[May 10, 2013] ATMEL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Tweet (Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion in conjunction with our Condensed Consolidated Financial Statements and the related Notes included in this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to review and consider carefully the various disclosures made by us in this Quarterly Report on Form 10-Q and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2012. Atmel's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports are available, free of charge, through the "Investors" section of www.atmel.com. We make these reports available as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website located at www.sec.gov that contains Atmel's reports filed with, or furnished to, the SEC. The information disclosed on our website is not incorporated herein and does not form a part of this Quarterly Report on Form 10-Q. This discussion contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2013 and beyond. Our statements regarding the following matters also fall within the meaning of "forward looking" statements and should be considered accordingly: the expansion of the market for microcontrollers, revenue for our maXTouch products, expectations for our new XSense products, our gross margin expectations and trends, anticipated revenue by geographic area and the ongoing transition of our revenue base to Asia, expectations or trends involving our operating expenses, capital expenditures, cash flow and liquidity, our factory utilization rates, the effect and timing of new product introductions, our ability to access independent foundry capacity and the corresponding financial condition and operational performance of those foundry partners, the effects of our strategic transactions and restructuring efforts, the estimates we use in respect of the amount and/or timing for expensing unearned stock based compensation and similar estimates related to our performance based restricted stock units, our expectations regarding tax matters, the outcome of litigation (including intellectual property litigation in which we may be involved or in which our customers may be involved, especially in the mobile device sector) and the effects of exchange rates and our ongoing efforts to manage exposure to exchange rate fluctuation. Our actual results could differ materially from those projected in any forward looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion and in Part II Item 1A - Risk Factors, and elsewhere in this Quarterly Report on Form 10-Q. Generally, the words "may," "will," "could," "should," "would," "anticipate," "expect," "intend," "believe," "seek," "estimate," "plan," "view," "continue," the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward looking statements. The information included in this Quarterly Report on Form 10-Q is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. We undertake no obligation to update any forward looking statements in this Quarterly Report on Form 10-Q. OVERVIEW We are one of the world's leading designers, developers and suppliers of microcontrollers, which are self-contained computers-on-a-chip. Microcontrollers are generally less expensive, consume less power and offer enhanced programming capabilities compared to traditional microprocessors. Our microcontrollers and related products are used in many of the world's leading smartphones, Ultrabooks, tablet devices, e-readers, wireless peripherals and other consumer and industrial electronics. They provide core functionality for such things as touch sensing, sensor and lighting management, security and encryption, wireless applications, industrial controls, building automation and battery management. We offer an extensive portfolio of capacitive touch products that integrate our microcontrollers with fundamental touch focused intellectual property ("IP") we have developed, and we continue to leverage our market and technology advantages to expand our product portfolio within the touch related eco-system. Toward that end, and as a natural extension of our touch controller business, in 2012, we announced our XSense products, a new type of touch sensor based on proprietary metal mesh technologies. We also design and sell products that are complementary to our microcontroller business, including nonvolatile memory, radio frequency, mixed signal and application specific integrated circuits. Our semiconductors also provide functionality for smart meters, commercial, residential and architectural LED-based lighting systems, touch panels used on household and industrial appliances, various aerospace, industrial and military products and systems, 22-------------------------------------------------------------------------------- Table of Contents and numerous electronic based automotive components like keyless ignition and access, engine control, and lighting and entertainment systems for standard and hybrid vehicles. We continue to focus on the development of wireless products that allow devices to communicate and connect with each other. We also continue to integrate enhanced wireless capabilities into our product portfolio, including technologies such as "ZigBee" and "Wi-Fi Direct" that enable the so-called "Internet of Things," where smart, connected devices and appliances seamlessly share data and information. We own and operate one wafer manufacturing facility in Colorado Springs, Colorado, consistent with our strategic determination made several years ago to maintain lower fixed costs and capital investment requirements. During the three months ended March 31, 2013, we repurchased 2.4 million shares of our common stock in the open market and subsequently retired those shares under our existing stock repurchase program. As of March 31, 2013, $111.8 million remained available for common stock repurchases under this program. RESULTS OF OPERATIONS Three Months Ended March 31, 2013 March 31, 2012 (in thousands, except percentage of net revenue) Net revenue $ 329,143 100.0 % $ 357,837 100.0 % Gross profit 131,305 39.9 % 152,367 42.6 % Research and development 68,308 20.8 % 66,289 18.5 % Selling, general and administrative 63,577 19.3 % 69,855 19.5 % Acquisition-related charges 2,255 0.7 % 1,956 0.5 % Restructuring charges 42,814 13.0 % - - % Recovery of receivables from foundry supplier (439 ) (0.1 )% - - % Credit from reserved grant income - - % (10,689 ) (3.0 )% Gain on sale of assets (4,430 ) (1.3 )% - - % Settlement charges 21,600 6.6 % $ - - % (Loss) income from operations $ (62,380 ) (19.0 )% $ 24,956 7.0 % Net Revenue Our net revenue totaled $329.1 million for the three months ended March 31, 2013, a decrease of 8%, or $28.7 million, from $357.8 million in net revenue for the three months ended March 31, 2012. Revenue for the three months ended March 31, 2013 was lower than the three months ended March 31, 2012 primarily as a result of lower sales throughout our distribution channel, particularly in Asia. Revenue in the consumer and aerospace markets decreased in the three months ended March 31, 2013 as compared to the same period last year. Net revenue denominated in Euros was 24% and 21% of total net revenue for the three months ended March 31, 2013 and March 31, 2012, respectively. Average exchange rates utilized to translate foreign currency revenue and expenses in Euros were approximately 1.33 and 1.31 Euros to the dollar for the three months ended March 31, 2013 and 2012, respectively. Our net revenue for the three months ended March 31, 2013 would have been approximately $0.9 million lower had the average exchange rate in the three months ended March 31, 2013 remained the same as the average exchange rate in effect for the three months ended March 31, 2012. Net Revenue - By Operating Segment Our net revenue by operating segment is summarized as follows: Three Months Ended March 31, March 31, Change % Change 2013 2012 (in thousands, except for percentages) Microcontroller $ 215,468 $ 217,802 $ (2,334 ) (1 )% Nonvolatile Memory 27,053 47,733 (20,680 ) (43 )% RF and Automotive 46,638 43,510 3,128 7 % ASIC 39,984 48,792 (8,808 ) (18 )% Total net revenue $ 329,143 $ 357,837 $ (28,694 ) (8 )% 23-------------------------------------------------------------------------------- Table of Contents Microcontroller Microcontroller segment net revenue decreased 1% to $215.5 million for the three months ended March 31, 2013 from $217.8 million for the three months ended March 31, 2012. Microcontroller net revenue represented 65% and 61% of total net revenue for the three months ended March 31, 2013 and March 31, 2012, respectively. Inventory held by distributors of our microcontroller products decreased significantly as of March 31, 2013 as compared to March 31, 2012. Nonvolatile Memory Nonvolatile Memory segment net revenue decreased 43% to $27.1 million for the three months ended March 31, 2013 from $47.7 million for the three months ended March 31, 2012. The decrease was primarily due to the sale of our Serial Flash product line in the third quarter of 2012, which accounted for 26% of the total nonvolatile memory segment revenue for the three months ended March 31, 2012. RF and Automotive RF and Automotive segment net revenue increased 7% to $46.6 million for the three months ended March 31, 2013 from $43.5 million for the three months ended March 31, 2012. This increase was primarily related to our mixed signal products, which rose 47% period over period. ASIC ASIC segment net revenue decreased 18% to $40.0 million for the three months ended March 31, 2013 from $48.8 million for the three months ended March 31, 2012. Our aerospace business revenue decreased approximately 31% during the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily from reduced market demand. Net Revenue by Geographic Area Our net revenue by geographic area for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, is summarized in the table below. Revenue is attributed to regions based on the location to which we ship. See Note 10 of Notes to Condensed Consolidated Financial Statements for further discussion. Three Months Ended March 31, March 31, Change % Change 2013 2012 (in thousands, except for percentages) Asia $ 196,883 $ 202,900 $ (6,017 ) (3 )% Europe 83,048 99,374 (16,326 ) (16 )% United States 44,181 48,190 (4,009 ) (8 )% Other* 5,031 7,373 (2,342 ) (32 )% Total net revenue $ 329,143 $ 357,837 $ (28,694 ) (8 )% _________________________________________ * Primarily includes South Africa, and Central and South America Net revenue outside the United States accounted for 87% of our net revenue for both the three months ended March 31, 2013 and 2012. Our net revenue in Asia decreased $6.0 million, or 3%, for the three months ended March 31, 2013, compared to the three months ended March 31, 2012. The decrease in Asia for the three months ended March 31, 2013, compared to the three months ended March 31, 2012 was primarily due to weaker demand in the industrial market. In the three months ended March 31, 2013, our Asian distributors significantly reduced their inventory of our products as compared to the three months ended March 31, 2012. Net revenue for the Asia region was 60% and 57% of total net revenue for the three months ended March 31, 2013 and 2012, respectively. Our net revenue in Europe decreased $16.3 million, or 16%, for the three months ended March 31, 2013, compared to the three months ended March 31, 2012. The decrease in this region for the three months ended March 31, 2013, compared to the three months ended March 31, 2012 was primarily a result of the continued decline in industrial, military and aerospace markets. Net revenue for the Europe region was 25% and 28% of total net revenue for the three months ended March 31, 2013 and 2012, respectively. 24-------------------------------------------------------------------------------- Table of Contents Our net revenue in the United States decreased by $4.0 million, or 8%, for the three months ended March 31, 2013, compared to the three months ended March 31, 2012. This decrease resulted from a continued decline in consumer and industrial markets, which were primarily affected by lower revenue for energy-related products. Net revenue for the U.S. region was 13% of total net revenue for both the three months ended March 31, 2013 and 2012. Revenue and Costs - Impact from Changes to Foreign Exchange Rates Changes in foreign exchange rates have historically had an effect on our net revenue and operating costs. Net revenue denominated in foreign currencies was 24% and 21% of our total net revenue for the three months ended March 31, 2013 and 2012, respectively. Costs denominated in foreign currencies were 18% of our total costs for both the three months ended March 31, 2013 and 2012. Average exchange rates utilized to translate foreign currency revenue and expenses denominated in Euros were approximately 1.33 and 1.31 Euros to the dollar for the three months ended March 31, 2013 and 2012, respectively. For the three months ended March 31, 2013, changes in foreign exchange rates had an favorable overall effect on our operating results. Our net revenue for the three months ended March 31, 2013 would have been approximately $0.9 million lower had the average exchange rate in the three months ended March 31, 2013 remained the same as the average rate in effect for the three months ended March 31, 2012. Our loss from operations would have been approximately $0.4 million higher had the average exchange rate in the three months ended March 31, 2013 remained the same as the average exchange rate in the three months ended March 31, 2012. We continue to monitor the economic situation in Europe, which remains uncertain. The elimination of the Euro as a common currency, the withdrawal of member states from the Eurozone or other events affecting the liquidity, volatility or use of the Euro could have a significant effect on our revenue and operations if any of those events were to occur. Gross Margin Gross margin declined to 39.9% for the three months ended March 31, 2013, compared to 42.6% for the three months ended March 31, 2012. Gross margin in the three months ended March 31, 2013 was negatively affected by lower sales, a weaker pricing environment and adverse manufacturing variances. Over the past several years, we transitioned our business to a "fab-lite" manufacturing model, lowering our fixed costs and capital investment requirements by selling manufacturing operations and transitioning to foundry partners. We own and operate one wafer fabrication facility in Colorado Springs, Colorado. Inventory decreased to $335.8 million at March 31, 2013 from $348.3 million at December 31, 2012 primarily related to improved inventory management and higher sales. Inventory write-downs, if undertaken, may affect our results of operations, including gross margin, depending on the nature of those adjustments. If the demand for certain semiconductor products declines or does not materialize as we expect, we could be required to record additional write-downs, which would adversely affect our gross margin. For the three months ended March 31, 2013, we manufactured approximately 47% of our products in our own wafer fabrication facility compared to 56% for the three months ended March 31, 2012. Our cost of revenue includes the costs of wafer fabrication, assembly and test operations, inventory write-downs, royalty expense, freight costs and share-based compensation expense. Our gross margin as a percentage of net revenue fluctuates depending on product mix, manufacturing yields, utilization of manufacturing capacity, reserves for excess and obsolete inventory, and average selling prices, among other factors. Research and Development Research and development ("R&D") expenses increased 3%, or $2.0 million, to $68.3 million for the three months ended March 31, 2013 from $66.3 million for the three months ended March 31, 2012. R&D expenses for the three months ended March 31, 2013, were unfavorably affected by approximately $0.7 million of foreign exchange rate fluctuations, compared to rates in effect for the three months ended March 31, 2012. As a percentage of net revenue, R&D expenses totaled 21% for the three months ended March 31, 2013, compared to 19% for the three months ended March 31, 2012. Our internally developed process technologies are an important part of new product development. We continue to invest in developing process technologies emphasizing wireless, high voltage, analog, digital, and embedded memory manufacturing processes. Our technology development groups, in partnership with certain external foundries, are developing new and enhanced fabrication processes, including architectures utilizing advanced processes at the 65 nanometer line width node. We believe this investment allows us to bring new products to market faster, add innovative features and achieve performance improvements. We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve. 25-------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Selling, general and administrative ("SG&A") expenses decreased 9%, or $6.3 million, to $63.6 million for the three months ended March 31, 2013 from $69.9 million for the three months ended March 31, 2012. The decrease is primarily a result of lower share-based compensation charges and other employee-related charges. SG&A expenses were unfavorably affected by approximately $0.4 million of foreign exchange rate fluctuations, compared to rates in effect for the three months ended March 31, 2012. As a percentage of net revenue, SG&A expenses decreased to 19% of net revenue for the three months ended March 31, 2013, compared to 20% for the three months ended March 31, 2012. Share-Based Compensation We primarily issue restricted stock units to our employees as equity compensation. Employees may also participate in an Employee Stock Purchase Program that offers the ability to purchase stock through payroll withholdings at a discount to market price. Share-based compensation cost for stock options is based on the fair value of the award at the measurement date (grant date). The compensation amount for those options is calculated using a Black-Scholes option valuation model. For restricted stock unit awards, the compensation amount is determined based upon the market price of our common stock on the grant date. Share-based compensation for restricted stock units, other than performance-based units described below, is recognized as an expense over the applicable vesting term for each employee receiving restricted stock units. The recognition as expense of the fair value of performance-related share-based awards is determined based upon management's estimate of the probability and timing for achieving the associated performance criteria, utilizing the fair value of the common stock on the grant date. Share-based compensation for performance-related awards is recognized over the estimated performance period, which may vary from period to period based upon management's estimates regarding the likelihood of achieving relevant performance criteria. The following table summarizes share-based compensation included in operating results for the three months ended March 31, 2013 and 2012: Three Months Ended March 31, March 31, 2013 2012 (In thousands) Cost of revenue $ 1,844 $ 2,255 Research and development 4,608 6,763 Selling, general and administrative 8,310 10,309 Total share-based compensation expense, before income taxes 14,762 19,327 Tax benefit (2,606 ) (2,790 ) Total share-based compensation expense, net of income taxes $ 12,156 $ 16,537 In May 2011, we adopted the 2011 Long-Term Performance-Based Incentive Plan (the "2011 Plan"), which provides for the grant of restricted stock units to eligible employees. Vesting of restricted stock units granted under the 2011 Plan is subject to the satisfaction of performance metrics tied to revenue growth and operating margin over the designated performance periods. The performance periods for the 2011 Plan run from January 1, 2011 through December 31, 2013 and consist of three one-year performance periods (calendar years 2011, 2012 and 2013) and a three year cumulative performance period. We did not issue any performance-based restricted stock units in the three months ended March 31, 2013. We issued 0.2 million performance-based restricted stock units in the three months ended March 31, 2012. We recorded total share-based compensation expense related to performance-based restricted stock units of $0.4 million and $4.3 million under the 2011 Plan in the three months ended March 31, 2013 and 2012, respectively. The expense recorded for the three months ended March 31, 2013 decreased from the three months ended March 31, 2012 as a result of reducing our estimates regarding the probability of achieving all performance criteria and an increase in the estimated forfeiture rate for these performance-based restricted stock units resulting in a total credit of $2.4 million. We are required to reassess the probability of vesting at each reporting date, and any change in its forecasts may result in an increase or decrease to the expense recognized. As a result, the expense recognition for performance-based restricted stock units could change over time, requiring adjustments to the financial statements to reflect changes in our judgment regarding the probability of achieving the performance goals. 26-------------------------------------------------------------------------------- Table of Contents The 2011 Plan performance metrics include revenue growth rankings for us relative to a semiconductor peer group or a microcontroller peer group, as determined by the Compensation Committee. In addition, in order for a participant to receive credit for a performance period, we must achieve a minimum operating margin during such performance period, measured on a pro forma basis as defined in the 2011 Plan, subject to adjustment by the Compensation Committee. The Compensation Committee is required by the terms of the 2011 Plan to adjust downward the pro forma operating margin threshold if an industry-wide decline in adjusted revenue for our semiconductor peer companies occurs, and, if that occurs, any downward adjustment must be implemented in a manner consistent with the absolute decline in pro forma operating margin for peer companies as a group, as reviewed by the Compensation Committee. We evaluate, on a quarterly basis, the likelihood of meeting our performance metrics in determining share-based compensation expense for performance share plans. To the extent that aspects of a performance-based compensation plan such as ours are adjusted in the discretion of a compensation committee, the exercise of that discretion, notwithstanding that it is expressly permitted by the terms of a plan, may result in plan compensation awarded to named executive officers not being deductible. Our Compensation Committee has retained the discretion to implement our 2011 Plan, notwithstanding any potential loss of deductibility, in the manner that it believes most effectively achieves the objectives of our compensation philosophies. Until restricted stock units are vested, they do not have the voting rights of common stock and the shares underlying the awards are not considered issued and outstanding. Acquisition-Related Charges We recorded total acquisition-related charges of $2.3 million and $2.0 million for the three months ended March 31, 2013 and 2012, respectively, related to amortization of our various acquisitions since 2008. Included in those acquisition-related charges is amortization of $1.9 million and $1.4 million for the three months ended March 31, 2013 and 2012, respectively, associated with customer relationships, developed technology, trade name, non-compete agreements and backlog. We estimate that charges related to amortization of intangible assets will be approximately $4.1 million for the remainder of 2013. We also recorded other compensation related charges for these acquisitions of $0.4 million and $0.6 million for the three months ended March 31, 2013 and 2012. Gain on Sale of Assets On September 28, 2012, we sold our serial flash product line. Under the terms of the sale agreement, we transferred assets to the buyer, who assumed certain liabilities, in return for cash consideration of $25.0 million. As part of the sale transaction, we granted the buyer an exclusive option to purchase our remaining $7.0 million of serial flash inventory, which the buyer fully exercised during the three months ended March 31, 2013. As a result of the sale of that $7.0 million of remaining inventory, we recorded a gain of $4.4 million in our condensed consolidated statement of operations for the three months ended March 31, 2013 to reflect receipt of payment upon exercise of the related purchase option and the completion of the sale of the serial flash product line. Restructuring Charges The following table summarizes the activity related to the accrual for restructuring charges detailed by event for the three months ended March 31, 2013 and 2012: March 31, 2013 Q2'10 Q2'12 Q4'12 Q1'13 Total 2013 Activity Balances at January 1, 2013 - Restructuring $ 439 $ 7,418 $ 8,365 $ - $ 16,222 Accrual Charges - Employee termination costs, net of - - (460 ) 42,821 42,361 change in estimate Charges - Other - - - 453 453 Payments - Employee termination costs - (2,206 ) (5,161 ) - (7,367 ) Payments - Other - - (45 ) (453 ) (498 ) Foreign exchange (gain) loss - - (16 ) - (16 ) Balances at March 31, 2013 - Restructuring $ 439 $ 5,212 $ 2,683 42,821 $ 51,155 Accrual 27 -------------------------------------------------------------------------------- Table of Contents March 31, 2012 Q3'08 Q2'10 Total 2012 Activity (In thousands)Balances at January 1, 2012 - Restructuring Accrual $ 301 $ 1,846 $ 2,147 Payments - Employee termination costs - (741 ) (741 ) Foreign exchange (gain) loss - (226 ) (226 ) Balances at March 31, 2012 - Restructuring Accrual $ 301 $ 879 $ 1,180 2013 Restructuring Charges For the three months ended March 31, 2013, we recorded restructuring charges of $42.4 million related to workforce reductions, which we anticipate will result in cost savings for us in the future. Employee severance costs were recorded in accordance with the accounting standard related to costs associated with exit or disposal activities. Settlement Charges For the three months ended March 31, 2013, we recorded settlement charges of $21.6 million related to potential legal-related settlements undertaken in connection with actual, contemplated or anticipated litigation, or activities undertaken in preparation for, or anticipation of, possible litigation related to intellectual property. Credit from Reserved Grant Income In March 2012, the Greek government executed a ministerial decision related to an outstanding state grant previously made to a Greek subsidiary. Consequently, we recognized a benefit of $10.7 million in our results for the three months ended March 31, 2012 resulting from the reversal of a reserve previously established for that grant. The outstanding balance of the grant owed to the Greek government at March 31, 2013 was $4.4 million. In April 2013, our Greek subsidiary paid this amount to the Greek government, eliminating the remaining grant related obligations to the Greek government. Interest and Other Income (Expense), Net Years Ended March 31, March 31, 2013 2012 (In thousands) Interest and other income $ 727 $ 182 Interest expense (695 ) (1,170 ) Foreign exchange transaction gains 320 764 Total $ 352 $ (224 ) Interest and other income (expense), net, for the three months ended March 31, 2013 resulted in income of $0.4 million when compared to an expense of $0.2 million in the same period in 2012. We continue to have balance sheet exposures in foreign currencies subject to exchange rate fluctuations and may incur further gains or losses in the future as a result of such foreign exchange exposures. Benefit from (Provision for) Income Taxes For the three months ended March 31, 2013 and March 31, 2012, we recorded an income tax benefit of $14.4 million and an income tax provision of $4.3 million, respectively. We estimate our annual effective tax rate at the end of each quarter. In making these estimates, we, in consultation with our tax advisors, consider, among other things, annual pre-tax income, the geographic mix of pre-tax income and the application and interpretations of tax laws, treaties and judicial developments and the possible outcomes of audits. Our effective tax rate for the three months ended March 31, 2013 and 2012 was lower than the statutory federal income tax rate of 35%, primarily due to losses or income recognized in lower tax rate jurisdictions. 28-------------------------------------------------------------------------------- Table of Contents We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. Our 2002 through 2012 tax years generally remain subject to examination by federal and most state tax authorities. For significant foreign jurisdictions, the 2002 through 2012 tax years generally remain subject to examination by their respective tax authorities. At March 31, 2013, and December 31, 2012, we had $35.3 million and $27.2 million of unrecognized tax benefits, respectively, which, if recognized, would affect the effective tax rate. Also at March 31, 2013 and December 31, 2012, we had $47.9 million and $45.5 million of unrecognized tax benefits, respectively, which, if recognized, would result in adjustments to other tax accounts, primarily deferred tax assets. The increase in unrecognized tax benefits during the three months ended March 31, 2013 is primarily due to new foreign transfer pricing reserves accrued by the Company during such period. Increases or decreases in unrecognizable tax benefits could occur over the next twelve months due to tax law changes, unrecognized tax benefits established in the normal course of business, or the conclusion of ongoing tax audits in various jurisdictions around the world. We believe that before December 31, 2013, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain income tax examination periods will expire, or both. If we reach a settlement with tax authorities and/or such statutes of limitations expire, we expect to record a corresponding adjustment to the applicable unrecognized tax benefits. Given the uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, we estimate that the range of potential decreases in underlying uncertain tax positions may be between $0 and $10.0 million during the next twelve months, although those estimates are subject to various factors beyond our control. The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. We regularly assess our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which we do business. Liquidity and Capital Resources At March 31, 2013, we had $244.8 million of cash, cash equivalents and short-term investments, compared to $296.1 million at December 31, 2012. The decrease in cash balances during the first quarter of 2013 resulted principally from payments made for two acquisitions completed at the end of 2012, a prepayment made to Conductive Inject Technologies related to XSense production, timing of vendor payables and customer receivables and common stock repurchases. Our current asset to liability ratio, calculated as total current assets divided by total current liabilities, was 2.62 at March 31, 2013 compared to 2.84 at December 31, 2012. Working capital, calculated as total current assets less total current liabilities, decreased to $553.3 million at March 31, 2013, compared to $621.1 million at December 31, 2012. Cash used in operating activities was $12.0 million for the three months ended March 31, 2013 compared to cash provided by operating activities of $60.6 million for the three months ended March 31, 2012, and capital expenditures totaled $4.1 million and $7.4 million for the three months ended March 31, 2013 and 2012, respectively, with the decrease resulting primarily from a reduction in the purchase of testing equipment. As of March 31, 2013, of the $244.8 million aggregate cash and cash equivalents and short-term investments held by us, the amount of cash and cash equivalents held by our foreign subsidiaries was $189.7 million. If the funds held by our foreign subsidiaries were needed for our operations in the United States, the repatriation of some of these funds to the United States could require payment of additional U.S. taxes. Operating Activities Net cash used in operating activities was $12.0 million for the three months ended March 31, 2013, compared to cash provided by operating activities of $60.6 million for the three months ended March 31, 2012. Net cash used in operating activities for the three months ended March 31, 2013 was determined primarily by adjusting net loss of $47.7 million for certain non-cash charges for depreciation and amortization of $19.9 million and share-based compensation charges of $14.8 million. Accounts receivable increased by 4% or $7.9 million to $196.4 million at March 31, 2013, from $188.5 million at December 31, 2012. The average number of days of accounts receivable outstanding increased to 54 days for the three months ended March 31, 2013 from 50 days for the three months ended December 31, 2012 primarily due to higher shipments in the third month of the quarter. Inventories decreased to $335.8 million at March 31, 2013 from $348.3 million at March 31, 2012. Inventories consist of raw wafers, purchased foundry wafers, work-in-process and finished units. Our number of days of inventory increased to 154 days for the three months ended March 31, 2013 from 148 days for the three months ended December 31, 2012. Investing Activities Net cash used in investing activities was $25.9 million and $7.4 million for the three months ended March 31, 2013 and March 31, 2012, respectively. For the three months ended March 31, 2013, we paid $4.1 million for acquisitions of fixed assets, compared to $7.4 million in the three months ended March 31, 2012 resulting principally from reduced purchases of testing equipment. During the three months ended March 31, 2013, we paid $25.9 million for acquisitions, net of cash acquired. We anticipate expenditures for capital purchases in 2013 to be relatively consistent with 2012, and to be used principally to maintain existing manufacturing operations and to expand manufacturing capacity for our XSense product. 29 -------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash used in financing activities was $11.6 million and $92.9 million for the three months ended March 31, 2013 and 2012, respectively. The cash used was primarily related to stock repurchases of $15.4 million in the three months ended March 31, 2013, compared to $96.2 million in the three months ended March 31, 2012 and tax payments related to shares withheld for vested restricted stock units of $3.7 million for the three months ended March 31, 2013, compared to $5.4 million for the three months ended March 31, 2012. During the three months ended March 31, 2013, we repurchased 2.4 million shares of our common stock in the open market and subsequently retired those shares under our existing stock repurchase program. As of March 31, 2013, $111.8 million remained available for repurchases under this program. Proceeds from the issuance of common stock related to exercises of stock options and our employee stock purchase plan totaled $6.9 million and $7.7 million for the three months ended March 31, 2013 and 2012, respectively. We believe our existing balances of cash, cash equivalents and short-term investments, together with anticipated cash flow from operations, available equipment lease financing, and other short-term and medium-term bank borrowings that we believe would be available to us, will be sufficient to meet our liquidity and capital requirements over the next twelve months. Since a substantial portion of our operations are conducted through our foreign subsidiaries, our cash flow, ability to service debt, and payments to vendors are partially dependent upon the liquidity and earnings of our subsidiaries as well as the distribution of those earnings, or repayment of loans or other payments of funds by those subsidiaries, to us. Our foreign subsidiaries are separate and distinct legal entities and may be subject to local legal or tax requirements, or other restrictions that may limit their ability to transfer funds to other group entities including the U.S. parent entity, whether by dividends, distributions, loans or other payments. During the next twelve months, we expect our operations to continue to generate positive cash flow. However, a portion of cash balances may be used to make capital expenditures, repurchase common stock, or make acquisitions. During 2013 and in future years, our ability to make necessary capital investments or strategic acquisitions will depend on our ability to continue to generate sufficient cash flow from operations and to obtain adequate financing if necessary. We believe we have sufficient working capital to fund our future operations with $244.8 million in cash, cash equivalents and short-term investments as of March 31, 2013 together with expected future cash flows from operations. Off-Balance Sheet Arrangements (Including Guarantees) See the paragraph under the heading "Guarantees" in Note 7 of Notes to Condensed Consolidated Financial Statements for a discussion of off-balance sheet arrangements. Recent Accounting Pronouncements See Note 1 of Notes to Condensed Consolidated Financial Statements for information regarding recent accounting pronouncements. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our Condensed Consolidated Financial Statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the estimates, assumptions and judgments involved in provisions for revenue, excess and obsolete inventory, sales reserves and allowances, share-based compensation expense, allowances for doubtful accounts receivable, estimates for useful lives associated with long-lived assets, recoverability of goodwill and intangible assets, restructuring charges, liabilities for uncertain tax positions, deferred tax asset valuation allowances and litigation have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting policies. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results, although there can be no assurance that results will not differ in the future. The critical accounting estimates associated with these policies are described in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" of our Annual Report on Form 10-K filed with the SEC on February 26, 2013. 30-------------------------------------------------------------------------------- Table of Contents [ Back To TMCnet.com's Homepage ]