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CAVIUM, 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 Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this document. The information in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "estimate," "project," "predict," "potential," "continue," "strategy," "believe," "anticipate," "plan," "expect," "intend" and similar expression intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading "Risk Factors." Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. OCTEON®, OCTEON®PlusTM, OCTEON Fusion®, FusionStackTM, NITROX®, NEURONTM, CelestialTM , ECONA®, PureVu® and WiVuTM are trademarks or registered trademarks of Cavium, Inc. 15 -------------------------------------------------------------------------------- Table of Contents Overview We are a provider of highly integrated semiconductor processors that enable intelligent processing for networking, communications, storage, wireless, security, video and connected home and office applications. Our product allows our customers to develop networking, wireless, storage and electronic equipment that is application-aware and content-aware and securely processes voice, video and data traffic at high speeds. Our products are systems on a chip, or SoCs, which incorporate single or multiple processor cores, a highly integrated architecture and customizable software that is based on a broad range of standard operating systems. We focus our resources on the design, sales and marketing of our products, and outsource the manufacturing of our products. From our incorporation in 2000 through 2003, we were primarily engaged in the design and development of our first processor family, NITROX, which we began shipping commercially in 2003. In 2004, we introduced and commenced commercial shipments of NITROX Soho. In 2006, we commenced our first commercial shipments of our OCTEON family of multi-core MIPS64 processors. We introduced a number of new products within all three of these product families in 2006. In 2007 we introduced our new line of OCTEON based storage services processors designed to address the specific needs in the storage market, as well as other new products in the OCTEON and NITROX families. In 2008, we expanded our OCTEON and NITROX product families with new products including wireless services processors to address the needs for wireless infrastructure equipment. In 2009, we announced the OCTEON II Internet Application Processor, or IAP, family multi-core MIPS64 processors, with one to 32 cores to address next generation networking applications support converged voice, video, data mobile traffic and services. In 2010, we announced the next generation NITROX III, a processor family with 16 to 64-cores that delivers security and compression processors for application delivery, cloud computing and wide area network optimization. In 2011, we introduced NEURON, a new search processor product family that targets a wide range of high performance, L2-L4 network search applications in enterprise and service provider infrastructure equipment. In 2011, we also introduced another new product family, the OCTEON Fusion, a single chip SoCs with up to 6x MIPS64 cores and up to 8x LTE/3G baseband DSP cores which enable macro base station class features for small cell base stations. In 2012, we introduced OCTEON III, Cavium's 48-core 2.5GHz multi-core processor family that can deliver up to 100Gbps of application processing, up to 120GHz of 64-bit compute processing per chip and can be connected in multi-chip configurations. In August 2012, we announced Project Thunder, the development of a new family of 64-bit ARMv8 scalable multi-core processors for cloud and datacenter applications. We expect that this processor family will integrate high-performance computer, networking, security, and storage along with targeted workload application acceleration and high-speed industry standard IOs. In August 2008, we acquired substantially all of the assets of Star Communications, Inc. With the acquisition of Star, we added the Star ARM-based processors to our portfolio to address connected home and office applications and introduced our ECONA line of dual-core ARM processors that address a variety of connected home and office applications. In December 2008, we acquired W&W Communications, Inc. This acquisition launched us into the video processor market with our PureVu product line. These products address the need for video processing in wireless displays, teleconferencing, gaming and other applications. In December 2009, we acquired MontaVista Software, Inc. This acquisition complemented our broad portfolio of multi-core processors to deliver integrated and optimized embedded solutions to the market. In October 2010, we acquired Celestial Systems, Inc. With the acquisition of Celestial Systems, we gained additional professional services such as Digital Media product development and Android commercialization and support. In January 2011, we completed the acquisition of substantially all of the assets and assumed certain liabilities of Wavesat Inc. This acquisition added multicore wireless digital system processing to our embedded processor product line. In March 2011, we completed the acquisition of substantially all of the assets and assumed certain liabilities of Celestial Semiconductor, Ltd. With the acquisition of Celestial Semiconductor, we have added capabilities to enable a processor family targeted for the large and growing market of converged media, gateway and wireless display applications. Since inception, we have invested heavily in new product development and our net revenue has grown from $7.4 million in 2004 to $235.5 million in 2012 driven primarily by demand in the enterprise network and data center markets and increased demand in the broadband and consumer markets. We expect sales of our products for use in the enterprise network and data center markets to continue to represent a significant portion of our revenue in the foreseeable future, however, we do expect growth in the broadband and consumer as well as the access and servicer provider markets. 16-------------------------------------------------------------------------------- Table of Contents We primarily sell our products to OEMs, either directly or through their contract manufacturers. Contract manufacturers purchase our products only when an OEM incorporates our product into the OEM's product, not as commercial off-the-shelf products. Our customers' products are complex and require significant time to define, design and ramp to volume production. Accordingly, our sales cycle is long. This cycle begins with our technical marketing, sales and field application engineers engaging with our customers' system designers and management, which is typically a multi-month process. If we are successful, a customer will decide to incorporate our product in its product, which we refer to as a design win. Because the sales cycles for our products are long, we incur expenses to develop and sell our products, regardless of whether we achieve the design win and well in advance of generating revenue, if any, from those expenditures. We do not have long-term purchase commitments from any of our customers, as sales of our products are generally made under individual purchase orders. However, once one of our products is incorporated into a customer's design, it is likely to remain designed in for the life cycle of the product. We believe this to be the case because a redesign would generally be time consuming and expensive. We have experienced revenue growth due to an increase in the number of our products, an expansion of our customer base, an increase in the number of average design wins within any one customer and an increase in the average revenue per design win. Our revenue from MontaVista is mainly from sale of software subscriptions of embedded Linux operating system, related development tools, support and professional services. The net revenue for our software and services are primarily derived from the sale of time-based software licenses, software maintenance and support, and from professional services arrangements and training. Key Business Metrics for Semiconductor Products Design Wins. We closely monitor design wins by customer and end market on a periodic basis. We consider design wins to be a key ingredient in our future success, although the revenue generated by each design win can vary significantly. Our long-term sales expectations are based on internal forecasts from specific customer design wins based upon the expected time to market for end customer products deploying our products and associated revenue potential. Pricing and Margins. Pricing and margins depend on the features of the products we provide to our customers. In general, products with more complex configurations and higher performance tend to be priced higher and have higher gross margins. These configurations tend to be used in high performance applications that are focused on the enterprise network, data center, and access and service provider markets. We tend to experience price decreases over the life cycle of our products, which can vary by market and application. In general, we experience less pricing volatility with customers that sell to the enterprise and data center markets. Sales Volume. A typical design win can generate a wide range of sales volumes for our products, depending on the end market demand for our customers' products. This can depend on several factors, including the reputation, market penetration, the size of the end market that the product addresses, and the marketing and sales effectiveness of our customer. In general, our customers with greater market penetration and better branding tend to develop products that generate larger volumes over the product life cycle. In addition, some markets generate large volumes if the end market product is adopted by the mass market. Customer Product Life Cycle. We typically commence commercial shipments from nine months to three years following a design win. Once our product is in production, revenue from a particular customer may continue for several years. We estimate our customers' product life cycles based on the customer, type of product and end market. In general, products that go into the enterprise network and data center take longer to reach volume production but tend to have longer lives. Products for other markets, such as broadband and consumer, tend to ramp relatively quickly, but generally have shorter life cycles. We estimate these life cycles based on our management's experience with providers of networking equipment and the semiconductor market as a whole. 17-------------------------------------------------------------------------------- Table of Contents Results of Operations Three months ended March 31, 2013 and 2012 Our net revenue, cost of revenue, gross profit and gross margin for the periods presented were: Three Months Ended March 31, 2013 2012 change % (in thousands) Net revenue $ 69,530 $ 52,743 $ 16,787 31.8 % Cost of revenue 26,159 28,008 (1,849 ) -6.6 % Gross Profit $ 43,371 $ 24,735 $ 18,636 75.3 % Gross Margin 62.4 % 46.9 % 15.5 % Net Revenue. Our net revenue consists primarily of sales of our semiconductor products to providers of networking equipment and their contract manufacturers and distributors. Initial sales of our products for a new design are usually made directly to providers of networking equipment as they design and develop their product. Once their design enters production, they often outsource their manufacturing to contract manufacturers that purchase our products directly from us or from our distributors. We price our products based on market and competitive conditions and periodically reduce the price of our products, as market and competitive conditions change, and as manufacturing costs are reduced. We do not experience different margins on direct sales to providers of networking equipment and indirect sales through contract manufacturers because in all cases we negotiate product pricing directly with the providers of networking equipment. To date, most of our revenue has been denominated in U.S. dollars. Cisco Systems, Inc. accounted for 19% and 28% of our net revenue for the three months ended March 31, 2013 and 2012, respectively. No other customer accounted for more than 10% of our revenues for the three months ended March 31, 2013 and 2012. Revenue and costs relating to sales to distributors are deferred if we grant more than limited rights of returns and price credits or if we cannot reasonably estimate the level of returns and credits issuable. We have an existing agreement with a distributor to distribute our products primarily in the United States. Given the terms of the distribution agreement, for sales to this distributor, we defer revenue and costs until products are sold to its end customers. For the three months ended March 31, 2013 and 2012, 5.9%, 5.7%, respectively, of our net revenues were from products sold by this distributor. Revenue recognition depends on notification from this distributor that product has been sold to its end customers. We use our distributors, other than the distributor discussed above, primarily to support international sale logistics in Asia, including importation and credit management. Total net revenue through these distributors was $21.4 million and $14.7 million for the three months ended March 31, 2013 and 2012, respectively, which accounted for 30.8% and 27.8% of net revenue for the three months ended March 31, 2013 and 2012, respectively. The inventory at these distributors at the end of the period may fluctuate from time to time mainly due to the OEM production ramps or new customer demands. While we have purchase agreements with our distributors, the distributors do not have long-term contracts with any of the equipment providers. Our distributor agreements limit the distributor's ability to return product up to a portion of purchases in the preceding quarter. Given our experience, along with our distributors' limited contractual return rights, we believe we can reasonably estimate expected returns from our distributors. Accordingly, we recognize sales through distributors at the time of shipment, reduced by our estimate of expected returns. Our net revenue increased by $16.8 million or 31.8% in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase in net revenue was attributable mainly to the increase in sales in our enterprise network; data center; and access and service provider markets, combined of $17.8 million, which was partially offset by the decrease in sales in our broadband and consumer market of $1.0 million. The overall increase in sales in our enterprise networks; data center; and access and service provider markets was mainly due to the increase in demand for our products, as a result of the timing of these customers' volume production of our design wins. The decrease in sales of our broadband and consumer market resulted from lower demand from our customers, affected by the timing of volume production of our design wins in the broadband and consumer side. 18-------------------------------------------------------------------------------- Table of Contents The following table is based on the geographic location of our customers including the original equipment manufacturers, contract manufacturers or the distributors who purchased our products and services. For sales to our distributors, their geographic location may be different from the geographic locations of the ultimate end customers. Sales by geography for the periods presented were: Three Months Ended March 31, 2013 2012 (in thousands) United States $ 22,651 $ 19,638 China 16,820 13,687 Korea 7,035 2,723 Taiwan 5,891 5,553 Mexico 4,150 955 Malaysia 3,465 4,486 Other countries 9,518 5,701 Total $ 69,530 $ 52,743 Cost of Revenue and Gross Margin. We outsource wafer fabrication, assembly and test functions of our products. A significant portion of our cost of revenue consists of payments for the purchase of wafers and for assembly and test services, amortization of acquired intangibles and amortization related to capitalized mask costs. To a lesser extent, cost of revenue includes expenses relating to our internal operations that manage our contractors, stock-based compensation, the cost of shipping and logistics, royalties, inventory valuation expenses for excess and obsolete inventories, warranty costs and changes in product cost due to changes in sort, assembly and test yields. In general, our cost of revenue associated with a particular product declines over time as a result of yield improvements, primarily associated with design and test enhancements. We use third-party foundries and assembly and test contractors, which are primarily located in Asia, to manufacture, assemble and test our semiconductor products. We purchase processed wafers on a per wafer basis from our fabrication suppliers, which are currently Taiwan Semiconductor Manufacturing Company, or TSMC, with the remaining manufacturing outsourced to Samsung Electronics, or Samsung, and Fujitsu Microelectronics, or Fujitsu. We also outsource the sort, assembly, final testing and other processing of our product to third-party contractors, primarily ASE Electronics in Taiwan, Malaysia and Singapore, as well as ISE Labs, Inc., in the United States. We negotiate wafer fabrication on a purchase order basis. There are no long-term agreements with any of these third-party contractors. A significant disruption in the operations of one or more of these third-party contractors would impact the production of our products for a substantial period of time, which could have a material adverse effect on our business, financial condition and results of operations. Our gross margin has been and will continue to be affected by a variety of factors, including the product mix, average sales prices of our products, the amortization expense associated with the acquired intangible assets, the timing of cost reductions for fabricated wafers and assembly and test service costs, inventory valuation charges, the cost of fabrication masks that are capitalized and amortized, and the timing and changes in sort, assembly and test yields. Overall gross margin is impacted by the mix between higher performance, higher margin products and services and lower performance, lower margin products and services. In addition, we typically experience lower yields and higher associated costs on new products, which improve as production volumes increase. Gross margin increased from 46.9% in the three months ended March 31, 2012 to 62.4% in the three months ended March 31, 2013, an increase of 16.0%. During the first quarter of 2012, we wrote-down certain Celestial product inventories of approximately $4.8 million. Excluding this inventory write down in the first quarter of 2012, gross margin increased by 6.4% in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase in the overall gross margin percentage was mainly due to overall increases in revenue and shifts of product sales mix of our semiconductor products as we sold more of our higher performance products, which yield higher gross margins compared to our lower performance products. 19-------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Research and development expenses primarily include personnel costs, engineering design development software and hardware tools, allocated facilities expenses and depreciation of equipment used in research and development, and stock-based compensation. Total research and development expenses for the periods presented were: Three Months Ended March 31, 2013 2012 change % (in thousands) Research and development expenses $ 32,415 $ 27,058 $ 5,357 19.8 % Percent of total net revenue 46.6 % 51.3 % -4.7 % Research and development expenses increased by $5.4 million or 19.8% in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Research and development expense in the three months ended March 31, 2013 included $3.6 million from a variable interest entity, or VIE. The remaining research and development expense increase of $1.8 million or 6.6%, was mainly due to increased depreciation and amortization expense of $1.1 million as a result of an increase in purchased technology licenses used for research and development projects. The other increase of $0.7 million was due to the increase in product development costs, facilities expense, design tools, increased headcount and other miscellaneous research and development, as a result of the increase in research and development activities to support the development of our new products. Research and development headcount was 534 at March 31, 2013 compared to 521 at March 31, 2012. Sales, General and Administrative Expenses Sales, general and administrative expenses primarily include personnel costs, accounting and legal fees, information systems, sales commissions, trade shows, marketing programs, depreciation, allocated facilities expenses and stock-based compensation. Total sales, general and administrative costs for the periods presented were: Three Months Ended March 31, 2013 2012 change % (in thousands) Sales, general and administrative $ 15,240 $ 12,484 $ 2,756 22.1 % Percent of total net revenue 21.9 % 23.7 % -1.8 % Sales, general and administrative expenses increased by $2.8 million or 22.1% in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase was mainly due to lower expense in the three months ended March 31, 2012 which resulted from a credit associated with the proceeds from settlement of an escrow claim of $4.4 million. Contributing to the increase is the cost incurred for severance and other benefits of $0.8 million related to restructuring activities during the three months ended March 31, 2013. The increase was partly offset by the decrease in salaries and employee benefits of $1.6 million due to decrease in headcount and the decrease in stock-based compensation expense of $0.5 million mainly due to the timing and reduced number of option and restricted stock unit grants. Further, during the first quarter of 2013, the Company recorded a credit of $0.7 million associated with the gain on sale of held for sale assets. Other sales, general and administrative expenses increased by $0.4 million mainly due to increased marketing related expenses which resulted from increased sales and increased outside services related to sale of certain assets of MontaVista. Sales, general and administrative headcount was 154 at March 31, 2013 compared to 192 at March 31, 2012. Other income (expense), net. Other income (expense), net primarily includes interest income on cash and cash equivalents, foreign currency gains and losses, financing expenses and interest expense associated with capital lease and technology license obligations. 20-------------------------------------------------------------------------------- Table of Contents Other expense, net for the periods presented were: Three Months Ended March 31, 2013 2012 change % (in thousands) Interest expense $ (342 ) $ (32 ) $ (310 ) 968.8 % Other, net (261 ) (94 ) (167 ) 177.7 % Total other expense, net $ (603 ) $ (126 ) $ (477 ) 378.6 % Other expense, net, increased by $0.5 million in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase was primarily due to higher interest expense associated with long-term capital lease payable and higher foreign exchange losses resulting from balance sheet remeasurement. Provision for (benefit from) Income Taxes. For the three months ended March 31, 2013 and 2012, the provision for (benefit from) income taxes was based on our estimated annual effective tax rate, plus any discrete items, and taking into account valuation allowance, as necessary, in compliance with applicable guidance. We update our estimate of our annual effective tax rate at the end of each quarterly period. Our estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and our interpretations of tax laws and the possible outcomes of current and future audits. The following table presents the provision for (benefit from) income taxes and the effective tax rates for the respective periods presented: Three Months Ended March 31, 2013 2012 change % (in thousands) Loss before income taxes $ (4,887 ) $ (14,993 ) $ 10,106 -67.4 % Provision for (benefit from) income taxes 426 (1,104 ) 1,530 -138.6 % Effective tax rate -8.7 % 7.4 % -16.1 % The provision for income taxes for the three months ended March 31, 2013 was primarily related to earnings in foreign jurisdictions. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to our loss before income taxes and the provision for income taxes recorded for the three months ended March 31, 2013 was primarily attributable to the impact of losses that are not benefited, the difference in foreign tax rates and increase in indefinite lived intangible related deferred tax liability. The benefit from income taxes for the three months ended March 31, 2012 was primarily related to the year-to-date pre-tax losses. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to our loss before income taxes and the benefit from income taxes recorded for the three months ended March 31, 2012 was primarily attributable to the impact of the differential in foreign tax rates, non-deductible stock-based compensation charges, and recovery of non-taxable escrow related to the Celestial Semiconductor acquisition. Liquidity and Capital Resources Following is a summary of our working capital and cash and cash equivalents as of March 31, 2013 and December 31, 2012: As of As of March 31, 2013 December 31, 2012 (in thousands) Working capital $ 124,403 $ 109,682 Cash and cash equivalents 86,511 76,784 Following is a summary of our cash flows from operating activities, investing activities and financing activities for the periods presented: 21-------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, 2013 2012 (in thousands) Net cash provided by operating activities $ 8,407 $ 6,796 Net cash provided by (used in) investing activities 337 (3,138 ) Net cash provided by (used in) financing activities 983 (1,797 ) Cash Flows from Operating Activities Net cash flows from operating activities increased by $1.6 million from $6.8 million in the three months ended March 31, 2012 compared to $8.4 million in the three months ended March 31, 2013. Total cash inflow from net loss, net of non-cash items in the three months ended March 31, 2013 was $11.7 million compared to $1.2 million in the three months ended March 31, 2012. The increase resulted mainly from higher net revenue which generated higher income from operations. Changes in assets and liabilities generated net cash outflow of $3.3 million in the three months ended March 31, 2013 compared to a cash inflow of $5.6 million in the three months ended March 31, 2012. The significant changes in assets and liabilities in the three months ended March 31, 2013 which resulted in cash outflows were lower accounts payable and accrued expenses resulting from the timing of payments to vendors, lower deferred revenue resulted from lower subscription licenses and professional services billings to customers and higher accounts receivable resulted from higher revenue. These cash outflows from changes in assets and liabilities was partially offset by the cash inflows resulted from the decrease in inventories due to the timing of inventory build-up and decrease in prepaid expenses and other current assets due to the timing of advance payments to vendors. The significant changes in the assets and liabilities for the three months ended March 31, 2012 were mainly due to decrease in inventories due to the timing of inventory build-up, higher accounts payable due to the timing of payments to vendors and higher deferred revenue due to the timing of the receipt of subscription license and professional billings from the customers. Cash Flows from Investing Activities Net cash provided by investing activities in the three months ended March 31, 2013 was $0.3 million compared to net cash used in investing activities in the three months ended March 31, 2012 of $3.1 million. Net cash provided by investing activities in the three months ended March 31, 2013 resulted from the receipt of cash proceeds of $3.4 million related to the sale of certain assets of MontaVista, which was partially offset by the cash payments made to purchase intangible assets of $2.3 million and property and equipment of $0.7 million. Net cash used in investing activities in the three months ended March 31, 2012 resulted from cash payments made to purchase property and equipment of $1.7 million and intangible assets of $1.5 million. Cash Flows from Financing Activities Net cash provided by financing activities in the three months ended March 31, 2013 was $1.0 million compared to net cash used in financing activities in the three months ended March 31, 2012 of $1.8 million. Net cash provided by financing activities in the three months ended March 31, 2013 resulted mainly from the proceeds received from issuance of common stock upon exercise of options of $6.8 million and cash received for a convertible note of the VIE to a third-party investor of $0.5 million, partially offset by the principal payments of capital lease and technology license obligations of $6.4 million. Net cash used in financing activities in the three months ended March 31, 2012 resulted from principal payments of capital lease and technology license obligations of $3.4 million, partially offset by the proceeds received from issuance of common stock upon exercise of options of $1.6 million. Capital Resources Cash equivalents consist primarily of an investment in a money market fund. We believe that our $86.5 million of cash and cash equivalents at March 31, 2013, and expected cash flow from operations, if any, will be sufficient to fund our projected operating requirements for at least 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our engineering, sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products and the continuing market acceptance of our products. Although we currently are not a party to any agreement with respect to potential material investments in, or acquisitions of, complementary businesses, services or technologies, other than disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. 22-------------------------------------------------------------------------------- Table of Contents Indemnities In the ordinary course of business, we have entered into agreements with customers that include indemnity provisions. Based on historical experience and information known as of March 31, 2013, we believe our exposure related to the above indemnities at March 31, 2013, is not material. We also enter into indemnification agreements with our officers and directors and our certificate of incorporation and bylaws include similar indemnification obligations to our officers and directors. It is not possible to determine the amount of our liability related to these indemnification agreements and obligations to our officers and directors due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Contractual Obligations The following table describes our commitments to settle contractual obligations in cash as of March 31, 2013: Payments Due By Period Remainder 1 to 3 3 to 5 More Than Total of 2013 Years Years 5 Years (in thousands) Operating lease obligations $ 28,619 $ 3,345 $ 8,063 $ 8,252 $ 8,959 Capital lease and technology license obligations 38,008 11,632 21,226 5,150 - Total $ 66,627 $ 14,977 $ 29,289 $ 13,402 $ 8,959 As of March 31, 2013, the liability for uncertain tax positions was $0.8 million. The timing of any payments which could result from these unrecognized tax benefits will depend upon a number of factors. Accordingly, the timing of payment cannot be estimated. In addition, we have other obligations for goods and services entered into in the normal course of business. These obligations, however, are either not enforceable or legally binding or are subject to change based on our business decisions. Critical Accounting Policies and Estimates The preparation of our financial statements and accompanying disclosures in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and the accompanying notes. The SEC has defined a company's critical accounting policies as policies that are most important to the portrayal of a company's financial condition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified our most critical accounting policies and estimates to be as follows: (1) revenue recognition; (2) stock-based compensation; (3) inventory valuation; (4) accounting for income taxes; (5) mask costs; (6) business combinations and (7) goodwill and purchased intangible assets. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information not presently available. Actual results may differ significantly from these estimates if the assumptions, judgments and conditions upon which they are based turn out to be inaccurate. Management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 28, 2013. Recent Accounting Pronouncements Please refer to the recent accounting pronouncements listed in Note 1 of Condensed Consolidated Financial Statements. |