TMCnet News
TESSERA TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the fiscal year ended December 31, 2010 found in our Annual Report on Form 10-K, filed on February 24, 2011. This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified. The identification of certain statements as "forward-looking" is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenues, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management's plans and objectives for our current and future operations, management's plans for repurchasing our common stock pursuant to the authorization of our Board of Directors, the levels of customer spending or research and development activities, general economic conditions, the sufficiency of financial resources to support future operations and capital expenditures. Words such as "expects," "anticipates," "plans," "believes," "seeks," "estimates," "could," "would," "may," "intends," "targets" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading "Risk Factors" within Part II, Item 1A of this Quarterly Report and other documents we file from time to time with the Securities and Exchange Commission (the "SEC"), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. 35-------------------------------------------------------------------------------- Table of Contents Corporate Information Our principal executive offices are located at 3025 Orchard Parkway, San Jose, California 95134. We also have offices, research and development and manufacturing facilities in other locations. Our telephone number is (408) 321-6000. We maintain a website at www.tessera.com. The reference to our website address does not constitute incorporation by reference of the information contained on this website. Tessera, the Tessera logo, µBGA, µPILR, OptiML, DigitalOptics, SHELLCASE and FotoNation are trademarks or registered trademarks of Tessera or its affiliated companies in the United States ("U.S.") and other countries. All other company, brand and product names may be trademarks or registered trademarks of their respective companies. In this Quarterly Report, the "Company," "Tessera," "we," "us" and "our" refer to Tessera Technologies, Inc. and its subsidiaries on a consolidated basis. Business Overview Tessera is a technology innovator that develops, invests in, licenses and delivers innovative miniaturization technologies and products for next-generation electronic devices. Our Micro-electronics solutions enable smaller, higher-functionality devices through chip-scale and wafer-level packaging, silicon-level interconnect and 3D packaging, as well as silent air cooling technology. Our imaging and optics solutions provide cost-effective, high-quality camera functionality in consumer electronic products through technologies that include Extended Depth of Field ("EDoF"), zoom and MEMS-based auto-focus. We also offer custom micro-optics for semiconductor lithography, communications, medical, industrial and other applications. We license our patents and technologies worldwide, as well as deliver products based on these technologies. Our patent portfolio includes more than 2,500 domestic and internationally issued patents and patent applications, covering a range of advanced semiconductor packaging, substrate, interconnect, circuitry design, memory modules, 3D architecture, imaging and optics, and thermal management technologies. We have two reportable segments: Micro-electronics and Imaging and Optics. The Micro-electronics segment is primarily composed of our licensing business in our core markets, including DRAM, Flash, SRAM, DSP, ASIC, ASSP, micro-controllers, general purpose logic and analog devices, and our development and licensing efforts in emerging areas of packaging, interconnect, circuitry design, 3D architecture, and thermal management technology. The Imaging and Optics segment is composed of two elements. The first is our licensing business in the imaging and optics market, such as our wafer-level image sensor packaging and image enhancement technologies. The second is our product and service business, which includes manufacturing small form factor micro-optics and non-recurring services such as engineering, design, assembly and infrastructure improvement. We derive the majority of our revenues from license fees and royalties received under patent license agreements associated with our Micro-electronics technology, with a growing contribution from our Imaging and Optics technologies. Our Micro-electronics packaging technologies have been widely adopted and aspects of our technologies have been licensed to more than 70 companies, including Motorola, Inc., Intel Corporation, Hynix Semiconductor, Inc., Samsung Electronics Co., Ltd., Sharp Corporation, Powertech Technology, Inc., Texas Instruments, Inc. and Toshiba Corporation. We believe that more than 100 companies across the semiconductor supply chain have invested in the materials, equipment and assembly infrastructure needed to manufacture products incorporating our packaging technology. In April 2011, we announced that we are exploring a possible separation of our Imaging and Optics business. We have not set a definitive timetable for completing our exploration of strategic alternatives for the Imaging and Optics business, and there can be no assurance that the process will result in any transaction. Our Technologies We develop, license and manufacture technologies in two key areas: • Micro-electronics-including semiconductor packaging technologies encompassing interconnect and substrates, and thermal management technology; and • Imaging and Optics-including wafer-level packaging, wafer-level optics, image enhancement technologies, MEMS-based products, and micro-optics. 36 -------------------------------------------------------------------------------- Table of Contents Micro-electronics Technologies In the early 1990s, Tessera's founders invented packaging technology which is now widely used throughout the semiconductor industry. Our innovations include the industry's first chip-scale packaging technology. Our CSP technology also supports a variety of MCP and stacked packaging implementations, which satisfy the diverse requirements for stacked chip, Package-on-Package and System-in-Package designs. Our packaging technologies are widely used today in high volume packaging for a full range of integrated circuits ("ICs"). A few examples are listed below. • High performance dynamic random access memory ("DRAM") chips, such as: • Double-Data-Rate two ("DDR2"); and • Double-Data-Rate three ("DDR3") • Other memory chips, such as: • Not Or ("NOR") and Not And ("NAND") Flash memory; • Static random access memory ("SRAM"): • Mobile DRAM; • Graphic DRAM ("GDDRx"); and • Memory MCP (e.g., Flash + RAM) • Application-specific integrated circuits ("ASICs") and application-specific standard product semiconductors ("ASSPs"), such as: • Baseband and other high frequency communication processors; • Mobile Application and Multi Media Processors; • Radio Frequency transceivers and other Radio Frequency Systems; • Audio, Video, Image and Graphics processors; • Power management; and • Connectivity (Bluetooth, Wi-Fi, Global Positioning System among others) • General purpose ICs, such as: • Microcontrollers; • Digital Signal Processors ("DSPs"); and • Analog We are also applying our industry-leading miniaturization expertise to thermal management solutions. We are developing a unique silent air cooling technology that we believe will enable the cooling of thinner consumer electronics devices without much of the high noise currently associated with many traditional fan solutions. Imaging & Optics Technologies Advancements in Imaging and Optics technologies are enabling higher quality images in considerably smaller digital still cameras and other camera-enabled devices including cell phones, security systems and personal computers. Our portfolio of imaging and optics technologies include the following: • Image Enhancement technologies, which improve the quality of captured digital still camera and cell phone images: • OptiML Focus enables a high-quality image to be simultaneously brought into focus; • OptiML UFL improves low-light performance; • OptiML Zoom offers 3X zoom capabilities; • OptiML Red-Eye automatically detects and removes red- and golden-eye defects; • OptiML Face Tools provide face-oriented imaging technology such as face tracking/detection, smile/blink detection, face recognition and face beautification; and 37 -------------------------------------------------------------------------------- Table of Contents • OptiML Video Tools provide video image stabilization and video face beautification capabilities for mobile devices such as camera phones, pocket camcorders and digital still cameras; • MEMS-based single-chip solutions enable auto-focus functionality and image quality comparable with digital still cameras. • Micro-optics, which are small form factor optics developed and delivered on a variety of substrates, on one or both surfaces of a wafer and in multi-wafer forms. • Wafer-level Packaging technologies used in image sensor packaging. • Wafer-level Optics technology, which enables the manufacturing and assembly of lens modules. We have ceased further development of our Wafer-level Optics technology but will continue to support our two current Wafer-level Optics licensees. We actively consider acquisitions of businesses and technologies that would enable us to more effectively address additional markets. Our Products and Solutions Within our Imaging and Optics segment, we develop and manufacture imaging and optics solutions as well as provide services to our licensees to shorten their development effort and time to market. We manufacture small form factor micro-optics solutions using our wafer-level processes and equipment, targeted at three main markets: lithography, communications and barcode scanners. Results of Operations Acquisitions We have grown our business partly through acquisitions. On May 5, 2010, we completed the acquisition of Siimpel Corporation ("Siimpel"), a developer and manufacturer of MEMS-based camera solutions for mobile imaging applications for $15.0 million. Siimpel's MEMS Auto-focus and MEMS Auto-focus + Shutter solutions complement our EDoF technology and enables us to offer a wider range of high-value IP-based imaging and optics solutions. The impact of the acquisition on our financial results has been included in the following discussion. Revenues Our revenues are generated from royalty and license fees, past production payments, and product and service revenues. Royalty and license fees include revenues from license fees and royalty payments generated from licensing the right to use our technologies or intellectual property. Licensees generally report shipment information 30 to 60 days after the end of the quarter in which such activity takes place. Since there is no reliable basis on which we can estimate our royalty revenues prior to obtaining these reports from the licensees, we recognize royalty revenues on a one quarter lag. The timing of revenue recognition and the amount of revenue actually recognized for each type of revenues depends upon a variety of factors, including the specific terms of each arrangement, our ability to derive fair value of the element and the nature of our deliverables and obligations. In addition, our royalty revenues will fluctuate based on a number of factors such as: (a) the timing of receipt of royalty reports; (b) the rate of adoption and incorporation of our technology by semiconductor manufacturers and assemblers; (c) the extent to which large equipment vendors and materials providers develop and supply tools and materials to enable manufacturing using our technology; (d) the demand for products incorporating semiconductors that use our licensed technology; (e) the cyclicality of supply and demand for products using our licensed technology; and (f) the impact of economic downturns. In 2005, we provided two major DRAM manufacturers with first-mover pricing advantages with respect to royalties due to us under their respective TCC licenses based on several factors, including volumes. The effect of the volume pricing adjustments may cause, at certain high shipment volumes and for these two DRAM manufacturers only, our aggregate annual DRAM royalty revenues to grow less rapidly than annual growth in overall unit shipments in the DRAM segment. An additional effect may include some quarter-to-quarter fluctuations in growth in our revenues from the DRAM segment, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers in a given calendar quarter and their royalty payments within a calendar year. Some of our license agreements have fixed expiration dates. We need to renew or relicense these agreements prior to their expiration. Based on various factors including the technology and business needs of our licensees, we may not be able to renew or relicense such license agreements on terms favorable to us, or at all. During 2010, certain license agreements expired and were not renewed. We have expanded our licensable technology portfolio through internal development and acquisitions from third parties, but there is no guarantee that these measures will meet the technology and business needs of our licensees. In order to maintain existing relationships with some of our licensees, we may be forced to renew or relicense our license agreements on terms that are more favorable to such licensees. In the past, we have engaged in litigation and arbitration proceedings to directly or indirectly enforce our intellectual property rights and the terms of our license agreements, including proceedings to ensure proper and full payment of royalties by our current licensees and by third parties whose products incorporate our intellectual property rights. We believe that similar future proceedings may result in fluctuations in our revenue. 38-------------------------------------------------------------------------------- Table of Contents The following table sets forth our operating results for the periods indicated as a percentage of revenues: Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2011 2010 2011 2010 Revenues: Royalty and license fees 92 % 92 % 92 % 92 % Product and service revenues 8 8 8 8 Total revenues 100 100 100 100 Operating expenses: Cost of revenues 8 8 8 8 Research, development and other related costs 27 24 27 25 Selling, general and administrative 32 27 31 28 Litigation expense 10 6 10 8 Restructuring charges - - 1 - Total operating expenses 77 65 77 69 Operating income 23 35 23 31 Other income and expense, net 1 - 1 1 Income before taxes 24 35 24 32 Provision for income taxes 8 15 8 14 Net income 16 % 20 % 16 % 18 % The following table sets forth our revenues by type (in thousands, except for percentages): Three Months Ended June 30, June 30, Increase % 2011 2010 (Decrease) Change Royalty and license fees $ 65,402 92 % $ 68,356 92 % $ (2,954 ) (4 )% Product and service revenues 5,328 8 6,221 8 (893 ) (14 ) Total revenues $ 70,730 100 % $ 74,577 100 % $ (3,847 ) (5 )% Six Months Ended June 30, June 30, Increase % 2011 2010 (Decrease) Change Royalty and license fees $ 127,660 92 % $ 127,209 92 % $ 451 0 % Product and service revenues 10,843 8 11,630 8 (787 ) (7 ) Total revenues $ 138,503 100 % $ 138,839 100 % $ (336 ) (0 )% In January 2011, we announced that five licensees or former licensees were in breach of contract or did not renew their license agreements. The impact was a decrease in revenue of approximately $8.5 million and $16.7 million for the three and six months ended June 30, 2011 as compared to the same period in 2010. For the three months ended June 30, 2011, revenues were $70.7 million as compared to $74.6 million for the three months ended June 30, 2010, a decrease of $3.9 million, or 5%. The overall decrease in revenues in the three months ended June 30, 2011 as compared to the same period in 2010 was primarily due to the impact of the aforementioned licensees and former licensees of $8.5 million and lower lithography sales in our micro-optics products of $1.0 million, offset by higher royalty revenues from other TCC licensees and from optical image enhancement and embedded image enhancement technologies of $5.7 million. Revenues for the six months ended June 30, 2011 were $138.5 million as compared to $138.8 million for the six months ended June 30, 2010, a decrease of $0.3 million, or less than 1%. The overall decrease in revenues in the six months ended June 30, 2011 as compared to the same period in 2010 was primarily due to the impact of the aforementioned licensees and former licensees of $16.7 million, a non-recurring $3.0 million payment for past royalties under a $15.0 million litigation settlement with United Test Assembly Center Ltd. ("UTAC") recorded in the six month period ended June 30, 2010, and lower lithography sales in our micro-optics products of $1.0 million, offset by higher royalty revenues from other TCC licensees and from optical image enhancement and embedded image enhancement technologies of $20.4 million. 39-------------------------------------------------------------------------------- Table of Contents Cost of Revenues Cost of revenues primarily consists of direct compensation, materials, amortization of intangible assets related to acquired technologies, supplies and depreciation expense. Amortization of certain acquired intangible assets and depreciation expense of property and equipment are generally classified as a component of cost of revenues from research, development and other related costs when an in-process development project reaches commercialization. Excluding amortization of acquired intangible assets, cost of revenues relates primarily to product and service revenues. For each associated period, cost of revenues as a percentage of total revenues varies based on the rate of adoption of our technologies, the product and service revenues component of total revenues, the mix of product sales to semiconductor, optics and communications industries and the timing of property and equipment being placed in service. Cost of revenues for the three months ended June 30, 2011 was $5.3 million, as compared to $5.8 million for the three months ended June 30, 2010, a decrease of $0.5 million, or 7%. The decrease was primarily attributable to a decrease in production expenses related to decreased Micro-optics sales. Cost of revenues for the six months ended June 30, 2011 was $10.9 million, as compared to $11.0 million for the six months ended June 30, 2010, a decrease of $0.1 million, or 1%. The decrease was primarily attributable to a decrease in production expenses related to decreased Micro-optics sales. Research, Development and Other Related Costs Research, development and other related costs consist primarily of compensation and related costs for personnel, as well as costs related to patent applications and examinations, amortization of intangible assets, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of chip-scale, circuitry design, 3D architecture, wafer-level packaging technology, high-density substrate, thermal management technology, image sensor packaging, image enhancement technology, including MEMS-based products, and micro-optic lens solutions such as diffractive and refractive optical elements to integrated micro-optical subassemblies. All research, development and other related costs are expensed as incurred. Research, development and other related costs for the three months ended June 30, 2011 were $18.8 million, as compared to $18.3 million for the three months ended June 30, 2010, an increase of $0.5 million, or 2%. The increase was primarily due to $0.7 million of increased expenses incurred by Siimpel, acquired in May 2010, and an increase in legal expenses of $1.1 million, offset by decreases in personnel related expenses of $0.4 million, depreciation expense of $0.4 million and material costs of $0.4 million. Research, development and other related costs for the six months ended June 30, 2011 were $37.4 million, as compared to $34.2 million for the six months ended June 30, 2010, an increase of $3.2 million, or 10%. The increase was primarily due to $2.8 million of increased expenses incurred by Siimpel, acquired in May 2010, and an increase in legal expenses of $1.8 million, offset by decreases in depreciation expense of $0.8 million and material costs of $0.7 million. We believe that a significant level of research and development expenses will be required for us to remain competitive in the future. Selling, General and Administrative Selling expenses consist primarily of compensation and related costs for sales and marketing personnel, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance and accounting personnel, legal expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities related expenses, are not allocated to other expense line items. Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2011 were $22.8 million, as compared to $20.2 million for the three months ended June 30, 2010, an increase of $2.6 million, or 13%. The increase was primarily attributable to the inclusion of $0.1 million of increased expenses in 2011 incurred by Siimpel, acquired in May 2010, and increases in stock-based compensation expense of $1.6 million, personnel related expense of $1.2 million and amortization of intangible assets of $0.5 million, offset by decreases in consulting services of $0.5 million and facility related expense of $0.1 million. SG&A expenses for the six months ended June 30, 2011 were $42.2 million, as compared to $39.4 million for the six months ended June 30, 2010, an increase of $2.8 million, or 7%. The increase was primarily attributable to the inclusion of $0.4 million of increased expenses in 2011 incurred by Siimpel, acquired in May 2010, and increases in personnel related expenses of $1.9 million, amortization of intangible assets of $1.0 million and stock-based compensation expense of $1.0 million, offset by a decrease in consulting services of $1.7 million. Litigation Expense. Litigation expense for the three months ended June 30, 2011 was $7.2 million, as compared to $4.3 million for the three months ended June 30, 2010, an increase of $2.9 million, or 66%. The increase was primarily attributable to an increase in our legal proceedings related to our arbitration with Amkor. Litigation expense for the six months ended June 30, 2011 was $13.2 million, as compared to $10.9 million for the six months ended June 30, 2010, an increase of $2.3 million, or 21%. The increase was primarily attributable to an increase in case activities in our legal proceedings related to our arbitration with Amkor, offset by expenses incurred in 2010 related to the UTAC litigation as a settlement was reached with UTAC in March 2010. Refer to Note 12-"Commitments and Contingencies" of the Notes to Condensed Consolidated Financial Statements under the subheading "Contingencies" for additional details. 40 -------------------------------------------------------------------------------- Table of Contents We expect that litigation expense will continue to be a material portion of our operating expenses in future periods, and may fluctuate significantly in some periods, because of our ongoing litigation, as described under the subheading "Contingencies" in Note 12-"Commitments and Contingencies" of the Notes to Condensed Consolidated Financial Statements, and because we expect that we will become involved in other litigation from time to time in the future in order to enforce and protect our intellectual property rights. Restructuring Charges. In January 2011, the Company announced a reorganization of its Imaging and Optics segment to focus on key growth opportunities including EDoF, Zoom and MEMS-based auto-focus and a reduction of Imaging and Optics employees by up to 15% of our worldwide employee base along with certain headquarters support functions. Restructuring charges primarily consisted of severance and costs related to the continuation of certain employee benefits and were $2.1 million for the six months ended June 30, 2011. No restructuring charges were incurred for the three months ended June 30, 2011. No restructuring charges were incurred for the three or six months ended June 30, 2010. Stock-based Compensation Expense The following table sets forth our stock-based compensation expense for the three and six months ended June 30, 2011 and 2010 (in thousands): Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2011 2010 2011 2010 Cost of revenues $ 129 $ 121 $ 272 $ 296 Research, development and other related costs 2,408 2,573 4,854 5,250 Selling, general and administrative 6,290 4,717 9,765 8,731 Total stock-based compensation expense $ 8,827 $ 7,411 $ 14,891 $ 14,277 Stock-based compensation expense categorized by various equity components for the three and six months ended June 30, 2011 and 2010 is summarized in the table below (in thousands): Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2011 2010 2011 2010 Employee stock options $ 5,825 $ 4,051 $ 9,172 $ 7,802 Restricted stock awards and units 2,456 2,772 4,630 5,381 Employee stock purchase plan 546 588 1,089 1,094 Total stock-based compensation expense $ 8,827 $ 7,411 $ 14,891 $ 14,277 Stock-based compensation awards included employee stock options, restricted stock awards and units and employee stock purchases under our 2003 Employee Stock Purchase Plan. Stock-based compensation expense for the three months ended June 30, 2011 and 2010 was $8.8 million and $7.4 million, respectively. Stock-based compensation expense for the six months ended June 30, 2011 and 2010 was $14.9 million and $14.3 million, respectively. The overall increase from the three and six months ended June 30, 2010 was primarily related to an increase in stock-based compensation expense resulting from modification of stock awards to certain executive employees terminated from the Company. Future stock-based compensation expense will increase as we grant additional stock awards and will vary due to volatility in our stock price and timing of modifications to stock awards, if any. Other Income and Expense, Net Other income and expense, net for the three months ended June 30, 2011 was $0.7 million, as compared to $0.4 million, for the three months ended June 30, 2010. Other income and expense, net for the six months ended June 30, 2011 was $1.3 million, as compared to $1.0 million, for the six months ended June 30, 2010. The increase from the three and six months ended June 30, 2010 was primarily due to an increase in interest income on the higher average balance of cash equivalents and investments as compared to the same period in 2010. Provision for Income Taxes The provision for income taxes for the three and six months ended June 30, 2011 was $5.7 million and $11.3 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The income tax provision for the three and six months ended June 30, 2010 was $11.4 million and $19.5 million, respectively, and was comprised of domestic income tax and foreign income and withholding tax. The decrease in the provision for income taxes from the three and six months ended June 30, 2010 was primarily attributable to a decrease in taxable income as proportionately impacted by state tax law changes which reduced state tax payable, an increased benefit from domestic research credits, and a reduction in losses in jurisdictions for which no benefit can be realized. 41 -------------------------------------------------------------------------------- Table of Contents Segment Operating Results We have two reportable segments: Micro-electronics and Imaging and Optics. In addition to these reportable segments, the Corporate Overhead division includes certain operating amounts that are not allocated to the reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments. The Micro-electronics segment is primarily composed of the licensing business in our core markets, including DRAM, Flash, SRAM, DSP, ASIC, ASSP, micro-controllers, general purpose logic and analog devices, and our development and licensing efforts in emerging areas of packaging, substrate, interconnect, circuitry design, memory modules, 3D architecture and thermal management technologies. The Imaging and Optics segment is composed of two elements. The first is our licensing business in the imaging and optics market, such as our wafer-level image sensor packaging and image enhancement technologies. The second is our product and service business, which includes manufacturing small form factor micro-optics and non-recurring services such as engineering, design, assembly and infrastructure improvement. Our reportable segments were determined based upon the manner in which our management views and evaluates our operations. Segment information below and in Note 13-"Segment and Geographic Information" of the Notes to Condensed Consolidated Financial Statements is presented in accordance with the authoritative guidance on segment reporting. The following table sets forth our segments' revenues, operating expenses and operating income (loss) for the three and six months ended June 30, 2011 and 2010 (in thousands): Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2011 2010 2011 2010 Revenues: Micro-electronics: Royalty and license fees $ 60,487 $ 65,094 $ 114,102 $ 120,850 Product and service revenues - - - - Total Micro-electronics revenues 60,487 65,094 114,102 120,850 Imaging and Optics: Royalty and license fees 4,915 3,262 13,558 6,359 Product and service revenues 5,328 6,221 10,843 11,630 Total Imaging and Optics revenues 10,243 9,483 24,401 17,989 Total revenues 70,730 74,577 138,503 138,839 Operating expenses: Micro-electronics Segment 19,534 13,523 37,577 29,460 Imaging and Optics Segment 20,365 23,213 43,063 43,121 Corporate Overhead 14,230 11,887 25,133 22,903 Total operating expenses 54,129 48,623 105,773 95,484 Operating income (loss): Micro-electronics Segment 40,953 51,571 76,525 91,390 Imaging and Optics Segment (10,122 ) (13,730 ) (18,662 ) (25,132 ) Corporate Overhead (14,230 ) (11,887 ) (25,133 ) (22,903 ) Total operating income $ 16,601 $ 25,954 $ 32,730 $ 43,355 Revenues and operating income amounts in this section have been presented on a basis consistent with U.S. GAAP applied at the segment level. Corporate Overhead expenses which have been excluded are primarily support services, human resources, legal, finance, IT, corporate development, procurement activities, and insurance expenses. For the three months ended June 30, 2011, corporate overhead expenses were $14.2 million as compared to $11.9 million for the three months ended June 30, 2010. The increase of $2.3 million was mainly attributable to increases in stock-based compensation expense of $1.7 million and personnel related expenses of $1.1 million, offset by a decrease in facilities and depreciation expenses of $0.4 million. For the six months ended June 30, 2011, corporate overhead expenses were $25.1 million as compared to $22.9 million for the six months ended June 30, 2010. The increase of $2.2 million was mainly attributable to increases in personnel related expenses of $1.6 million and stock-based compensation expense of $1.3 million, offset by decreases in legal and outside services of $0.4 million and facilities and depreciation expenses of $0.2 million. 42 -------------------------------------------------------------------------------- Table of Contents Micro-electronics Segment Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2011 2010 2011 2010 Revenues: Micro-electronics: Royalty and license fees $ 60,487 $ 65,094 $ 114,102 $ 120,850 Product and service revenues - - - - Total Micro-electronics revenues 60,487 65,094 114,102 120,850 Operating expenses: Cost of revenues 200 4 407 4 Research, development and other related costs 8,342 6,781 16,192 13,356 Selling, general and administrative 3,721 2,698 7,604 5,463 Litigation expense 7,271 4,040 13,199 10,637 Restructuring charges - - 175 - Total operating expenses 19,534 13,523 37,577 29,460 Total operating income $ 40,953 $ 51,571 $ 76,525 $ 91,390 In January 2011, we announced that five licensees or former licensees were in breach of contract or did not renew their license agreements. The impact was a decrease in revenue of approximately $8.5 million and $16.7 million for the three and six months ended June 30, 2011 as compared to the same period in 2010. For the three months ended June 30, 2011, Micro-electronics revenues were $60.5 million as compared to $65.1 million for the three months ended June 30, 2010, a decrease of $4.6 million, or 7%. The overall decrease in revenues in the three months ended June 30, 2011 as compared to the same period in 2010 was primarily due to the impact of the aforementioned licensees and former licensees of $8.5 million, offset by new licenses and higher royalties reported from other TCC licensees of $3.9 million. Micro-electronics revenues for the six months ended June 30, 2011 were $114.1 million as compared to $120.9 million for the six months ended June 30, 2010, a decrease of $6.8 million, or 6%. The overall decrease in revenues in the six months ended June 30, 2011 as compared to the same period in 2010 was primarily due to the impact of the aforementioned licensees and former licensees of $16.7 million, and a non-recurring $3.0 million payment for past royalties under a $15.0 million litigation settlement with UTAC recorded in the six month period ended June 30, 2010, offset by new licenses and higher royalties reported from other TCC licensees of $13.0 million. Micro-electronics revenues consist primarily of royalties received from our TCC licensees. Such royalty revenues are distributed between two primary market segments: DRAM and Wireless. In 2005, we provided two major DRAM manufacturers with first-mover pricing advantages in respect of royalties due to us under their respective TCC licenses, based on several factors including volumes. The effect of the volume pricing adjustments may cause, at certain high shipment volumes and for these two DRAM manufacturers only, our aggregate annual DRAM royalty revenues to grow less rapidly than annual growth in overall unit shipments in the DRAM segment. An additional effect may include, depending on the relative DRAM market share enjoyed by these two DRAM manufacturers in a given calendar quarter as well as the timing of when they reach the volume pricing incentive, some quarter-to-quarter and year-to-year fluctuations in the growth in our revenues from the DRAM segment. We have no other contracts that provide volume-based pricing adjustments. Operating expenses for the three months ended June 30, 2011 were $19.5 million and consisted primarily of research, development and other related costs of $8.3 million, SG&A expenses of $3.7 million, litigation expense of $7.3 million. The increase of $6.0 million, or 44%, in total operating expense as compared to $13.5 million for the three months ended June 30, 2010, was primarily attributable to increases in litigation expense of $3.2 million, personnel related expenses of $1.1 million, legal services of $0.7 million and amortization of intangible assets of $0.7 million. Operating expenses for the six months ended June 30, 2011 were $37.6 million and consisted primarily of research, development and other related costs of $16.2 million, SG&A expenses of $7.6 million and litigation expense of $13.2 million. The increase of $8.1 million, or 28%, in total operating expense as compared to $29.5 million for the three months ended June 30, 2010, was primarily attributable to increases in litigation expense of $2.6 million, personnel related expenses of $2.3 million, legal services of $1.4 million, amortization of intangible assets of $1.3 million and material and supplies costs of $0.6 million, offset by a decrease in outside services of $0.6 million. We expect that litigation expense will continue to be a material portion of the Micro-electronics segment's operating expenses in future periods, and may fluctuate significantly in some periods, because of our ongoing legal actions, as described under the subheading "Contingencies" in Note 12-"Commitments and Contingencies" of the Notes to Condensed Consolidated Financial Statements, and because 43 -------------------------------------------------------------------------------- Table of Contents we expect that we will become involved in other litigation from time to time in the future in order to enforce and protect our intellectual property rights. Operating income for the three months ended June 30, 2011 and 2010 was $41.0 million and $51.6 million, respectively, which represented a decrease of $10.6 million, or 21%, for the reasons stated above. Operating income for the six months ended June 30, 2011 and 2010 was $76.5 million and $91.4 million, respectively, which represented a decrease of $14.9 million, or 16%, for the reasons stated above. Imaging and Optics Segment Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2011 2010 2011 2010 Revenues: Imaging and Optics: Royalty and license fees $ 4,915 $ 3,262 $ 13,558 $ 6,359 Product and service revenues 5,328 6,221 10,843 11,630 Total Imaging and Optics revenues 10,243 9,483 24,401 17,989 Operating expenses: Cost of revenues 5,161 5,784 10,466 10,977 Research, development and other related costs 10,443 11,559 21,206 20,797 Selling, general and administrative 4,761 5,870 9,507 11,347 Restructuring charges - - 1,884 - Total operating expenses 20,365 23,213 43,063 43,121 Total operating loss $ (10,122 ) $ (13,730 ) $ (18,662 ) $ (25,132 ) Imaging and Optics revenues for the three months ended June 30, 2011 were $10.2 million as compared to $9.5 million for the three months ended June 30, 2010, an increase of $0.7 million, or 8%. The increase in Imaging and Optics revenues in the three months ended June 30, 2011 as compared to the same period in 2010 was primarily due to higher royalty revenues from optical image enhancement and embedded image enhancement technologies of $1.8 million, offset by lower lithography sales in our micro-optics products of $1.0 million. Imaging and Optics revenues for the six months ended June 30, 2011 were $24.4 million as compared to $18.0 million for the six months ended June 30, 2010, an increase of $6.4 million, or 36%. The increase in Imaging and Optics revenues in the six months ended June 30, 2011 as compared to the same period in 2010 was primarily due to higher royalty revenues from optical image enhancement and embedded image enhancement technologies of $7.3 million, offset by lower lithography sales in our micro-optics products of $0.9 million. In January 2011, we announced a reorganization of our Imaging and Optics segment to focus on key growth opportunities including EDoF, Zoom and MEMS-based auto-focus. We also announced a reduction of Imaging and Optics employees by up to 15% of our worldwide employee base along with certain headquarters support functions. Restructuring charges primarily consisted of severance and costs related to the continuation of certain employee benefits that are not expected to be recurring. Operating expenses for the three months ended June 30, 2011 were $20.4 million and consisted of cost of revenues of $5.2 million, research, development and other related costs of $10.4 million, SG&A expenses of $4.8 million. The decrease of $2.8 million, or 12%, in total operating expenses as compared to $23.2 million for the three months ended June 30, 2010 was primarily due to decreases in personnel related expenses of $1.2 million, material costs of $1.1 million, depreciation and facility related expenses of $0.7 million and stock-based compensation expense of $0.3 million, offset by $0.8 million of increased expenses incurred by Siimpel, acquired in May 2010. Operating expenses for the six months ended June 30, 2011 were $43.1 million and consisted of cost of revenues of $10.5 million, research, development and other related costs of $21.2 million, SG&A expenses of $9.5 million and restructuring charges of $1.9 million. Total operating expenses for the six months ended June 30, 2011 as compared to $43.1 million for the six months ended June 30, 2010 consisted primarily of $3.2 million of increased expenses incurred by Siimpel, acquired in May 2010, and restructuring charges of $1.9 million, offset by decreases in material costs of $1.3 million, depreciation and facility related expenses of $1.0 million, personnel related expenses of $1.0 million, stock-based compensation expense of $0.8 million, amortization of intangible assets of $0.3 million and legal and consulting services of $0.3 million. Operating loss for the three months ended June 30, 2011 and 2010 was $10.1 million and $13.7 million, respectively, which represented a reduced loss of $3.6 million, or 26%, for the reasons stated above. Operating loss for the six months ended June 30, 2011 and 2010 was $18.7 million and $25.1 million, respectively, which represented a reduced loss of $6.5 million, or 26%, for the reasons stated above. We have incurred significant operating losses from the Imaging and Optics segment. If the anticipated future results of the Imaging and Optics segment do not materialize as expected, then the related goodwill and intangible assets could be subject to an impairment charge in the future. 44-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As of As of June 30, December 31, (in thousands, except for percentages) 2011 2010 Cash and cash equivalents $ 77,086 $ 69,268 Short-term investments 449,986 405,737 Total cash, cash equivalents and short-term investments $ 527,072 $ 475,005 Percentage of total assets 71 % 67 % Six Months Ended June 30, June 30, 2011 2010 Net cash provided by operating activities $ 50,538 $ 53,350 Net cash used in investing activities $ (47,709 ) $ (47,664 ) Net cash provided by financing activities $ 4,989 $ 3,319 Cash generated from operations is our primary source of liquidity and capital resources. Our investment portfolio is also available for future cash requirements. Cash, cash equivalents and investments were $527.1 million at June 30, 2011, an increase of $52.1 million from $475.0 million at December 31, 2010. Cash and cash equivalents were $77.1 million at June 30, 2011, an increase of $7.8 million from $69.3 million at December 31, 2010. The increase in cash and cash equivalents was primarily the result of $50.5 million in cash provided by operating activities and $5.0 million in cash provided by financing activities, offset by $47.7 million net cash used in investing activities. Cash flows provided by operations were $50.5 million for the six months ended June 30, 2011, primarily due to net income of $22.8 million, adjusted for non-cash items of depreciation and amortization of $13.2 million, stock-based compensation expense of $14.9 million, offset by a net decrease in the changes in operating assets and liabilities of $0.4 million. Cash flows provided by operations were $53.4 million for the six months ended June 30, 2010, primarily due to net income of $24.8 million, adjusted for non-cash items of depreciation and amortization of $12.8 million, stock-based compensation expense of $14.3 million and net tax benefits from stock options of $1.3 million, and a net increase in the changes in operating assets and liabilities of $0.2 million. Net cash used in investing activities was $47.7 million for the six months ended June 30, 2011, primarily related to purchases of short-term investments of $195.2 million, purchases of intangible assets of $3.5 million, and purchases of property and equipment of $2.4 million, offset by proceeds from maturities and sales of investments of $151.2 million and proceeds from the sale of assets of $2.2 million. Net cash used in investing activities was $47.7 million in the six months ended June 30, 2010, primarily related to purchases of short-term investments of $235.1 million, the acquisition of Siimpel for $15.0 million in net consideration, purchases of property and equipment of $7.2 million, purchases of intangible assets of $1.7 million, offset by proceeds from maturities and sales of investments of $211.3 million. The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including municipal bonds and notes, corporate bonds and notes, commercial paper, treasury and agency notes and bills and money market funds. We invest excess cash predominantly in marketable debt securities that are of high-quality investment grade and the majority of which have maturities of less than two years. Our marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. The fair values for our securities are determined based on quoted market prices as of the valuation date and observable prices for similar assets. We evaluate our investments periodically for possible other-than-temporary impairment and review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, our intent to hold and whether we will not be required to sell the security before its anticipated recovery, on a more likely than not basis. If declines in the fair value of the investments are determined to be other-than-temporary, we report the credit loss portion of such decline in other income and expense, net, and the remaining noncredit loss portion in accumulated other comprehensive income. In August 2007, our Board of Directors authorized a plan to repurchase up to a maximum total of $100.0 million of our outstanding shares of common stock dependent on market conditions, share price and other factors. No expiration has been specified for this plan. Repurchases may 45-------------------------------------------------------------------------------- Table of Contents take place in the open market or through private transactions. As of June 30, 2011, we have repurchased a total of 645,000 shares of common stock at a total cost of $10.5 million under this plan at an average price of $16.26. As of June 30, 2011, the total amount available for repurchase was $89.5 million. We may continue to execute authorized repurchases from time to time under the plan. Net cash from financing activities was $5.0 million for the six months ended June 30, 2011 due to the issuance of common stock under our employee stock option programs and employee stock purchase plans. Net cash from financing activities was $3.3 million for the six months ended June 30, 2010, due to $2.5 million from the issuance of common stock under our employee stock option programs and employee stock purchase plans and $0.8 million of excess tax benefits from stock-based compensation for the period. We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and short-term investments currently available, will be sufficient to fund our operations, anticipated growth and acquisition funding needs for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us and not dilutive to our then-current stockholders. Contractual Cash Obligations Payments Due by Period Less than 1-3 4-5 Total 1 Year Years Years Thereafter (In thousands) Operating lease obligations $ 8,887 $ 2,938 $ 4,283 $ 1,666 $ - Purchase obligations 585 585 - - - Total $ 9,472 $ 3,523 $ 4,283 $ 1,666 $ - The amounts reflected in the table above for obligations represent aggregate future minimum lease payments under non-cancellable facility and equipment operating leases. In addition, we have agreements containing non-cancelable, nonrefundable payments terms with third parties to purchase services. For our facilities leases, rent expense charged to operations differs from rent paid because of scheduled rent increases. Rent expense is calculated by amortizing total rental payments on a straight-line basis over the lease term. We have recognized approximately $4.3 million in the liability for unrecognized tax benefits, including accrued interest and penalties. It is reasonably possible that unrecognized tax benefits will decrease by $0.6 million to $0.7 million during 2011 due to a lapse in a foreign statute of limitations relating to various tax incentives. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. As a result, this amount is not included in the table above. See Note 12-"Commitments and Contingencies" of the Notes to the Condensed Consolidated Financial Statements for additional detail. Off-Balance Sheet Arrangements and Related Party Transactions As of June 30, 2011, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K. In 2007, we licensed our OptiML wafer-level camera technology and SHELLCASE wafer-level packaging solutions to NemoTek Technologie S. A. ("NemoTek"), a supplier of camera solutions for the cell phone market. As of June 30, 2011 and December 31, 2010, we had an investment of approximately $2.0 million in NemoTek at each period end, which represented less than a 10 percent holding in NemoTek. Revenues from NemoTek were less than one percent of total revenues and were not significant for the three months ended June 30, 2011 and 2010. Revenues from NemoTek were less than one percent of total revenues and were not significant for the six months ended June 30, 2011 and 2010. The accounts receivable balance from NemoTek was not significant at June 30, 2011 and December 31, 2010. 46-------------------------------------------------------------------------------- Table of Contents Since 2008, we have engaged 3LP Advisors LLC ("3LP") to assist with the identification and acquisition of patents. A managing partner of 3LP, Mr. Kevin G. Rivette, is a member of our Board of Directors and has a 33.3% ownership interest in 3LP. For the three and six months ended June 30, 2011, we recognized operating expense of $0.3 million and $0.9 million, respectively, related to these engagements. For the three and six months ended June 30, 2010, we recognized operating expense of $0.6 million and $1.3 million, respectively, related to these engagements. At June 30, 2011 and December 31, 2010, accounts payable balance due to 3LP was $0.2 million and $0.4 million, respectively. In May 2011, we engaged IRT, Inc. ("IRT") to provide outside administrative services for a stated hourly rate plus reimbursement for incurred expenses. IRT is solely owned by Robert A. Young, our President and Chief Executive Officer. For the three and six months ended June 30, 2011, operating expenses recognized related to these services were not significant. At June 30, 2011, accounts payable balance due to IRT was not significant. We provide indemnification of varying scope to certain customers against claims of intellectual property infringement made by third parties arising from the use of our technologies. In accordance with authoritative guidance for accounting for guarantees, as interpreted by the authoritative guidance for guarantor's accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, we evaluate estimated losses for such indemnification. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, no such claims have been filed against us and, as a result, no liability has been recorded in the Company's financial statements. Critical Accounting Estimates During the three and six months ended June 30, 2011 there were no significant changes in our critical accounting estimates. For a discussion of our critical accounting policies, see Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2010 Annual Report on Form 10-K, filed on February 24, 2011. Recent Accounting Pronouncements See Note 3-"Recent Accounting Pronouncements" of the Notes to the Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption. 47-------------------------------------------------------------------------------- Table of Contents |