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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 year ended December 31, 2013 found in the Form 10-K. 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. 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. 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, statements regarding the likelihood or timing of the closing of the transaction with O-Film, the effect of cost-saving measures, 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, our plans for quarterly and special dividends and stock repurchases, the levels of customer spending or research and development activities, general economic conditions, and the sufficiency of financial resources to support future operations and capital expenditures. 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. Corporate Information Our principal executive offices are located at 3025 Orchard Parkway, San Jose, California 95134. 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, OptiML, DOC, the DOC logo, FotoNation, the FotoNation logo, FaceTools, FacePower, FotoSavvy, Invensas, the Invensas logo, xFD, BVA and SHELLCASE are trademarks or registered trademarks of the Company or its affiliated companies in the 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," "we," "us" and "our" refer to Tessera Technologies, Inc., which operates its business through its subsidiaries. Unless specified otherwise, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis. Business Overview We generate revenue from licensing to manufacturers and other implementers that use our technology in areas such as mobile computing and communications, memory and data storage, and 3DIC technologies. Our technology is both developed internally and acquired and includes chip-scale packaging solutions, interconnect solutions and product and solutions for 22-------------------------------------------------------------------------------- Table of Contents mobile imaging which include our FaceToolsTM, FacePowerTM, FotoSavvyTM, face beautification, red-eye removal, High Dynamic Range, panorama, and image stabilization intellectual property. In April 2014, the Company and its wholly-owned subsidiary DigitalOptics Corporation (together with its subsidiaries, "DOC") entered into a definitive agreement with Shenzhen O-Film Tech Co., LTD. ("Shenzhen O-Film," together with affiliates, collectively, "O-Film") whereby O-Film has agreed to pay DOC $50.0 million, consisting of a $20.5 million prepaid royalty and support fee for a non-exclusive license to specific FotoNation product features ($3.5 million of which was already paid by O-Film in the second quarter of 2014), $7.5 million for a non-exclusive license for core MEMS auto-focus and other related intellectual property and $22.0 million for certain manufacturing equipment and supplies and certain non-core patents and patent applications (including patents and patent applications for Wafer Level Optics, Micro Optics and camera module technology), in each case, at the closing of the transaction (except for the $3.5 million related to the FotoNation product features which was already paid). O-Film has also agreed to pay DOC a per unit royalty for O-Film's MEMS-based camera models beginning after an initial royalty free period of time. We have met our obligations under the agreement and are seeking to close the transaction. At present, however, timing and consummation of the transaction is uncertain. In March 2014, in connection with entering into a letter of intent with DOC, O-Film paid DOC a $5.0 million deposit, which will be credited toward the $50.0 million purchase price under the definitive agreement. The deposit is non-refundable in the event the transaction does not close, except in certain circumstances. In April 2014, O-Film also paid DOC a non-refundable fee of $2.0 million to retain an option to purchase leasehold improvements related to DOC's manufacturing facility in Taiwan. O-Film has agreed to cover substantially all of DOC's MEMS-related operating costs, including costs of DOC's facility in Arcadia, California, during the period from the date of the definitive agreement through October 2014. In January 2014, we announced the cessation of all mems|cam manufacturing operations. As part of these efforts, we are undertaking a workforce reduction of over 300 employees and are in the process of closing our facilities in Arcadia, California, Rochester, New York and in Taiwan and Japan. As a result of these closures, certain assets were impaired or were written off entirely and restructuring and other charges were taken in 2013. In the first nine months of 2014, we incurred an additional $5.8 million of restructuring and other charges. In this document, the operations and financial results of the mems|cam operations are considered discontinued operations. For more information regarding these actions, see Note 5 - "Discontinued Operations", Note 7 - "Goodwill and Identified Intangible Assets" and Note 14 - "Restructuring, Impairment of Long-Lived Assets and Other Charges" in the Notes to Condensed Consolidated Financial Statements. As a result of these actions, during the first quarter of 2014, we determined that we operate our business in one operating segment, focused on the monetization of intellectual property, both internally developed and acquired, through royalties, licenses and other means. Previously, we operated in two operating segments - Intellectual Property and DigitalOptics. All financial results and discussions below relate to continuing operations unless otherwise specified and conform to our determination that we now operate in a single operating segment. Results of Operations Revenues Our revenues are generated primarily from royalty and license fees. Royalty and license fees are 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 generally 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 licensees; (c) the demand for products incorporating semiconductors that use our licensed technology; (d) the cyclicality of supply and demand for products using our licensed technology; (e) volume incentive pricing terms in licensing agreements that may result in significant variability in quarterly revenue recognition from customers and (f) the impact of economic downturns. From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements, we need to renew or replace these agreements in order to maintain our revenue base. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations. If we are unable to replace the revenue from an expiring license with similar revenue from other customers, our royalty revenue could be adversely impacted as compared to periods prior to such expiration. 23-------------------------------------------------------------------------------- Table of Contents Powertech Technology, Inc. ("PTI"), a customer that accounted for 10% or more of total revenues for the year ended December 31, 2012, ceased making payments in 2012, which caused a substantial adverse impact to our royalty revenue as compared to prior periods. On February 27, 2014, we announced a settlement with PTI related to Tessera, Inc.'s and PTI's pending cases in the U. S. District Court for the Northern District of California. The settlement provides that PTI will pay $196 million to Tessera, Inc. with two required payments to be made in 2014 and quarterly recurring payments beginning in 2015 through the end of 2018. In addition, Tessera, Inc. and PTI have agreed to stay the pending cases. If Tessera, Inc. receives a majority of the total amount owed by PTI under the settlement, and other conditions are met, by March 31, 2015, Tessera, Inc. and PTI will dismiss the pending cases. 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. For example, on May 9, 2014 (as amended on June 23, 2014), the International Court of Arbitration of the International Chamber of Commerce issued an award in favor of Tessera, Inc. in its dispute with Amkor Technology, Inc. ("Amkor"). We believe that the dispute with Amkor and similar future proceedings may result in fluctuations in our revenue and expenses. The following table presents our historical operating results for the periods indicated as a percentage of revenues: Three Months Ended Nine Months Ended September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013 Revenues: Royalty and license fees (1) 100 % 100 % 100 % 100 % Total Revenues 100 100 100 100 Operating expenses: Cost of revenues 1 2 - 2 Research, development and other related costs 11 23 16 22 Selling, general and administrative 16 41 20 53 Litigation expense 6 34 10 39 Restructuring, impairment of long-lived assets and other charges - 3 - 5 Total operating expenses 34 103 46 121 Operating income (loss) from continuing operations 66 (3 ) 54 (21 ) Other income and expense, net 1 1 1 1 Income (loss) from continuing operations before taxes 67 (2 ) 55 (20 ) Provision for (benefit from) income taxes (43 ) 90 (8 ) 23 Income (loss) from continuing operations 110 (92 ) 63 (43 ) Income (loss) from discontinued operations, net of tax 6 (98 ) (2 ) (74 ) Net income (loss) 116 % (190 )% 61 % (117 )% (1) Revenue previously classified as past production payments, defined as royalty payments for the use of our intellectual property and where payments are made as part of a settlement of a patent infringement dispute from previously unlicensed parties, has been reclassified and is included in "Royalty and license fees" Our royalty and license fees were as follows (in thousands, except for percentages): 24-------------------------------------------------------------------------------- Table of Contents Three Months Ended September 30, September 30, Increase/ % 2014 2013 (Decrease) Change Royalty and license fees $ 93,334 $ 37,261 $ 56,073 150 % The $56.1 million or 150% increase in revenues was primarily due to the second payment made by PTI in connection with Tessera, Inc.'s settlement with PTI noted above and the impact of our new license agreement with Micron Technology, Inc.. Nine Months Ended September 30, September 30, Increase/ % 2014 2013 (Decrease) Change Royalty and license fees $ 218,883 $ 112,478 $ 106,405 95 % The $106.4 million or 95% increase in revenues was primarily due to episodic payments in the nine months ended September 30, 2014, including payments made by PTI in connection with Tessera, Inc.'s settlement with PTI noted above and payments related to new license agreements with Micron Technology, Inc. and Samsung Electronics Co., Ltd. Cost of Revenues Cost of revenues consists of direct compensation and depreciation expense. 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. For each associated period, cost of revenues as a percentage of total revenues varies based on the rate of adoption of our technologies and the timing of property and equipment being placed in service. Cost of revenues for the three months ended September 30, 2014 was $0.2 million, as compared to $0.8 million for the three months ended September 30, 2013, a decrease of $0.6 million, or 75%. Cost of revenues for the nine months ended September 30, 2014 was $1.3 million, as compared to $2.6 million for the nine months ended September 30, 2013, a decrease of $1.3 million, or 50%. The decreases were primarily related to a decrease in amortization due to the impairment of intangibles in 2013 (see Note 7 - "Goodwill and Identified Intangibles Assets" in the Notes to Condensed Consolidated Financial Statements). 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, product "tear downs" and reverse engineering, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of chip-scale and multi-chip packaging, circuitry design, 3D architectures, wafer-level packaging technology, advanced substrates, and image enhancement technology. All research, development and other related costs are expensed as incurred. Research, development and other related costs for the three months ended September 30, 2014 were $10.3 million, as compared to $8.4 million for the three months ended September 30, 2013, an increase of $1.9 million, or 23%. The increase was primarily related to an increase in salary and benefit costs partially offset by a decrease in legal expense related to the maintenance of patents. Research, development and other related costs for the nine months ended September 30, 2014 were $29.1 million, as compared to $24.7 million for the nine months ended September 30, 2013, an increase of $4.4 million, or 18%. The increase was primarily related to an increase in salary and benefit costs and outside services, partially offset by a decrease in legal expense related to the maintenance of patents. 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, reverse engineering personnel and services, amortization of intangibles, marketing programs, public relations, promotional materials, travel, trade 25-------------------------------------------------------------------------------- Table of Contents show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, and finance personnel, legal fees and 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. Our selling, general and administrative expenses have declined as we have implemented cost savings strategies. Selling, general and administrative expenses for the three months ended September 30, 2014 were $14.9 million, as compared to $15.3 million for the three months ended September 30, 2013, a decrease of $0.4 million, or 3%. The decrease was primarily attributable to a decrease of $0.6 million in outside services and a decrease of $0.5 million in depreciation due to the impairment of fixed assets during 2013. These savings were offset by an increase of $1.2 million in stock based compensation related to restricted stock granted to certain executives during the quarter. Selling, general and administrative expenses for the nine months ended September 30, 2014 were $45.2 million, as compared to $60.0 million for the nine months ended September 30, 2013, a decrease of $14.8 million, or 25%. The decrease was primarily attributable to a decrease of $5.4 million in salary and benefit costs related to the employee reductions resulting from our restructuring activities over the past several quarters, a decrease of $5.2 million in outside services and a decrease of $1.9 million in depreciation due to the impairment of fixed assets during 2013. Litigation Expense Litigation expense for the three months ended September 30, 2014 was $5.8 million, as compared to $12.7 million for the three months ended September 30, 2013, a decrease of $6.9 million, or 54%. Litigation expense for the nine months ended September 30, 2014 was $23.0 million, as compared to $44.1 million for the nine months ended September 30, 2013, a decrease of $21.1 million, or 48%. These decreases were primarily attributable to the decrease of our docket of legal proceedings, including the recent settlement activities. We expect that litigation expense may continue to be a material portion of our operating expenses in future periods, and may fluctuate significantly between periods, because of our ongoing litigation, as described in Part II, Item 1 - Legal Proceedings, and because of litigation initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights. Upon expiration of the current terms of our customers' licenses, if those licenses are not renewed, litigation may become a necessary element of a campaign to secure payment of reasonable royalties for the use of our patented technology. If we initiate such litigation, our future litigation expenses may increase. Restructuring, Impairment of Long-Lived Assets and Other Charges Restructuring, impairment of long-lived assets and other charges for the three months ended September 30, 2014 was $0.1 million, as compared to $1.0 million for the three months ended September 30, 2013, a decrease of $0.9 million. Restructuring, impairment of long-lived assets and other charges for the nine months ended September 30, 2014 was $1.6 million, as compared to $4.3 million for the nine months ended September 30, 2013, a decrease of $2.7 million. These expenses result from the continued restructuring of our DigitalOptics business. The costs are decreasing as the restructuring activities are nearly completed and we anticipate these activities will be completed within the near future. Stock-based Compensation Expense The following table sets forth our stock-based compensation expense for the three and nine months ended September 30, 2014 and 2013 (in thousands): Three Months Ended, September 30, 2014 September 30, 2013 Cost of revenues $ - $ (101 ) Research, development and other related costs 609 468 Selling, general and administrative 2,784 1,977 Total stock-based compensation expense $ 3,393 $ 2,344 26-------------------------------------------------------------------------------- Table of Contents Nine Months Ended, September 30, 2014 September 30, 2013 Cost of revenues $ 18 $ 26 Research, development and other related costs 2,276 2,543 Selling, general and administrative 7,530 7,446 Total stock-based compensation expense $ 9,824 $ 10,015 Stock-based compensation awards included employee stock options, restricted stock awards and units, and employee stock purchases. For the three months ended September 30, 2014, stock-based compensation expense was $3.4 million, of which $0.8 million related to employee stock options, $2.5 million related to restricted stock awards and units and $0.1 million related to employee stock purchases. For the three months ended September 30, 2013, stock-based compensation expense was $2.3 million, of which $1.4 million related to employee stock options, $0.6 million related to restricted stock awards and units and $0.3 million related to employee stock purchases. The increase in stock based compensation for the three months ended September 30, 2014 resulted from an increase in restricted stock grants given to certain executives. This increase was partially offset by fewer options outstanding due to employee reductions that were part of our restructuring activities that have occurred over the past several quarters. For the nine months ended September 30, 2014, stock-based compensation expense was $9.8 million, of which $2.6 million related to employee stock options, $6.8 million related to restricted stock awards and units and $0.5 million related to employee stock purchases. For the nine months ended September 30, 2013, stock-based compensation expense was $10.0 million, of which $6.4 million related to employee stock options, $2.4 million related to restricted stock awards and $1.2 million related to employee stock purchases. The decrease in stock based compensation for the nine months ended September 30, 2014 resulted from fewer options outstanding due to employee reductions that were part of our restructuring activities that have occurred over the past several quarters. This decrease was partially offset by an increase in restricted stock grants given to certain executives. Other Income and Expense, Net Other income and expense, net for the three months ended September 30, 2014 was $0.3 million, as compared to $0.2 million for the three months ended September 30, 2013. Other income and expense, net for the nine months ended September 30, 2014 was $1.1 million, as compared to $0.9 million for the three months ended September 30, 2013. Provision for (benefit from) Income Taxes The benefit from income taxes for the three months ended September 30, 2014 was $40.4 million and the benefit for income taxes for the nine months ended September 30, 2014 was $18.8 million. The benefit from income taxes for the three and nine months ended September 30, 2014 was primarily due to a benefit from the release of valuation allowance on U.S. federal deferred taxes offset by foreign withholding tax and foreign income taxes. The benefit from release of valuation allowance for the three and nine months ended September 30, 2014 is approximately $61.0 million. The provision for income taxes for the three and nine months ended September 30, 2013 was $33.4 million and $25.6 million, respectively, and was largely due to a projected tax benefit from domestic and certain foreign losses as offset by an increase in valuation allowance on U.S. federal deferred taxes. The Company's provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is based on actual taxes and tax reserves for the quarter. The increase in the benefit for income taxes for the nine months ended September 30, 2014 as compared to the same period in the prior year is largely attributable to the release in valuation allowance on U.S. federal deferred taxes recognized in the current period as opposed to an increase in valuation allowance that was recognized in the same period last year. The Company released substantially all of its valuation allowance against U.S. federal deferred tax assets. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both negative and positive evidence to assess the recoverability of our net deferred tax assets during the third quarter of 2014, we determined that it was more likely than not that we would realize substantially all of our U.S. federal deferred tax assets. Accordingly, we determined that no valuation allowance is required on substantially all of our federal deferred tax assets. We continue to monitor the likelihood that we will be able to recover our deferred tax assets. Adjustments could be required in the future if we conclude that it is more likely than not that deferred tax assets are not recoverable. A provision for a valuation allowance could 27-------------------------------------------------------------------------------- Table of Contents have the effect of increasing the income tax provision in the statement of operations in the period the valuation allowance is provided. Discontinued Operations Income from discontinued operations for the three months ended September 30, 2014 was $6.0 million, as compared to a loss of $36.8 million for the three months ended September 30, 2013. Loss from discontinued operations for the nine months ended September 30, 2014 was $5.3 million, as compared to a loss of $83.5 million for the nine months ended September 30, 2013. The improving financial performance during 2014 results from fewer active businesses included in discontinued operations during the first nine months of 2014 when compared to the first nine months of 2013. In the third quarter of 2013, we sold our Micro-Optics business located in Charlotte, North Carolina, and at the end of the first quarter of 2013, we shut-down our camera module manufacturing facility in Zhuhai, China so both of these operations had significant operations in 2013 but had no impact in 2014. Additionally, the Company received tax benefits in 2014 related to the release of a valuation on tax assets. The Company anticipates that the expenses associated with discontinued operations will reduce significantly over the reminder of the year. For further information about discontinued operations, see Note 5 - "Discontinued Operations" in the Notes to Condensed Consolidated Financial Statements for additional details. Liquidity and Capital Resources As of (in thousands, except for percentages) September 30, 2014 December 31, 2013 Cash and cash equivalents $ 47,338 $ 73,722 Short-term investments 351,370 285,865 Total cash, cash equivalents and short-term investments $ 398,708 $ 359,587 Percentage of total assets 72 % 74 % Nine Months Ended September 30, 2014 September 30, 2013 Net cash from operating activities $ 108,212 $ (62,899 ) Net cash from investing activities $ (65,222 ) $ 40,363 Net cash from financing activities $ (69,374 ) $ (2,990 ) Our primary source of liquidity and capital resources is our investment portfolio. Cash, cash equivalents and investments were $398.7 million at September 30, 2014, an increase of $39.1 million from $359.6 million at December 31, 2013. This increase resulted from $133.4 million in net income which generated $108.2 million in cash from operations and from $23.6 million in proceeds from the exercise of stock options and employee stock purchases. This increase was partially offset by $50.0 million in stock repurchases and $43.0 million in dividends paid during the first nine months of 2014. Cash and cash equivalents were $47.3 million at September 30, 2014, a decrease of $26.4 million from $73.7 million at December 31, 2013. Cash flows provided by operations were $108.2 million for the nine months ended September 30, 2014, primarily due to our net income of $133.4 million being adjusted for non-cash items of depreciation of $1.4 million, amortization of intangible assets of $13.8 million, stock-based compensation expense of $9.8 million and by $4.1 million in changes in operating assets and liabilities. These were partially offset by $53.2 million in reserves released in relation to deferred tax assets. Cash flows used in operations were $62.9 million for the nine months ended September 30, 2013, primarily due to our net loss of $131.4 million being adjusted for non-cash items of depreciation and amortization of $13.1 million, restructuring and impairment of $23.1 million, amortization of intangible assets of $17.2 million, impairment of goodwill of $6.7 million, stock-based compensation expense of $10.0 million and deferred income taxes of $22.9 million, offset by changes in operating assets and liabilities of $15.5 million. Net cash used in investing activities was $65.2 million for the nine months ended September 30, 2014, primarily related to the purchases of available-for-sale securities of $215.6 million and the purchase of $5.6 million in intangible assets, offset by maturities and sales of short-term investments of $149.8 million and $7.5 million in proceeds primarily from the sale of land and a building from our DigitalOptics business which was discontinued in 2013. Net cash provided by investing activities was $40.4 million for the nine months ended September 30, 2013, primarily related to the maturities and sales of short-term 28-------------------------------------------------------------------------------- Table of Contents investments of $228.5 million, offset by purchases of available-for-sale securities of $188.5 million, purchases of intangible assets of $2.4 million, and purchases of property and equipment of $15.8 million. Net cash used in financing activities was $69.4 million for the nine months ended September 30, 2014 due to dividend payments of $43.0 million and stock repurchases of $50.0 million, offset by $23.6 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans. Net cash used in financing activities was $3.0 million for the nine months ended September 30, 2013 due to dividend payments of $32.2 million and stock repurchases of $5.4 million, offset by $36.4 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans. 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 debt securities including corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills, certificates of deposit and money market funds. We invest excess cash predominantly in high-quality investment grade debt securities with less than two years to maturity. 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 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, on a net basis, and the remaining noncredit loss portion in accumulated other comprehensive income. For the nine months ended September 30, 2014 and 2013, no impairment charges with respect to our investments were recorded. In August 2007, the Company's Board authorized a plan to repurchase up to a maximum total of $100.0 million of the Company's outstanding shares of common stock dependent on market conditions, share price and other factors. In November 2013, the Board increased the amount authorized to be used for repurchases to $150.0 million. In October 2014, the Board increased the amount authorized to be used for repurchases to $250.0 million. As of September 30, 2014, we had repurchased a total of approximately 4,435,000 shares of common stock, since inception of the plan, at an average price of $20.11 per share for a total cost of $89.2 million. As of December 31, 2013, we had repurchased a total of approximately 2,145,000 shares of common stock, since inception of the plan, at an average price of $18.32 per share for a total cost of $39.3 million. The shares repurchased are recorded as treasury stock and are accounted for under the cost method. No expiration date has been specified for this plan. As of September 30, 2014, the total amount available for repurchase was $60.8 million and after taking into account the additional $100 million authorized by the Board in October 2014, approximately $160 million as of the date of this filing. We plan to continue to execute authorized repurchases from time to time under the plan. In April 2013, we announced plans for a capital allocation strategy. The strategy maintains the current quarterly dividend of $0.10 per share that we originally instituted in March 2012. We also announced a plan to provide for special dividends once a year equal to 20-30% of "Episodic Gain," which is net gain resulting from "Episodic Revenue". We define Episodic Revenue as revenue other than revenue payable over at least one year pursuant to a contract, and may include revenue such as non-recurring engineering fees, initial license fees, back payments resulting from audits, damages awards from courts or tribunals, and lump sum settlement payments. Another 20-30% of Episodic Gain would be used to provide a "sinking fund" to provide for the growth of the quarterly dividends. We also announced a plan to repurchase outstanding shares of our common stock in an amount equal to 20-30% of Episodic Gain. The Company evaluates the ratio of dividends and common stock repurchases under its capital allocation strategy from time to time, and may adjust such ratio to allocate all or a greater percentage of the total Episodic Gain towards stock repurchases or dividends, taking into account market conditions and other factors. We anticipate that all quarterly and special dividends, as well as stock repurchases, would be paid out of cash, cash equivalents and short-term investments. 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, dividends and stock repurchases and acquisition 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 29-------------------------------------------------------------------------------- Table of Contents Payments Due by Period Less than 1-3 4-5 Total 1 Year Years Years Thereafter (In thousands)Operating lease obligations $ 15,990 $ 3,251 $ 5,552 $ 4,869 $ 2,318 The amounts reflected in the table above for operating lease obligations represent aggregate future minimum lease payments under non-cancelable facility and equipment operating leases, and purchase obligations relating to fixed assets and inventory. 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. As of September 30, 2014, the Company had accrued $1.4M of unrecognized tax benefits in long term income taxes payable related to uncertain tax positions, and accrued approximately $0.5M of interest. 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 As of September 30, 2014, we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K. Critical Accounting Policies and Estimates During the nine months ended September 30, 2014, there were no significant changes in our critical accounting policies. See Note 2 - "Summary of Significant Accounting Policies" of the Notes to the Condensed Consolidated Financial Statements for additional detail. For a discussion of our critical accounting policies and estimates, see Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. Recent Accounting Pronouncements See Note 2 - "Summary of Significant Accounting Policies" of the Notes to the Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption. Item 3. Quantitative and Qualitative Disclosures About Market Risk For a discussion of the Company's market risk, see Item 7A - Quantitative and Qualitative Disclosures About Market Risk in the Form 10-K. |