts are estimable, the fair value of the contingent consideration was recognized as part of the cost of asset acquired at closing date. Accordingly, the total purchase consideration of $17.0 million was allocated to the developed technology.

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Acquisition of GigPeak, Inc.
On April 4, 2017, we completed the acquisition of all of the outstanding common stock of GigPeak, a publicly held company mainly operating in the United States in an all-cash transaction for approximately $250.1 million (the "Acquisition"). As a result of this Acquisition, we recorded amortizable intangible assets of $97.9 million and goodwill of $113.2 million during the first quarter of fiscal 2018. In addition, we recorded approximately $2.2 million of acquisition related costs during the first quarter of fiscal 2018, which were included in Selling, General and Administrative Expenses in the Condensed Consolidated Statements of Operations. Refer to Note 4 for details.
Overview
The following table and discussion provide an overview of our operating results for the three and six months ended September 30, 2018 and October 1, 2017
 
Three Months Ended
 
Six Months Ended
(in thousands, except for percentage)
September 30, 2018
 
October 1, 2017
 
September 30,
2018
 
October 1,
2017
Revenues
$
235,484

 
$
204,398

 
$
464,000

 
$
401,111

Gross profit
$
143,584

 
$
116,762

 
$
280,191

 
$
226,800