UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-29939
OMNIVISION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
77-0401990 |
(State or other jurisdiction |
|
(I.R.S. Employer |
of incorporation or organization) |
|
Identification Number) |
4275 Burton Drive, Santa Clara, California 95054
(Address of Principal Executive Offices) (Zip Code)
Registrants telephone number, including area code: (408) 567-3000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
|
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x
At September 1, 2015, 59,585,502 shares of common stock of the registrant were outstanding, exclusive of 20,599,187 shares of treasury stock.
OMNIVISION TECHNOLOGIES, INC.
PART I FINANCIAL INFORMATION
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
|
|
July 31, |
|
April 30, |
| ||
|
|
2015 |
|
2015 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
434,376 |
|
$ |
318,892 |
|
Short-term investments |
|
159,433 |
|
205,271 |
| ||
Accounts receivable, net |
|
147,468 |
|
151,086 |
| ||
Inventories |
|
320,598 |
|
343,966 |
| ||
Prepaid and deferred income taxes |
|
4,171 |
|
7,149 |
| ||
Prepaid expenses and other current assets |
|
20,729 |
|
5,628 |
| ||
Recoverable insurance proceeds |
|
|
|
12,500 |
| ||
Total current assets |
|
1,086,775 |
|
1,044,492 |
| ||
Property, plant and equipment, net |
|
143,735 |
|
145,214 |
| ||
Long-term investments |
|
151,634 |
|
192,021 |
| ||
Goodwill |
|
10,227 |
|
10,227 |
| ||
Intangibles, net |
|
49,127 |
|
52,287 |
| ||
Other long-term assets |
|
28,480 |
|
24,155 |
| ||
Total assets |
|
$ |
1,469,978 |
|
$ |
1,468,396 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
121,486 |
|
$ |
118,796 |
|
Accrued expenses and other current liabilities |
|
32,960 |
|
37,112 |
| ||
Litigation settlement accrual |
|
|
|
12,500 |
| ||
Income taxes payable |
|
888 |
|
3,444 |
| ||
Deferred revenues, less cost of revenues |
|
42,833 |
|
22,621 |
| ||
Current portion of long-term debt |
|
9,545 |
|
7,096 |
| ||
Total current liabilities |
|
207,712 |
|
201,569 |
| ||
Long-term liabilities: |
|
|
|
|
| ||
Long-term income taxes payable |
|
53,451 |
|
55,150 |
| ||
Non-current portion of long-term debt |
|
22,407 |
|
24,999 |
| ||
Other long-term liabilities |
|
18,363 |
|
23,898 |
| ||
Total long-term liabilities |
|
94,221 |
|
104,047 |
| ||
Total liabilities |
|
301,933 |
|
305,616 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (Note 13) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Stockholders equity: |
|
|
|
|
| ||
Common stock, $0.001 par value; 100,000 shares authorized; 80,185 shares issued and 59,586 outstanding at July 31, 2015 and 78,734 shares issued and 58,135 outstanding at April 30, 2015, respectively |
|
80 |
|
79 |
| ||
Additional paid-in capital |
|
719,261 |
|
709,442 |
| ||
Accumulated other comprehensive income |
|
17,272 |
|
40,069 |
| ||
Treasury stock, 20,599 shares at July 31, 2015 and April 30, 2015, respectively |
|
(278,683 |
) |
(278,683 |
) | ||
Retained earnings |
|
710,115 |
|
691,873 |
| ||
Total stockholders equity |
|
1,168,045 |
|
1,162,780 |
| ||
Total liabilities and stockholders equity |
|
$ |
1,469,978 |
|
$ |
1,468,396 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Revenues |
|
$ |
329,891 |
|
$ |
406,536 |
|
Cost of revenues |
|
255,354 |
|
318,116 |
| ||
Gross profit |
|
74,537 |
|
88,420 |
| ||
|
|
|
|
|
| ||
Operating expenses: |
|
|
|
|
| ||
Research, development and related |
|
36,114 |
|
34,732 |
| ||
Selling, general and administrative |
|
21,147 |
|
19,210 |
| ||
Amortization of acquired patent portfolio |
|
2,321 |
|
2,321 |
| ||
Total operating expenses |
|
59,582 |
|
56,263 |
| ||
|
|
|
|
|
| ||
Income from operations |
|
14,955 |
|
32,157 |
| ||
Equity in earnings of investee |
|
373 |
|
935 |
| ||
Interest expense, net |
|
(233 |
) |
(455 |
) | ||
Other income, net |
|
1,109 |
|
1,045 |
| ||
Income before income taxes |
|
16,204 |
|
33,682 |
| ||
|
|
|
|
|
| ||
Benefit from income taxes |
|
(2,038 |
) |
(11,645 |
) | ||
Net income |
|
$ |
18,242 |
|
$ |
45,327 |
|
|
|
|
|
|
| ||
Net income per share: |
|
|
|
|
| ||
Basic |
|
$ |
0.31 |
|
$ |
0.80 |
|
Diluted |
|
$ |
0.31 |
|
$ |
0.78 |
|
|
|
|
|
|
| ||
Shares used in computing net income per share: |
|
|
|
|
| ||
Basic |
|
58,584 |
|
56,583 |
| ||
Diluted |
|
59,739 |
|
58,158 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Net income |
|
$ |
18,242 |
|
$ |
45,327 |
|
|
|
|
|
|
| ||
Other comprehensive income (loss), net of tax: |
|
|
|
|
| ||
Translation gains (losses) |
|
98 |
|
(26 |
) | ||
Unrealized losses on available-for-sale securities |
|
(22,895 |
) |
(18 |
) | ||
Reclassification adjustment for gains on available-for-sale securities included in net income, net of tax |
|
|
|
(1 |
) | ||
Unrealized losses on available-for-sale securities |
|
(22,895 |
) |
(19 |
) | ||
|
|
|
|
|
| ||
Other comprehensive loss |
|
(22,797 |
) |
(45 |
) | ||
|
|
|
|
|
| ||
Comprehensive income (loss) |
|
$ |
(4,555 |
) |
$ |
45,282 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
18,242 |
|
$ |
45,327 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
8,364 |
|
8,886 |
| ||
Change in fair value of interest rate swap |
|
(256 |
) |
(306 |
) | ||
Stock-based compensation |
|
9,872 |
|
8,449 |
| ||
Tax effect from stock-based compensation |
|
761 |
|
938 |
| ||
(Gain) loss on equity investments, net |
|
615 |
|
(4,356 |
) | ||
Write-down of inventories |
|
8,754 |
|
10,166 |
| ||
Excess tax benefit from stock-based compensation |
|
(761 |
) |
(938 |
) | ||
Gain on disposal of property, plant and equipment |
|
(4 |
) |
(6 |
) | ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Accounts receivable, net |
|
3,618 |
|
(4,291 |
) | ||
Inventories |
|
15,105 |
|
(24,014 |
) | ||
Prepaid and deferred income taxes |
|
514 |
|
2,829 |
| ||
Prepaid expenses and other assets |
|
11,210 |
|
387 |
| ||
Accounts payable |
|
1,398 |
|
42,142 |
| ||
Accrued expenses and other liabilities |
|
(21,006 |
) |
(4,501 |
) | ||
Income taxes payable |
|
(4,255 |
) |
(16,060 |
) | ||
Deferred revenues, less cost of revenues |
|
20,064 |
|
6,810 |
| ||
Net cash provided by operating activities |
|
72,235 |
|
71,462 |
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchases of short-term investments |
|
(43,306 |
) |
(116,352 |
) | ||
Proceeds from sales or maturities of short-term investments |
|
88,745 |
|
71,188 |
| ||
Purchases of property, plant and equipment, net of sales |
|
(2,540 |
) |
(5,171 |
) | ||
Purchase and deposits for intangible and other assets |
|
(4,830 |
) |
|
| ||
Net cash provided by (used in) investing activities |
|
38,069 |
|
(50,335 |
) | ||
Cash flows from financing activities: |
|
|
|
|
| ||
Repayment of long-term borrowings |
|
(138 |
) |
(139 |
) | ||
Excess tax benefits from stock-based compensation |
|
761 |
|
938 |
| ||
Proceeds from exercise of stock options and employee stock purchase plan |
|
4,592 |
|
6,815 |
| ||
Net cash provided by financing activities |
|
5,215 |
|
7,614 |
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
(35 |
) |
2 |
| ||
Net increase in cash and cash equivalents |
|
115,484 |
|
28,743 |
| ||
Cash and cash equivalents at beginning of period |
|
318,892 |
|
297,952 |
| ||
Cash and cash equivalents at end of period |
|
$ |
434,376 |
|
$ |
326,695 |
|
Supplemental cash flow information: |
|
|
|
|
| ||
Taxes paid |
|
$ |
1,133 |
|
$ |
636 |
|
Interest paid |
|
$ |
489 |
|
$ |
551 |
|
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
| ||
Additions to property, plant and equipment included in accounts payable and accrued expenses and other current liabilities |
|
$ |
1,936 |
|
$ |
1,183 |
|
Write-off of employee stock-based compensation-related deferred tax assets |
|
$ |
|
|
$ |
842 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
Note 1 Basis of Presentation
Overview
The accompanying interim unaudited condensed consolidated financial statements as of July 31, 2015 and April 30, 2015 and for the three months ended July 31, 2015 and 2014 have been prepared by OmniVision Technologies, Inc., and its subsidiaries (OmniVision or the Company) in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The amounts as of April 30, 2015 are derived from the Companys audited annual financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with SEC rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the audited annual financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended April 30, 2015 (the Form 10-K).
Proposed Acquisition by Hua Capital Management, CITIC Capital and GoldStone Investment
On April 30, 2015, the Company entered into a definitive agreement (Merger Agreement) to be acquired by a consortium composed of Hua Capital Management Co., Ltd. (Hua Capital Management), CITIC Capital Holdings Limited (CITIC Capital), and GoldStone Investment Co., Ltd. (GoldStone Investment) (collectively, the Consortium). Under the terms of the Merger Agreement, OmniVision stockholders will receive $29.75 per share in cash, or a total of approximately $1.9 billion. The agreement was unanimously approved by the Companys Board of Directors in April 2015. OmniVisions stockholders also approved the transaction at a special meeting in July 2015. The transaction, which is expected to close in the third or fourth quarter of fiscal 2016, is subject to regulatory approvals, including antitrust review in the U.S. and the Peoples Republic of China, review and clearance by the Committee on Foreign Investment in the U.S., clearance or approval under applicable Taiwan law, and other customary closing conditions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and beliefs of what could occur in the future considering available information. Actual results could differ from these estimates.
Note 2 Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued new authoritative guidance for revenue recognition. The new revenue recognition guidance provides a comprehensive framework to address revenue recognition issues for all contracts with customers, and supersedes most previously-issued industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle and apply the new guidance, entities will follow a five-step approach: Step 1) identify the contracts with the customer; Step 2) identify the separate performance obligations in the contract; Step 3) determine the transaction price; Step 4) allocate the transaction price to separate performance obligations; and Step 5) recognize revenue when, or as, each performance obligation is satisfied. The new guidance is required to be applied retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The guidance is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted for the Company beginning in the first quarter of fiscal 2018. The Company has not yet selected the transition method, and is currently evaluating the impact this guidance may have on its financial position, results of operations and cash flows.
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
In August 2014, the FASB issued new authoritative guidance related to the disclosures around going concern. The new guidance specifies managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures, if applicable. The new guidance is effective for the Company beginning in the first quarter of fiscal 2018. Early adoption is permitted. The Company does not expect the adoption of this guidance to have any material effect on its financial position, results of operations and cash flows.
In January 2015, the FASB revised the authoritative guidance on reporting extraordinary items by eliminating such concept from GAAP. Previously, if an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax. The guidance is effective for the Company beginning in the first quarter of fiscal 2017. The Company does not expect the adoption of this guidance to have any material effect on its financial position, results of operations and cash flows.
In February 2015, the FASB revised the authoritative guidance for consolidation. The revised guidance affects reporting entities that are required to evaluate whether they should consolidate certain legal entities, and all legal entities are subject to reevaluation under the revised consolidation model. Other than modifying the evaluation guidance for limited partnerships and similar legal entities, the revised guidance also affects the consolidation analysis of reporting entities that are involved with variable-interest-entities. The guidance is effective for the Company beginning in the first quarter of fiscal 2017. The Company is currently evaluating the impact this guidance may have on its financial position, results of operations and cash flows.
In July 2015, the FASB revised the authoritative guidance for subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for the Company beginning in the first quarter of fiscal 2018. The Company is currently evaluating the impact this guidance may have on its financial position, results of operations and cash flows.
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
Note 3 Short-Term Investments
Available-for-sale securities as of the dates presented were as follows (in thousands):
|
|
As of July 31, 2015 |
| ||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
| ||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Municipal bonds |
|
$ |
18,287 |
|
$ |
3 |
|
$ |
(3 |
) |
$ |
18,287 |
|
U.S. government debt securities |
|
4,998 |
|
1 |
|
|
|
4,999 |
| ||||
Corporate debt securities/commercial paper |
|
136,202 |
|
8 |
|
(63 |
) |
136,147 |
| ||||
|
|
$ |
159,487 |
|
$ |
12 |
|
$ |
(66 |
) |
$ |
159,433 |
|
|
|
|
|
|
|
|
|
|
| ||||
Contractual maturity dates, less than one year |
|
|
|
|
|
|
|
$ |
159,433 |
| |||
Contractual maturity dates, one to two years |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
$ |
159,433 |
|
|
|
As of April 30, 2015 |
| ||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
| ||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Municipal bonds |
|
$ |
20,584 |
|
$ |
2 |
|
$ |
(6 |
) |
$ |
20,580 |
|
U.S. government debt securities |
|
25,041 |
|
2 |
|
(1 |
) |
25,042 |
| ||||
Corporate debt securities/commercial paper |
|
159,713 |
|
13 |
|
(77 |
) |
159,649 |
| ||||
|
|
$ |
205,338 |
|
$ |
17 |
|
$ |
(84 |
) |
$ |
205,271 |
|
|
|
|
|
|
|
|
|
|
| ||||
Contractual maturity dates, less than one year |
|
|
|
|
|
|
|
$ |
204,770 |
| |||
Contractual maturity dates, one to two years |
|
|
|
|
|
|
|
501 |
| ||||
|
|
|
|
|
|
|
|
$ |
205,271 |
|
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
Note 4 Supplemental Balance Sheet Account Information (in thousands)
|
|
July 31, |
|
April 30, |
| ||
|
|
2015 |
|
2015 |
| ||
Cash and cash equivalents: |
|
|
|
|
| ||
Cash |
|
$ |
311,949 |
|
$ |
242,884 |
|
Money market funds, commercial paper and U.S. government bonds |
|
122,427 |
|
76,008 |
| ||
|
|
$ |
434,376 |
|
$ |
318,892 |
|
Accounts receivable, net: |
|
|
|
|
| ||
Accounts receivable |
|
$ |
150,536 |
|
$ |
153,965 |
|
Less: Allowance for doubtful accounts |
|
(645 |
) |
(924 |
) | ||
Allowance for sales returns |
|
(2,423 |
) |
(1,955 |
) | ||
|
|
$ |
147,468 |
|
$ |
151,086 |
|
Inventories: |
|
|
|
|
| ||
Work in progress |
|
$ |
150,293 |
|
$ |
147,586 |
|
Finished goods |
|
170,305 |
|
196,380 |
| ||
|
|
$ |
320,598 |
|
$ |
343,966 |
|
Prepaid expenses and other current assets: |
|
|
|
|
| ||
Prepaid expenses |
|
$ |
6,749 |
|
$ |
4,250 |
|
Deposits and other |
|
13,387 |
|
377 |
| ||
Interest receivable |
|
593 |
|
1,001 |
| ||
|
|
$ |
20,729 |
|
$ |
5,628 |
|
Property, plant and equipment, net: |
|
|
|
|
| ||
Land |
|
$ |
13,000 |
|
$ |
13,000 |
|
Buildings |
|
82,611 |
|
82,624 |
| ||
Buildings/leasehold improvements |
|
29,453 |
|
29,452 |
| ||
Machinery and equipment |
|
124,053 |
|
121,270 |
| ||
Furniture and fixtures |
|
5,038 |
|
5,034 |
| ||
Software |
|
8,966 |
|
8,918 |
| ||
Construction in progress |
|
1,811 |
|
1,636 |
| ||
|
|
264,932 |
|
261,934 |
| ||
Less: Accumulated depreciation and amortization |
|
(121,197 |
) |
(116,720 |
) | ||
|
|
$ |
143,735 |
|
$ |
145,214 |
|
Other long-term assets: |
|
|
|
|
| ||
Deferred tax assets non-current |
|
$ |
604 |
|
$ |
604 |
|
Land-use rights |
|
2,110 |
|
2,124 |
| ||
Other long-term assets |
|
25,766 |
|
21,427 |
| ||
|
|
$ |
28,480 |
|
$ |
24,155 |
|
Accrued expenses and other current liabilities: |
|
|
|
|
| ||
Deferred tax liabilities current |
|
$ |
86 |
|
86 |
| |
Employee compensation |
|
15,400 |
|
15,268 |
| ||
Third party commissions |
|
333 |
|
389 |
| ||
Professional services |
|
2,452 |
|
2,961 |
| ||
Noncancelable purchase commitments |
|
1,963 |
|
1,788 |
| ||
Rebates |
|
3,888 |
|
2,802 |
| ||
Other |
|
8,838 |
|
13,818 |
| ||
|
|
$ |
32,960 |
|
$ |
37,112 |
|
Other long-term liabilities: |
|
|
|
|
| ||
Interest rate swap |
|
$ |
1,817 |
|
$ |
2,073 |
|
Deferred tax liabilities non-current |
|
14,639 |
|
20,232 |
| ||
Other |
|
1,907 |
|
1,593 |
| ||
|
|
$ |
18,363 |
|
$ |
23,898 |
|
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
Note 5 Long-term Investments
Long-term investments as of the dates indicated consisted of the following (in thousands):
|
|
July 31, |
|
April 30, |
| ||
|
|
2015 |
|
2015 |
| ||
VisEra |
|
$ |
103,451 |
|
$ |
134,392 |
|
WLCSP |
|
37,788 |
|
38,127 |
| ||
XinTec |
|
10,395 |
|
19,502 |
| ||
Total |
|
$ |
151,634 |
|
$ |
192,021 |
|
VisEra Technologies Company, Ltd.
In October 2003, the Company and Taiwan Semiconductor Manufacturing Company Limited (TSMC) entered into an agreement to form VisEra Technologies Company, Ltd. (VisEra), a joint venture in Taiwan, for the purposes of providing certain manufacturing and automated final testing services related to complementary metal oxide semiconductor (CMOS) image sensors. In August 2005, under an amendment to the original 2003 joint-venture agreement, the Company and TSMC formed VisEra Holding Company (VisEra Cayman), a company incorporated in the Cayman Islands, and VisEra became a subsidiary of VisEra Cayman. The Company and TSMC have equal interests in VisEra Cayman. As of July 31, 2015, the Company owned 49.1% of VisEra Cayman.
In June 2011, the Company entered into an agreement with VisEra to acquire from VisEra its CameraCubeChip production operations. The acquisition of the production operations was completed in October 2011, and the Company accounted for the transaction as a business combination. Under the terms of the agreement, the closing consideration was $42.9 million in cash. In April 2014, due to the lack of commercial viability for certain milestone deliverables, the Company agreed with VisEra to reduce the final installment of cash consideration from $9.0 million to $4.5 million. The Company paid the final $4.5 million to VisEra in April 2014.
The Company received the following dividend payments from VisEra during the periods presented (in thousands):
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Dividend payments received from VisEra |
|
$ |
|
|
$ |
|
|
In June 2015, VisEra Cayman declared a cash dividend. Consequently, as of July 31, 2015, the Company recorded a dividend receivable from VisEra Cayman of approximately $12.9 million in Prepaid expenses and other current assets. The cash dividend was subsequently received in August 2015.
The Company accounts for its investment in VisEra under the equity method. The following table presents equity income before elimination of unrealized intercompany profits and the equity income recorded by the Company for the periods indicated in Cost of revenues, consisting of its portion of the net income recorded by VisEra during the periods presented after the elimination of unrealized intercompany profits (in thousands).
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Equity income (loss) |
|
$ |
(1,054 |
) |
$ |
3,019 |
|
Net effect on Cost of revenues, after the elimination of unrealized intercompany profits |
|
$ |
(988 |
) |
$ |
3,422 |
|
China WLCSP Limited
China WLCSP Limited (WLCSP) is in the business of designing, manufacturing, packaging and selling certain wafer level chip scale packaging related services. In May 2007, the Company acquired 4,500,000 units of WLCSPs equity interests, or 20.0% of WLCSPs registered capital on a fully-diluted basis, for an aggregate purchase amount of $9.0 million.
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
In April 2010, WLCSP raised additional capital and reduced the Companys ownership percentage to 19.7%. In May 2010, WLCSP converted all of its owners equity into share capital. The pro rata interests of all shareholders remained the same after the conversion and no income was distributed. After the conversion, WLCSP had 180.0 million shares outstanding, and the Company owned 35.4 million shares. In September 2010, WLCSP issued an additional 9.5 million shares to other parties and reduced the Companys ownership percentage to 18.7%.
The Company has a seat on the WLCSP Board of Directors. With the determination that the Company has maintained significant influence over the operations of WLCSP, the Company accounts for its investment in WLCSP under the equity method.
In December 2013, WLCSP filed with the China Securities Regulatory Commission (CSRC) a registration statement for an initial public offering (IPO). The registration statement was approved by the CSRC in January 2014, and the IPO price was approximately $3.14 per share. As part of the IPO, WLCSP issued 37.2 million new shares and increased the total shares outstanding to 226.7 million shares. The Company also participated in the IPO as selling shareholder and sold 5.1 million shares, reducing the total number of shares owned by the Company to 30.3 million shares.
The issuance price of $3.14 for the 37.2 million new shares was higher than the Companys average per share carrying value for WLCSP. Consequently, the Company recognized a non-cash change-in-interest gain of approximately $14.1 million. In addition, with the sale of 5.1 million shares during the IPO, the Company received net cash proceeds of approximately $15.1 million, and recognized approximately $9.7 million as gain on the sale. The change-in-interest gain and the realized gain from the share sale, totaling approximately $23.8 million, were recorded in Other income, net for the three months ended January 31, 2014.
The foreign exchange effects on WLCSPs net assets are recorded as part of the Companys cumulative translation adjustment in Accumulated other comprehensive income. The total gain of $23.8 million from WLCSPs IPO included a pro rata release of approximately $1.0 million of the cumulative translation adjustment from Accumulated other comprehensive income.
As of July 31, 2015, the 30.3 million WLCSP shares owned by the Company represented an ownership percentage of 13.3%. The Company received the following dividend payments from WLCSP during the periods presented (in thousands):
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Dividend payments received from WLCSP |
|
$ |
876 |
|
$ |
726 |
|
The Company accounts for its investment in WLCSP under the equity method. The following table presents equity income recorded by the Company for the periods indicated in Equity in earnings of investee, consisting of its portion of the net income recorded by WLCSP from April 1, 2015 to June 30, 2015, and from April 1, 2014 to June 30, 2014, respectively (in thousands):
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Equity income |
|
$ |
373 |
|
$ |
935 |
|
XinTec, Inc.
XinTec, Inc. (XinTec) is a Taiwan-based supplier of chip scale packaging services. The Company first made investments in XinTec in April 2003, for $2.8 million. Through January 31, 2015, the Company directly owned 9.8 million shares in XinTec, representing an ownership percentage of 4.1%. Separately, VisEra Cayman owned 37.2 million shares in XinTec, representing an ownership percentage of 15.6%. Consequently, the Companys beneficial ownership percentage in XinTec was approximately 11.8%. The Company accounted for XinTec as a cost method investment through January 31, 2015.
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
In March 2015, XinTec successfully completed its IPO and became a listed company on the Taiwan Stock Exchange. As part of the IPO, XinTec issued 30.0 million new shares and increased the total shares outstanding to 268.2 million shares. The Company also participated in the IPO as selling shareholder and sold 224,357 shares at approximately $1.35 per share, realizing a gain of approximately $195,000. As of July 31, 2015, the remaining 9.6 million XinTec shares owned by the Company represented an ownership percentage of 3.6%. The lock-up period for 4.8 million of the XinTec shares owned by the Company will expire in September 2015, and the lock-up period for the remaining 4.8 million XinTec shares will expire in March 2016. VisEra Cayman also participated in the IPO as selling shareholder and sold 0.9 million shares. VisEra Caymans remaining 36.4 million shares in XinTec represented a 13.5% ownership. Consequently, as of July 31, 2015, the Companys beneficial ownership percentage in XinTec totaled approximately 10.2%.
As XinTecs share price became readily determinable upon its IPO in March 2015, the Company started to record its investment in XinTec as an available-for-sale security carried at fair value, with changes in fair value, net of deferred taxes, recorded in Accumulated other comprehensive income. Concurrently, VisEra Cayman also started to report its ownership in XinTec as an available-for-sale security carried at fair value, with changes in fair value recorded in Accumulated other comprehensive income. From April 30, 2015 to July 31, 2015, XinTecs share price decreased by approximately 45.0%. Consequently, for the three months ended July 31, 2015, the Company recorded an unrealized holding loss, net of tax, of approximately $5.9 million in Accumulated other comprehensive income. The Company also recorded an additional unrealized holding loss of approximately $17.0 million in Accumulated other comprehensive income, representing its share of VisEra Caymans unrealized holding loss on XinTec.
The following table presents the summary financial information of VisEra and WLCSP, as derived from their financial statements for the periods indicated. The summary financial information of WLCSP reflects the information as used by the Company for its equity method of accounting for WLCSP for the three months ended July 31, 2015 and 2014. Each of the investees financial information below was prepared under US GAAP (in thousands):
VisEra Holding Company
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Operating data: |
|
|
|
|
| ||
Revenues |
|
$ |
24,381 |
|
$ |
28,290 |
|
Gross profit |
|
3,311 |
|
7,993 |
| ||
Income from operations |
|
1,334 |
|
5,734 |
| ||
Net income (loss) |
|
$ |
(2,010 |
) |
$ |
6,963 |
|
China WLCSP Limited
|
|
Three Months Ended |
| ||||
|
|
June 30, |
| ||||
|
|
2015 |
|
2014 |
| ||
Operating data: |
|
|
|
|
| ||
Revenues |
|
$ |
21,838 |
|
$ |
22,125 |
|
Gross profit |
|
7,226 |
|
12,394 |
| ||
Income from operations |
|
711 |
|
7,234 |
| ||
Net income |
|
$ |
2,792 |
|
$ |
7,001 |
|
The Companys share of undistributed earnings of investees accounted for by the equity method as of the dates indicated were as follows (in thousands):
|
|
July 31, |
|
April 30, |
| ||
|
|
2015 |
|
2015 |
| ||
Undistributed earnings of investees |
|
$ |
47,030 |
|
$ |
61,408 |
|
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
Note 6 Goodwill and Intangible Assets
Goodwill
The following table summarizes the change to the carrying value of the Companys goodwill during the periods presented (in thousands):
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Beginning balance |
|
$ |
10,227 |
|
$ |
10,227 |
|
Changes to carrying value |
|
|
|
|
| ||
Ending balance |
|
$ |
10,227 |
|
$ |
10,227 |
|
Intangible Assets
Intangible assets as of the dates indicated consisted of the following (in thousands):
|
|
July 31, 2015 |
| |||||||
|
|
Cost |
|
Accumulated |
|
Net Book |
| |||
Acquired patent portfolio |
|
$ |
65,000 |
|
$ |
40,238 |
|
$ |
24,762 |
|
Core technology |
|
36,100 |
|
30,398 |
|
5,702 |
| |||
Patents and licenses |
|
36,396 |
|
17,790 |
|
18,606 |
| |||
Trademarks and tradenames |
|
1,400 |
|
1,400 |
|
|
| |||
Customer relationships |
|
340 |
|
283 |
|
57 |
| |||
Intangible assets, net |
|
$ |
139,236 |
|
$ |
90,109 |
|
$ |
49,127 |
|
|
|
April 30, 2015 |
| |||||||
|
|
Cost |
|
Accumulated |
|
Net Book |
| |||
Acquired patent portfolio |
|
$ |
65,000 |
|
$ |
37,917 |
|
$ |
27,083 |
|
Core technology |
|
36,100 |
|
29,923 |
|
6,177 |
| |||
Patents and licenses |
|
36,066 |
|
17,105 |
|
18,961 |
| |||
Trademarks and tradenames |
|
1,400 |
|
1,400 |
|
|
| |||
Customer relationships |
|
340 |
|
274 |
|
66 |
| |||
Intangible assets, net |
|
$ |
138,906 |
|
$ |
86,619 |
|
$ |
52,287 |
|
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
The following table presents the amortization of intangible assets recorded by the Company for the periods indicated (in thousands):
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Amortization of intangible assets |
|
$ |
1,169 |
|
$ |
1,192 |
|
Amortization of acquired patent portfolio |
|
$ |
2,321 |
|
$ |
2,321 |
|
The total expected future annual amortization of these intangible assets is as follows (in thousands):
Years Ending April 30, |
|
|
| |
2016 |
|
$ |
10,363 |
|
2017 |
|
13,737 |
| |
2018 |
|
12,656 |
| |
2019 |
|
3,243 |
| |
2020 |
|
2,434 |
| |
Thereafter |
|
6,694 |
| |
Total |
|
$ |
49,127 |
|
Note 7 Borrowing Arrangements and Related Derivative Instruments
The following table sets forth the Companys debt as of the dates indicated (in thousands):
|
|
July 31, |
|
April 30, |
| ||
|
|
2015 |
|
2015 |
| ||
Mortgage loan |
|
$ |
22,961 |
|
$ |
23,099 |
|
Construction loan |
|
8,991 |
|
8,996 |
| ||
|
|
31,952 |
|
32,095 |
| ||
Less: amount due within one year |
|
(9,545 |
) |
(7,096 |
) | ||
Non-current portion of long-term debt |
|
$ |
22,407 |
|
$ |
24,999 |
|
As of July 31, 2015, aggregate debt maturities were as follows (in thousands):
Years Ending April 30, |
|
Mortgage |
|
Construction |
|
Total |
| |||
2016 |
|
$ |
554 |
|
$ |
6,539 |
|
$ |
7,093 |
|
2017 |
|
22,407 |
|
2,452 |
|
24,859 |
| |||
Total |
|
$ |
22,961 |
|
$ |
8,991 |
|
$ |
31,952 |
|
Mortgage Loan
On March 16, 2007, the Company entered into a Loan and Security Agreement with a domestic bank for the purchase of a complex of four buildings located in Santa Clara, California (the Santa Clara Property). The Loan and Security Agreement provides for a mortgage loan in the principal amount of $27.9 million (the Mortgage Loan). The Mortgage Loan matures on March 31, 2017, and borrowings under the Mortgage Loan accrue interest at the London Interbank Borrowing Rate (LIBOR) plus 90 basis points. The Company was in compliance with the financial covenants of the Loan and Security Agreement as of July 31, 2015.
Interest rates under the Mortgage Loan for the dates indicated are set forth below:
|
|
July 31, |
|
April 30, |
|
|
|
2015 |
|
2015 |
|
Mortgage Loan |
|
1.1 |
% |
1.1 |
% |
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
In conjunction with the Mortgage Loan, the Company entered into an interest rate swap with the same bank to effectively convert the variable interest rate described above to a fixed rate. The swap is for a period of ten years, and the notional amount of the swap approximates the principal outstanding under the Mortgage Loan. The Company is the fixed rate payer under the swap and the rate is fixed at 5.3% per annum and the effective rate on the Mortgage Loan is fixed at approximately 6.2%.
Construction Loan
On August 3, 2009, OmniVision Technologies (Shanghai) Co. Ltd., a wholly-owned subsidiary of the Company, entered into a Fixed Assets Loan Agreement with a bank in China (the Construction Loan). The purpose of the Construction Loan was to construct a research center for the Company in Pudong Development Zone, the Zhang Jiang Science Park in Shanghai, China. During the second quarter of fiscal 2011, the Company completed the construction of the research center. As of July 31, 2015, the total amount outstanding under the Construction Loan was Chinese Yuan 55.0 million, or approximately $9.0 million. The Construction Loan matures on June 30, 2016.
The interest rate under the Construction Loan is based on an indicative rate as published by the Chinese government, and will be adjusted only at the anniversary of each drawdown. The interest rate under the Construction Loan was 5.6% at July 31, 2015 and April 30, 2015, respectively. The Company was in compliance with the financial covenants of the Fixed Assets Loan Agreement as of July 31, 2015.
Derivative Instruments and Hedging Activities
As indicated above, the Company entered into an interest rate swap in connection with the Mortgage Loan. The swap was set up to reduce the effect of interest rate variability on the Mortgage Loans interest payments, and is scheduled to expire in March 2017. The Company has not designated the interest rate swap as a hedging instrument. Consequently, the Company is remeasuring the interest rate swap at fair value at each subsequent balance sheet date, and immediately recognizing any changes to the fair value in earnings. On the Condensed Consolidated Balance Sheet, the Company records the swap as either an asset or a liability, depending on whether the fair value represents a gain or loss. (See Note 9.)
The table below presents the location of the swap on the Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets, and the related effect on the Companys results of operations and financial positions for the periods indicated (in thousands):
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Location of amounts recognized in Condensed Consolidated Statements of Income and amount of gains: |
|
|
|
|
| ||
Other income, net |
|
$ |
256 |
|
$ |
306 |
|
|
|
July 31, |
|
April 30, |
| ||
|
|
2015 |
|
2015 |
| ||
Location of amounts on Condensed Consolidated Balance Sheets and fair values: |
|
|
|
|
| ||
Other long-term liabilities |
|
$ |
1,817 |
|
$ |
2,073 |
|
Note 8 Net Income Per Share
Basic net income per share is computed by dividing net income attributable to OmniVision by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed according to the treasury stock method using the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares represent the effect of stock options, purchases via employee stock purchase plans and restricted stock units. The calculation of diluted net income per share excludes potential common stock if the effect of such stock is antidilutive.
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Basic: |
|
|
|
|
| ||
Numerator: |
|
|
|
|
| ||
Net income |
|
$ |
18,242 |
|
$ |
45,327 |
|
|
|
|
|
|
| ||
Denominator: |
|
|
|
|
| ||
Weighted average common shares for net income per share |
|
58,584 |
|
56,583 |
| ||
|
|
|
|
|
| ||
Basic net income per share |
|
$ |
0.31 |
|
$ |
0.80 |
|
|
|
|
|
|
| ||
Diluted: |
|
|
|
|
| ||
Numerator: |
|
|
|
|
| ||
Net income |
|
$ |
18,242 |
|
$ |
45,327 |
|
|
|
|
|
|
| ||
Denominator: |
|
|
|
|
| ||
Denominator for basic net income per share |
|
58,584 |
|
56,583 |
| ||
Weighted average effect of dilutive securities: |
|
|
|
|
| ||
Stock options, restricted stock units and employee stock purchase plan shares |
|
1,155 |
|
1,575 |
| ||
Weighted average common shares for diluted net income per share |
|
59,739 |
|
58,158 |
| ||
|
|
|
|
|
| ||
Diluted net income per share |
|
$ |
0.31 |
|
$ |
0.78 |
|
|
|
|
|
|
| ||
Antidilutive common stock subject to outstanding options (excluded from the calculation of diluted net income per share) |
|
508 |
|
1,683 |
|
Note 9 Fair Value Measurements
The authoritative guidance for fair value measurements specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Companys own assumption of market participant valuation (unobservable inputs). The fair value hierarchy consists of the following three levels:
· Level 1 Inputs are quoted prices in active markets for identical assets or liabilities.
· Level 2 Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
· Level 3 Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
The following table presents the Companys financial assets and liabilities that are measured at fair value on a recurring basis which were comprised of the following types of instruments as of the date indicated (in thousands):
|
|
July 31, 2015 |
| ||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Money market funds |
|
$ |
38,172 |
|
$ |
38,172 |
|
$ |
|
|
$ |
|
|
U.S. government debt securities and municipal bonds |
|
27,726 |
|
|
|
27,726 |
|
|
| ||||
Corporate debt securities/commercial paper |
|
215,962 |
|
|
|
215,962 |
|
|
| ||||
Equity investment in XinTec |
|
10,395 |
|
10,395 |
|
|
|
|
| ||||
Total assets |
|
$ |
292,255 |
|
$ |
48,567 |
|
$ |
243,688 |
|
$ |
|
|
Interest rate swap |
|
(1,817 |
) |
|
|
(1,817 |
) |
|
| ||||
Total liabilities |
|
$ |
(1,817 |
) |
$ |
|
|
$ |
(1,817 |
) |
$ |
|
|
The following table presents the Companys financial assets and liabilities that are measured at fair value on a recurring basis which were presented on the Companys Condensed Consolidated Balance Sheets as of the date indicated (in thousands):
|
|
July 31, 2015 |
| ||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Cash equivalents |
|
$ |
122,427 |
|
$ |
38,172 |
|
$ |
84,255 |
|
$ |
|
|
Short-term investments |
|
159,433 |
|
|
|
159,433 |
|
|
| ||||
Long-term investments |
|
10,395 |
|
10,395 |
|
|
|
|
| ||||
Total assets |
|
$ |
292,255 |
|
$ |
48,567 |
|
$ |
243,688 |
|
$ |
|
|
Interest rate swap |
|
(1,817 |
) |
|
|
(1,817 |
) |
$ |
|
| |||
Total liabilities |
|
$ |
(1,817 |
) |
$ |
|
|
$ |
(1,817 |
) |
$ |
|
|
The following table presents the Companys financial assets and liabilities that are measured at fair value on a recurring basis which were comprised of the following types of instruments as of the date indicated (in thousands):
|
|
April 30, 2015 |
| ||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Money market funds |
|
$ |
15,338 |
|
$ |
15,338 |
|
$ |
|
|
$ |
|
|
U.S. government debt securities and municipal bonds |
|
65,783 |
|
|
|
65,783 |
|
|
| ||||
Corporate debt securities/commercial paper |
|
200,158 |
|
|
|
200,158 |
|
|
| ||||
Equity investment in XinTec |
|
19,502 |
|
19,502 |
|
|
|
|
| ||||
Total assets |
|
$ |
300,781 |
|
$ |
34,840 |
|
$ |
265,941 |
|
$ |
|
|
Interest rate swap |
|
$ |
(2,073 |
) |
$ |
|
|
$ |
(2,073 |
) |
$ |
|
|
Total liabilities |
|
$ |
(2,073 |
) |
$ |
|
|
$ |
(2,073 |
) |
$ |
|
|
The following table presents the Companys financial assets and liabilities that are measured at fair value on a recurring basis which were presented on the Companys Condensed Consolidated Balance Sheets as of the date indicated (in thousands):
|
|
April 30, 2015 |
| ||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Cash equivalents |
|
$ |
76,008 |
|
$ |
15,338 |
|
$ |
60,670 |
|
$ |
|
|
Short-term investments |
|
205,271 |
|
|
|
205,271 |
|
|
| ||||
Long-term investments |
|
19,502 |
|
19,502 |
|
|
|
|
| ||||
Total assets |
|
$ |
300,781 |
|
$ |
34,840 |
|
$ |
265,941 |
|
$ |
|
|
Interest rate swap |
|
$ |
(2,073 |
) |
$ |
|
|
$ |
(2,073 |
) |
$ |
|
|
Total liabilities |
|
$ |
(2,073 |
) |
$ |
|
|
$ |
(2,073 |
) |
$ |
|
|
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
There have been no transfers between Level 1 and Level 2 during the three months ended July 31, 2015. The Company did not hold any investments classified as Level 3 as of July 31, 2015.
For the Companys interest rate swap, the Company obtains fair value quotes from the issuing bank and assesses the quotes for reasonableness by comparing them to the present values of expected cash flows. The present value approach is based on observable market interest rate curves that are commensurate with the terms of the interest rate swap. The carrying value represents the fair value of the swap, as adjusted for any non-performance risk associated with the Company. XinTec completed its IPO in March 2015 and became a listed company on the Taiwan Stock Exchange, at which time the Company started to record its investment in XinTec as an available-for-sale security carried at fair value, with changes in fair value, net of deferred taxes, recorded in Accumulated other comprehensive income. The fair value of the investment in XinTec as of July 31, 2015 was based on the per share closing price of the stock on the Taiwan Stock Exchange.
Due to their short maturities, the reported amounts of the Companys financial instruments, including cash equivalents, short-term investments, accounts receivable, accounts payable and other current liabilities approximate their fair values.
For its investment in WLCSP, the Company uses the equity method of accounting. (See Note 5.) As of July 31, 2015, using the per share closing price of the stock of $7.54 on the Shanghai Stock Exchange (categorized as Level 1 for purposes of the fair value hierarchy), the aggregate fair value of the Companys investment in WLCSP totaled approximately $228.3 million.
The Mortgage Loan and the Construction Loan are recorded at cost. Their book values, however, approximate fair values as the underlying interest rates are based on risk-adjusted market rates; they are categorized as Level 2 for purposes of the fair value measurement hierarchy.
Note 10 Segment and Geographic Information
For all periods presented, the Company operated as a single reportable business segment.
The Company sells its image-sensor products either directly to original equipment manufacturers (OEMs) and value added resellers (VARs) or indirectly through distributors. The following table illustrates the percentage of revenues from sales to OEMs and VARs and to distributors for the periods indicated:
|
|
Three Months Ended |
| ||
|
|
July 31, |
| ||
|
|
2015 |
|
2014 |
|
OEMs and VARs |
|
69.7 |
% |
79.7 |
% |
Distributors |
|
30.3 |
|
20.3 |
|
Total |
|
100.0 |
% |
100.0 |
% |
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
Since the end-user customers of the Companys customers market and sell their products worldwide, the Companys revenues by geographic location are not necessarily indicative of the geographic distribution of end-user sales, but rather indicate where their components are sourced. The revenues by geography in the following table are based on the country or region in which the Companys customers issue their purchase orders for the periods presented (in thousands):
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
China |
|
$ |
258,015 |
|
$ |
334,247 |
|
Singapore |
|
24,359 |
|
4,272 |
| ||
Japan |
|
18,578 |
|
23,174 |
| ||
Ireland |
|
9,809 |
|
5,658 |
| ||
United States |
|
2,925 |
|
1,611 |
| ||
All other |
|
16,205 |
|
37,574 |
| ||
Total |
|
$ |
329,891 |
|
$ |
406,536 |
|
The Companys long-lived assets, including its property, plant and equipment, net, long-term investments, land-use rights and other long-term assets, are located in the following countries as of the dates indicated (in thousands):
|
|
July 31, |
|
April 30, |
| ||
|
|
2015 |
|
2015 |
| ||
China |
|
$ |
156,665 |
|
$ |
154,573 |
|
Taiwan |
|
118,850 |
|
157,722 |
| ||
United States |
|
47,013 |
|
47,785 |
| ||
All other |
|
716 |
|
706 |
| ||
Total |
|
$ |
323,244 |
|
$ |
360,786 |
|
Note 11 Supplemental Financial Information
Additional Paid-in Capital
The following table shows the amounts recorded to Additional paid-in capital for the three months ended July 31, 2015 (in thousands):
|
|
Additional |
| |
|
|
Paid-in |
| |
|
|
Capital |
| |
Balance at April 30, 2015 |
|
$ |
709,442 |
|
Exercise of common stock options |
|
396 |
| |
Employee stock purchase plan |
|
4,195 |
| |
Employee stock-based compensation |
|
9,872 |
| |
Withholding tax deduction on restricted stock units |
|
(5,405 |
) | |
Tax effect from stock-based compensation |
|
761 |
| |
Balance at July 31, 2015 |
|
$ |
719,261 |
|
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
Accumulated Other Comprehensive Income
The following table presents the components of, and the changes in, accumulated other comprehensive income for the three months ended July 31, 2015 (in thousands):
|
|
Balance at |
|
Other |
|
Amounts |
|
Related Tax |
|
Balance at |
| |||||
Accumulated translation gains |
|
$ |
2,420 |
|
$ |
151 |
|
$ |
|
|
$ |
(53 |
) |
$ |
2,518 |
|
Accumulated unrealized gains (losses) on available-for-sale securities, net |
|
37,649 |
|
(26,078 |
) |
|
|
3,183 |
|
14,754 |
| |||||
Total accumulated other comprehensive income |
|
$ |
40,069 |
|
$ |
(25,927 |
) |
$ |
|
|
$ |
3,130 |
|
$ |
17,272 |
|
The following table sets forth the amounts reclassified out of Accumulated Other Comprehensive Income into the Condensed Consolidated Statements of Income and the associated presentation location, for the periods indicated (in thousands):
|
|
|
|
Three Months Ended |
| ||||
|
|
|
|
July 31, |
| ||||
Comprehensive Income Components |
|
Location |
|
2015 |
|
2014 |
| ||
Accumulated unrealized gains (losses) on available-for-sale securities, net |
|
|
|
|
|
|
| ||
|
|
Other income, net |
|
$ |
|
|
$ |
(1 |
) |
|
|
Total amounts reclassified out of Accumulated Other Comprehensive Income |
|
$ |
|
|
$ |
(1 |
) |
Note 12 Income Taxes
The Company reported the following operating results for the periods presented (in thousands):
|
|
Three Months Ended |
| ||||
|
|
July 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Income before income taxes |
|
$ |
16,204 |
|
$ |
33,682 |
|
Benefit from income taxes |
|
$ |
(2,038 |
) |
$ |
(11,645 |
) |
Effective income tax rate |
|
(12.6 |
)% |
(34.6 |
)% |
The Companys effective income tax rate reflects the impact of a significant amount of the Companys earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate.
The Companys quarterly income taxes reflect an estimate of the corresponding fiscal years annual effective tax rate and include, when applicable, adjustments from discrete tax items. For the three months ended July 31, 2015, the discrete adjustments to the Companys income taxes included the tax benefits that resulted from the reduction of unrecognized tax benefits due to the lapses of applicable statute of limitations in certain foreign jurisdictions and the reversal of deferred tax liabilities accrued on undistributed earnings for certain non-U.S. investee companies.
During the three months ended July 31, 2015, the Company reduced unrecognized tax benefits by approximately $3.1 million due to the lapses of applicable statute of limitations in certain foreign jurisdictions. During the three months ended July 31, 2015, the Company accrued an additional $300,000 of interest related to the Companys unrecognized tax
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
benefits. As of July 31, 2015, the Company anticipates that the balance of gross unrecognized tax benefits will decrease by approximately $4.3 million due to the lapses of the applicable statute of limitations in certain jurisdictions over the next 12 months.
Note 13 Commitments and Contingencies
Commitments
During the three months ended July 31, 2014, the Company entered into a development and supply agreement with Powerchip Technology Corporation (PTC) pursuant to which the Company would deposit up to $1.0 million with PTC as prepaid wafer credit. As of July 31, 2015, the Company has not made any deposits under this agreement.
Litigation
From time to time, the Company has been subject to legal proceedings and claims with respect to such matters as patents, product liabilities and other actions arising out of the normal course of business.
Ziptronix, Inc. v. OmniVision Technologies, Inc., Taiwan Semiconductor Manufacturing Company Ltd., and TSMC North America Corp.
On December 6, 2010, Ziptronix, Inc. (Ziptronix) filed a complaint alleging patent infringement against the Company in the District Court for the Northern District of California. The case is entitled Ziptronix, Inc. v. OmniVision Technologies, Inc., Taiwan Semiconductor Manufacturing Company Ltd., and TSMC North America Corp., Case No. CV10-05525. In its complaint, Ziptronix asserts that the Company has made, used, offered to sell, sold and/or imported into the United States image sensors that infringe the following six patents: U.S. Patent Nos. 7,387,944 (Method for Low Temperature Bonding and Bonded Structure), 7,335,572 (Method for Low Temperature Bonding and Bonded Structure), 7,553,744 (Method for Low Temperature Bonding and Bonded Structure), 7,037,755 (Three Dimensional Device Integration Method and Integrated Device), 6,864,585 (Three Dimensional Device Integration Method and Integrated Device), and 7,807,549 (Method for Low Temperature Bonding and Bonded Structure). The complaint seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against the Company. The Company answered the complaint on May 4, 2011 and denied each of Ziptronixs infringement claims against it.
On November 22, 2011, Defendants Taiwan Semiconductor Manufacturing Company Ltd., and TSMC North America Corp. (collectively TSMC) filed amended counterclaims asserting that Ziptronix has infringed, actively induced infringement of, and/or induced contributory infringement of the following five patents: U.S. Patent Nos. 6,682,981 (Stress Controlled Dielectric Integrated Circuit Fabrication), 7,307,020 (Membrane 3D IC Fabrication), 6,765,279 (Membrane 3D IC Fabrication), 7,385,835 (Membrane 3D IC Fabrication), and 6,350,694 (Reducing CMP Scratch, Dishing and Erosion by Post CMP Etch Back Method for Low-K Materials). Ziptronix answered the amended counterclaims on December 9, 2011 and denied each of TSMCs infringement claims against it.
On August 9, 2012, Ziptronix filed a second amended complaint adding claims that the defendants infringe the following three patents: U.S. Patent Nos. 8,153,505 (Method for Low Temperature Bonding and Bonded Structure), 8,043,329 (Method for Low Temperature Bonding and Bonded Structure), and 7,871,898 (Method for Low Temperature Bonding and Bonded Structure). The Company answered the second amended complaint on August 27, 2012, and denied each of Ziptronixs infringement claims against it.
Claim construction briefing has been submitted, but there is no claim construction hearing currently scheduled. On September 30, 2014, the court granted TSMCs motion for summary judgment of noninfringement based on extraterritoriality issues. On March 2, 2015, the court granted the Companys motion for summary judgment of noninfringement of its non-U.S. sales. The courts summary judgment order addresses most of Ziptronixs infringement claims asserted in the case and the Company expects to vigorously defend itself against Ziptronixs remaining allegations of infringement. The Company is currently unable to predict the ultimate outcome of this case and therefore cannot determine the likelihood of loss nor estimate the loss or a range of possible loss.
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
Securities Litigation
On October 26, 2011, the first of several putative class action complaints was filed in the United States District Court for the Northern District of California against the Company and three of its executives, one of whom is a director. All of the complaints alleged that the defendants violated the federal securities laws by making misleading statements or omissions regarding the Companys business and financial results, in particular regarding the use of its imaging sensors in Apple Inc.s iPhone. These actions have been consolidated as In re OmniVision Technologies, Inc. Litigation, Case No. 11-CV-5235 (RMW) (the Securities Case). On April 23, 2012, plaintiffs filed a consolidated complaint on behalf of a purported class of purchasers of the Companys common stock between August 27, 2010 and November 6, 2011, seeking unspecified damages. On March 29, 2013, the court denied the defendants motion to dismiss. On December 30, 2014, the parties entered into a stipulation and agreement of settlement to resolve the litigation, which was then submitted to the court for preliminary approval. The stipulation and agreement of settlement provides for a payment of $12.5 million to the plaintiff class, which is funded solely by the Companys insurance carriers. The Company also entered into a mutual release agreement with one of its insurance carriers. In March 2015, the court entered an order granting preliminary approval of the settlement and ordering notice to the putative plaintiff class. On June 5, 2015, the court granted final approval of the settlement and entered a final judgment and order dismissing the action.
As of April 30, 2015, the Company reported on its balance sheet $12.5 million as Recoverable insurance proceeds within Total current assets, and $12.5 million as Litigation settlement accrual within Total current liabilities. As a result of the final judgment and order dismissing the action, the Company reversed the $12.5 million of recoverable insurance proceeds, and the corresponding $12.5 million of litigation settlement accrual, with no additional cash settlement payment from the Company, and no impact on its results of operations.
Derivative Litigation
On November 15, 2011, the first of three shareholder derivative complaints was filed in the Superior Court of California, County of Santa Clara, against several of the Companys current and former officers and directors. These three state court actions were consolidated under the caption In re OmniVision Technologies, Inc. Derivative Litigation, Case No. 1-12-CV-216875 (California State Action). On March 21, 2012, a fourth similar shareholder derivative complaint captioned Carpenters Pension Fund of West Virginia v. Shaw Hong, et al., Case No. 12-CV-1423, was filed in the United States District Court for the Northern District of California (California Federal Action). On May 10, 2012, a fifth similar shareholder derivative complaint captioned Edker Pope v. Shaw Hong, et. al., Case No. 7514, was filed in the Court of Chancery of the State of Delaware (Delaware Action). These complaints make allegations similar to those presented in Securities Case, but they assert various state law causes of action, including claims of breach of fiduciary duty and unjust enrichment. All of these derivative complaints seek unspecified damages on behalf of the Company, which is named solely as nominal defendant against whom no recovery is sought. The proceedings in these derivative actions had been stayed by agreement and the California Federal Action and Delaware Action remain stayed. In the California State Action, the Court has set a schedule for the filing of an amended complaint and the filing of defendants anticipated demurrers. The Company is currently unable to predict the outcome of these actions and therefore cannot determine the likelihood of loss nor estimate the loss or a range of possible loss.
Raytheon Company v. Sony Corporation, OmniVision Technologies, Inc., and Apple, Inc.
On March 6, 2015, Raytheon Company (Raytheon) filed a complaint alleging patent infringement against the Company in the District Court for the Eastern District of Texas. The case is entitled Raytheon Co. v. Sony Corp. et al., Case No. 2:15-CV-00342-JRG-RSP. In its complaint, Raytheon asserts that the Company has made, used, offered to sell, sold and/or imported into the United States image sensors that infringe U.S. Patent No. 5,591,678 (the 678 Patent). The complaint seeks unspecified monetary damages, interest, fees, expenses, costs and other equitable relief against the Company. The Company answered the complaint on May 1, 2015 and denied each of Raytheons infringement claims against it. In addition, the Company had moved to transfer the matter to the Northern District of California along with several other defendants. Notably, the 678 Patent expired in January 2014. The Company is currently unable to predict the ultimate outcome of this case and therefore cannot determine the likelihood of loss nor estimate the loss or a range of possible loss.
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended July 31, 2015 and 2014
(unaudited)
Merger Litigation
In connection with the Merger Agreement and the transactions contemplated thereby, a number of putative class action lawsuits have been filed in the Superior Court of the State of California, County of Santa Clara. The actions filed Pope v. OmniVision Technologies, Inc., et al., No. 15-CV-280161 (filed May 4, 2015); Francisco v. Xiaoying, et al., No. 15-CV-280270 (filed May 6, 2015); Agee v. OmniVision Technologies, Inc., No. 15-CV-280311 (filed May 7, 2015); Levine v. OmniVision Technologies, Inc., No. 15-CV-280344 (filed May 7, 2015); ODonnell v. OmniVision Technologies, Inc., No. 15-CV-280411 (filed May 8, 2015); Smith v. Hong, et al., No. 15-CV-280863 (filed May 19, 2015); and Nido v. OmniVision Technologies, Inc., No. 15-CV-281031 (filed May 22, 2015). In general, the various complaints assert that, among other things, the members of the Board of Directors breached their fiduciary duties to OmniVisions stockholders by engaging in a process that was not designed to, and did not, maximize the stockholders value, and that OmniVision and the proposed acquiring entities aided and abetted the Board of Directors alleged breaches of fiduciary duties. The complaints generally seek to enjoin the merger, rescission of the merger to the extent it is implemented, or alternatively, rescissionary damages. On June 2, 2015, the actions were consolidated under the caption In re OmniVision Technologies, Inc. Shareholder Litigation, No. 15-CV-280161. On June 8, 2015, a consolidated amended complaint was filed. The amended complaint adds allegations that the Board of Directors breached their fiduciary duties by issuing a false and misleading preliminary proxy statement. The amended complaint also adds allegations that J.P. Morgan aided and abetted the directors alleged breaches of fiduciary duty. On July 1, 2015, plaintiffs filed a motion for a preliminary injunction seeking to enjoin the shareholder vote on the merger. The Court held a hearing on this motion on July 16, 2015. At that hearing the Court denied plaintiffs motion for an injunction. The Court has set a schedule for the filing of an amended complaint and the filing of defendants anticipated demurrers. The Company is currently unable to predict the outcome of this action and therefore cannot determine the likelihood of loss nor estimate the loss or a range of possible loss.
Note 14 Related Party Transactions
The following table presents the amounts paid for services provided by related parties and the balances payable for the periods indicated (in thousands):
|
|
|
|
Three Months Ended |
| ||||
Related |
|
|
|
July 31, |
| ||||
Party |
|
Description |
|
2015 |
|
2014 |
| ||
|
|
|
|
|
|
|
| ||
VisEra |
|
Purchases of color filter and other manufacturing services |
|
$ |
19,999 |
|
$ |
25,162 |
|
|
|
Balances payable at period end, net |
|
$ |
12,744 |
|
$ |
17,735 |
|
|
|
|
|
|
|
|
| ||
WLCSP |
|
Purchases of packaging services |
|
$ |
7,926 |
|
$ |
3,549 |
|
|
|
Balances payable at period end, net |
|
$ |
4,431 |
|
$ |
1,809 |
|
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with our unaudited condensed interim financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve risks and uncertainties. Forward-looking statements generally include words such as anticipates, believes, expects, intends, may, outlook, plans, seeks, will and words of similar import as well as the negative of those terms. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q, including, but not limited to, statements regarding our projected results of operations for future reporting periods, the continuing shift of our sales towards our OmniBSI-2 and the increase in the shipment of units for PureCel devices, the extent of future sales through original equipment manufacturers, or OEMs, and distributors, future growth trends and opportunities in certain markets, the capabilities of new products, our expectations regarding our customers future actions, the timing of the production of our products, the continuing capabilities of our production system, the increasing competition in our industry, the effect of supply constraints, the ability of our suppliers to cost effectively expand to meet supply needs, the continued importance of the mobile phone market to our business, our expectations regarding market preferences with respect to image sensor technologies, the continued concentration of manufacturers in the mobile phone market, the further expansion of the smartphone segment within the mobile phone market, our ability to benefit from any future sales trends in China, India or other non-U.S. jurisdictions, continued price competition and the consequent reduction in the average selling prices of our products, anticipated benefits of our joint ventures and alliances, the ability of our new products to mitigate declines in our average selling prices, the development of our business and manufacturing capacity, future expenses we expect to incur, our future investments, our future working capital requirements, the effect of a change in foreign currency exchange and market interest rates, the geographic distribution of our sales and end users of our products, the continued improvement of general global and domestic economic conditions, our ability to improve our inventory turnover and to generate positive cash flow, the effects of adjustments to our tax positions and the sufficiency of our available cash, cash equivalents and short-term investments are based on current expectations and are subject to important factors that could cause actual results to differ materially from those projected in the forward-looking statements. Such important factors include, but are not limited to, those set forth in Part II under the caption Item 1A. Risk Factors, beginning on page 44 of this Quarterly Report and elsewhere in this Quarterly Report and in other documents we file with the U.S. Securities and Exchange Commission, or SEC. All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors.
OmniVision, the OmniVision logo, OmniPixel and TrueFocus are registered trademarks of OmniVision Technologies, Inc., CameraChip, CameraCubeChip, OmniBSI, OmniBSI+, OmniBSI-2, OmniGlass, OmniHDR, OmniPixel2, OmniPixel3, OmniPixel3-HS, OmniPixel3-GS, OmniQSP, PureCel, PureCel-S, SquareGA and ViV are trademarks of OmniVision Technologies, Inc. Wavefront Coded and Wavefront Coding are registered trademarks of OmniVision CDM Optics, Inc., a wholly-owned subsidiary of OmniVision Technologies, Inc.
Overview
We design, develop and market high-performance, highly integrated and cost-efficient semiconductor image-sensor devices. Our main products, image-sensing devices which we refer to as CameraChip image sensors, capture an image electronically and are used in a number of consumer and commercial mass-market applications. Our CameraChip image sensors are manufactured using the complementary metal oxide semiconductor, or CMOS, fabrication process and are predominantly single-chip solutions that integrate several distinct functions including image capture, image processing, color processing, signal conversion and output of a fully processed image or video stream. We have also integrated our CameraChip image sensors with wafer-level optics, which we refer to as CameraCubeChip imaging devices. Our CameraCubeChip imaging device is a small footprint, total camera solution that we believe will enable the further miniaturization of camera products. We believe that our highly integrated image sensors and imaging devices enable camera device manufacturers to build high quality camera products that are smaller, less complex, more reliable, more cost-effective and more power-efficient than cameras using traditional charge-coupled devices, or CCDs.
Technology and Product Lines
CameraChip image sensors
All traditionally designed CMOS image sensors capture light on the front side of the chip, so the photo-sensitive portion has to share the surface of the image sensor with the metal wiring of the transistors in the imaging pixel and the metal
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
wiring acts to limit the amount of image light that reaches the photo-sensitive portion of the image sensor. This type of pixel architecture is referred to as the front side illumination, or FSI, architecture. Our FSI products that are currently in production are based primarily on the OmniPixel3-HS pixel architecture, which we introduced in February 2008. In April 2014, we introduced a new FSI pixel architecture, the OmniPixel3-GS, which is a global shutter pixel architecture capable of capturing smear-free images.
In May 2008, we announced a new approach to CMOS image sensor design we call OmniBSI technology. OmniBSI technology is based on an idea called back side illumination, or BSI. With our OmniBSI architecture, the image sensor receives light through the back side of the chip. As a result, there is no metal wiring to block the image light, and the entire backside of the image sensor can be photo-sensitive. Not only does this enable us to produce a superior image, it also permits the front of the chip surface area to be devoted entirely to processing, and permits an increase in the number of metal layers, both of which result in greater functionality. Capturing light on the back side of the image sensor also allows us to reduce the distance the light has to travel to the imaging pixels, and thus provide a wider angle of light acceptance. Widening the angle of light acceptance in turn makes it possible to reduce the height of the camera module, and thus the height of the device which incorporates the camera module.
Since 2008, we have continued to refine our BSI technology. In February 2010, we announced our OmniBSI-2 architecture, which represents our second-generation BSI technology and enables us to design imaging pixels as small as 1.1 µm in dimension. In January 2012, we introduced new image sensors based on OmniBSI+, our improved 1.4 µm OmniBSI architecture.
In November 2013, we launched our PureCel image-sensor product line. Our PureCel sensors are based on advanced technology platforms and updated pixel array architectures and designs. Compared to our OmniBSI-2 based products, our PureCel products have increased unit area light sensitivity and lower power consumption.
In October 2014, we extended our PureCel product family with PureCel-S. PureCel-S products are based on a stacked-die concept to further improve the performance of the image sensor. With this stacked-die structure, image processing is handled by a logic chip stacked beneath the image sensor, allowing for additional functionality to be implemented. This arrangement also allows for improvements in image-capturing quality and processing speeds, as well as thinner form factors for consumer products.
CameraCubeChip Technology
In February 2009, we announced the introduction of our CameraCubeChip technology. This is a three-dimensional, reflowable, total camera solution that combines the full functionality of our CameraChip image sensors and wafer-level optics in one compact, small-footprint package. Our CameraCubeChip devices can be soldered directly to printed circuit boards, with no socket or insertion requirements. We believe our CameraCubeChip solution can streamline the mobile phone manufacturing process, thus resulting in lower cost and faster time-to-market for our customers. Currently, the market for CameraCubeChip devices is still nascent, but going forward, we see significant opportunities in the mobile phones and entertainment applications, such as tablets and wearable devices.
Other
In March 2010, we acquired Aurora Systems, Inc., or Aurora, a privately-held company incorporated in California. Aurora is a supplier of liquid crystal on silicon, or LCOS, devices for use in mobile projection applications and high definition home theater projection systems. With the acquisition of Aurora, we acquired advanced image projection technology to capitalize on trends in the emerging video-projection consumer market.
In January 2013, we introduced a dual-camera video sharing technology that we call Video-in-Video, or ViV. ViV allows for the combination of video feeds from both the front- and rear-facing cameras into a single video stream.
New Products
In August 2014, we introduced the OV7676, a 1/7.5-inch VGA image sensor based on our 3-µm OmniPixel3-HS pixel technology. The OV7676 can be used in a wide range of applications, including mobile phones, tablets, wearables, notebooks, and IP network cameras. It is also equipped with ViV.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In September 2014, we introduced the OVM6211 CameraCubeChip, a CameraCubeChip imaging device based on our OmniPixel-3GS global shutter pixel architecture. The OVM6211 is capable of capturing 400 x 400 video at 120 frames per second, or FPS, and has an ultra-low power mode for machine and computer vision applications.
In October 2014, we introduced the OV13860, our first 13-megapixel PureCel-S image sensor with 1.3-µm pixels. The 1/2.6-inch OV13860 leverages our stacked-die technology, which separates the imaging array from the image sensor processing pipeline into a stacked-die structure. The OV13860 is designed for premium smartphones, and is capable of capturing full resolution 13-megapixel still images at 30 FPS, or record ultra-high resolution 4k2K video at 30 FPS, 1080p high definition, or HD, at 60 FPS, or 720p HD at 120 FPS.
In October 2014, we also introduced the OV16850, a 16-megapixel PureCel-S image sensor in a native 16:9 format, designed for premium smartphones. The 1/2.6-inch OV16850 is based on our 1.12-µm pixel architecture, and leverages our stacked-die technology. It is capable of capturing full-resolution 16-megapixel images at 30 FPS, 4K2K video at 30 FPS, quad HD video at 60 FPS, and 720p video at 120 FPS.
In October 2014, we introduced two additional sensors designed specifically for automotive applications, the 1.3-megapixel OV10642 and the WVGA OV10625. These OmniHDR automotive high dynamic range sensors use a special red-clear filter that is required for many forward-looking automotive applications. The 1/2.6-inch OV10642 supports an active array of 1280 x 1080 pixels and the 1/3.2-inch OV10625 supports an active array of 752 x 548 pixels.
In October 2014, lastly, we introduced the OV9750, a 1/3-inch image sensor based on our 3.75-µm OmniPixel3-HS pixel technology. The OV9750 is designed for the commercial security and surveillance market and can capture both visible and near-infrared video in HD format. It is capable of operating in a 1280 x 960 resolution at 60 FPS with 10-bit output, or at 45 FPS with 12-bit output.
In November 2014, we introduced the OV23850 and OV21840, a family of PureCel-S image sensors designed for premium smartphones, with resolutions of 23.8 megapixels and 21.4 megapixels, respectively. The OV23850 and OV21840 PureCel-S sensors leverage our stacked-die technology, which separates the imaging array from the image sensor processing pipeline into a stacked-die structure. This enables additional sensor functionalities, such as phase detection autofocus, two-dimensional contrast fast autofocus and high dynamic range, or HDR, video, while maintaining a small footprint. The 1/2.3-inch OV23850 supports an active array of 5632 x 4224 pixels, operating at 24 FPS. The 1/2.4-inch OV21840 supports an active array of 5344 x 4016 pixels, operating at 27 FPS. Both the OV23850 and OV21840 are also capable of recording quad HD video at 30 FPS in HDR mode, 720p HD video at 120 FPS, and 1080p HD video at 90 FPS.
In March 2015, we introduced the OV16880, our first image sensor with 1-µm pixels. The 1/3-inch OV16880 is a 16-megapixel PureCel-S image sensor with advanced features such as phase detection autofocus and fast contrast autofocus. It also uses buried color filter array technology to reduce pixel crosstalk and improve signal-to-noise ratio performance. The OV16880 is capable of capturing 16-megapixel images at 30 FPS, 4K video at 30 FPS, 1080p video at 90 FPS, and 720p video at 120 FPS.
In May 2015, we introduced the OV9752, a 1/3-inch image sensor that has an RGB-IR dual band color filter, allowing it to capture images in either visible light or infrared. The OV9752 is designed for commercial security and surveillance systems and is based on our 3.75-µm OmniPixel3-HS pixel technology. It is capable of capturing HD images and video in 1280 x 960 pixel resolution as well as infrared information.
In June 2015, we introduced the OV9734, a 720p HD PureCel image sensor designed for slim notebooks, tablets, mobile phones, and other devices that require thin bezels. The 1/9-inch OV9734 can capture 720p HD video at 30 FPS or VGS resolution at 45 FPS.
In June 2015, we also introduced the OV6946, a 1/18-inch image sensor designed for advanced medical imaging applications, such as reusable endoscopy. The OV6946 is based on our 1.75-µm OmniBSI+ pixel architecture, and can capture 400 x 400 resolution images and video at 30 FPS.
In July 2015, we introduced the OV7699 CameraChip and OVM7699 CameraCubeChip. The OV7699 is a 1/13-inch VGA image sensor based on our 1.75-µm OmniBSI+ pixel architecture, and capture VGA resolution images and video at 30 FPS. The OVM7699 is the OV7699 packaged in our proprietary CameraCubeChip format.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In July 2015, we also introduced the OV13853, a 13-megapixel PureCel image sensor. The 1/3.06-inch OV13853 is based on our 1.12-µm pixel architecture, and supports advanced features such as phase detection autofocus. The OV13853 is capable of capturing 13-megapixel images at 30 FPS, 4K2K ultra-high definition video at 30 FPS with full-horizontal field of view and electronic image stabilization, or EIS, and 1080p HD video at 60 FPS with EIS.
Current Economic Environment
We operate in a challenging economic environment that has undergone significant changes in technology and in patterns of global trade. We remain a leader in the development and marketing of image sensing devices based on the CMOS fabrication process and have benefited from the growing market demand for and acceptance of this technology.
A significant amount of our revenues is derived from markets outside of the United States, in particular from the Asian markets. These markets are extremely competitive and we continue to see entrance of new competitors. Due to our reliance on sales in these markets, a slowdown in demand in these markets could have an adverse effect on our financial results. For example, in the third quarter of fiscal 2015, demand for our products slowed down in the China market, possibly attributable to the competitive environment faced by our customers and a protracted upgrade cycle for the local wireless infrastructure. This demand slowdown in the region had negatively impacted our revenues. Given our long-term relationships and established ecosystem in China, we believe that demand for our products in the region will resume. Indeed, for the first quarter of fiscal 2016, business seems to be recovering. However, due to our limited visibility, uncertainty as to how manufacturers will react to Chinas recent currency devaluation, and the intense competition in the market, we expect that volatility in the China market, as well as other Asian markets, will continue, at least in the near future.
In the past, we have experienced fluctuations in our financial results due in part to changing macroeconomic conditions. As macroeconomic conditions have improved, our sales have generally also tended to improve and when macroeconomic uncertainties have returned, our sales have generally tended to be negatively impacted, although that has not always been the case. For example, in fiscal 2014, macroeconomic conditions appeared to continue to improve, and our annual sales increased slightly when compared to fiscal 2013. However, for the second half of fiscal 2014, we actually experienced a decline in sales when compared to the similar period in fiscal 2013. Given the continuing uncertainties in the current economic environment and the volatility in our business, we remain cautious and we expect our customers to be cautious as well, which could affect our future results.
Market Environment
We sell our products worldwide directly to OEMs, which include branded customers and contract manufacturers, and value added resellers, or VARs, and indirectly through distributors. In order to ensure that we address all available markets for our image sensors, we organize our marketing efforts into end-use market groups, each of which concentrates on a particular product or, in some cases, customers within a product group. Thus, we have marketing teams that address the mobile phone market, the entertainment market, the notebook and webcam market, the digital still camera, or DSC, market, the commercial security and surveillance market, and the automotive and medical markets.
In the mobile phone market in particular, future revenues depend to a large extent on an extensive design win process where a particular mobile phone maker determines which image sensor to design into one or more specific models. The time lag between design win and volume shipments varies from as little as three months to as much as 12 months, which could cause an unexpected delay in generating revenues, especially during periods of product transitions. Design wins are also an important driver in the many other markets that we address. In some markets, such as automotive or medical applications, the time lag between a particular design win and revenue generation can be longer than one year.
The overwhelming majority of our sales depend on decisions by the engineering designers for manufacturers of products that incorporate image sensors to specify one of our products rather than one made by a competitor. In most cases, the decision to specify a particular image sensor requires conforming other specifications of the product to the chosen image sensor and makes subsequent changes both difficult and expensive. Accordingly, the ability to produce and deliver reliable products in large quantities and in a timely manner is a key competitive differentiator. Since our inception, we have shipped more than 5.9 billion image sensors, including approximately 215 million in the three months ended July 31, 2015. We believe that these quantities demonstrate the capabilities of our production system, including our sources of offshore fabrication.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
We outsource the wafer fabrication and packaging of our image-sensor products to third parties and our investee companies. We outsource the color filter and micro-lens phases of production to VisEra Technologies Company, Ltd., or VisEra, our joint venture with Taiwan Semiconductor Manufacturing Company Limited, or TSMC. This approach allows us to focus our resources on the design, development, marketing and testing of our products and to significantly reduce our capital requirements.
To increase and enhance our production capabilities, we work closely with TSMC, our principal wafer supplier and one of the largest wafer fabrication companies in the world, to increase, as necessary, the number of its fabrication facilities at which our products can be produced. In addition, we outsource some of our wafer fabrication needs to Powerchip Technology Corporation, or PTC. Since the first quarter of fiscal 2015, we have also started to ship products that were fabricated by Shanghai Huali Microelectronics Corporation, or Huali, and Wuhan Xinxin Semiconductor Manufacturing Corporation, or XMC. Huali and XMC are the newest additions to our list of qualified wafer fabrication suppliers. Our investments in VisEra and two other key back-end packaging suppliers are part of a broad strategy to ensure that we have sufficient back-end capacity for the processing of our image sensors. To enhance our CameraCubeChip production capabilities, we acquired from VisEra in October 2011 its CameraCubeChip production and assembly operations, which we had previously outsourced to them.
We currently perform the final testing of our packaged products at our own facility in China. As necessary, we will make further investments to expand our testing and production capacity, as well as our overall capability to design additional custom products for our customers.
Since our customers end-user customers market and sell their products worldwide, our revenues by geographic location are not necessarily indicative of the geographic distribution of end-user sales, but rather indicate where the products and/or their components are manufactured or sourced. The revenues we report by geography are based on the country or region in which our customers issue their purchase orders to us. Recently, our sales mix for products that are used in devices made by end-user customers located in the China market has increased. We anticipate that this market will continue to be a substantial source of our future revenues. In addition, we expect that the India market will become a more significant source of future revenues for us over the next few years.
Many of the products using our image sensors, such as mobile phones, entertainment applications such as tablets and wearable devices, notebooks and webcams, and DSCs are consumer electronics goods. These mass-market camera devices generally have seasonal cycles which historically have caused the sales of our customers to fluctuate quarter-to-quarter. In addition, since a very large number of the manufacturers who use our products are located in China and Taiwan, the pattern of demand for our image sensors has been increasingly influenced by the timing of the extended lunar or Chinese New Year holiday, a period in which the factories which use our image sensors generally close. Consequently, demand for our image sensors has historically been stronger in the second and third quarters of our fiscal year and weaker in the first and fourth quarters of our fiscal year. However, due to macroeconomic uncertainties and changes in our end-user customer demands in the past several years, the seasonal cycle of our business has been less predictable. For example, in fiscal 2014, we experienced a decline in sales of products that were used in mobile phones made by end-user customers located in North America, which was partially offset by an increase in the sale of products that were used in mobile phones made by end-user customers located in China. This change in end-user demand mix altered our quarterly sales pattern in fiscal 2014. Then, in the third quarter of fiscal 2015, when demand for our products slowed down in the China market, our quarterly sales pattern was altered again. Given the current economic environment and continued changes in our end-user demands, we remain cautious toward our near-term business prospects and the return of the historical seasonal cycle of our business. While we believe that the market opportunities represented by mobile phones and entertainment applications such as tablets and wearable devices remain very large, the opportunities presented could be deferred because of the uncertainty surrounding the sustainability of the current global economic recovery.
We believe that, like the DSC market, mobile phone, tablet, notebook and webcam demand will not only continue to shift toward higher resolutions, but also will increasingly fragment into multiple market segments with differing product attributes. For example, we see the further expansion of the smartphone segment within the mobile phone market. In addition, there is increased demand for customization, and several different interface standards are coming to maturity. All of these trends will require the development of a broader variety of products.
As the markets for image sensors have grown, we have experienced competition from manufacturers of CMOS and CCD image sensors. Our principal competitors in the market for CMOS image sensors include ON Semiconductor, Samsung,
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Sharp, Sony, STMicroelectronics and Toshiba. We expect to see continued price competition in the image-sensor market for mobile phones, entertainment devices, notebooks and webcams, commercial security and surveillance systems, digital still and video cameras, automotive and medical imaging systems as those markets continue to grow. Although we believe that we currently compete effectively in those markets, our competitive position could be impaired by companies that have greater financial, technical, marketing, manufacturing and distribution resources, broader product lines, better access to large customer bases, greater name recognition, longer operating histories and more established strategic and financial relationships than we do. Such companies may be able to adapt more quickly to new or emerging technologies and customer requirements or devote greater resources to the promotion and sale of their products. Many of these competitors own and operate their own fabrication facilities, which in certain circumstances may give them the ability to price their products more aggressively than we can or may allow them to respond more rapidly than we can to changing market opportunities.
In addition, from time to time, other companies enter the CMOS image-sensor market by using obsolete and available manufacturing equipment. While these efforts have rarely had any long-term success, the new entrants do sometimes manage to gain market share in the short-term by pricing their products significantly below current market levels which may put additional downward pressure on the prices that we can obtain for our products.
In common with many other semiconductor products and as a response to competitive pressures, the average selling prices, or ASPs, of image-sensor products have declined steadily since their introduction, and we expect ASPs to continue to decline in the future, especially if sales of mobile phones that use our products continue to shift from those made by end-user customers located in North America to those made by end-user customers located in Asia where we continue to experience strong pricing pressure. Some of this ASP decline may be offset by the adoption of some of our newer and higher resolution products such as our CameraCubeChip products, which carry a higher ASP because of the added value from the attachment of wafer-level optics to our image sensors. Depending on the adoption rate and unit volume, we believe these products could help to mitigate the rate of ASP decline. In order to maintain or grow our revenues, we need to increase the number of units we sell by a large enough amount to offset the effect of declining ASPs.
Separately, in order to maintain our gross margins, we and our suppliers must work continuously to lower our manufacturing costs and increase our production yields. In fiscal 2013, we requested our suppliers to invest in additional equipment in connection with the production of our OmniBSI-2 products. Such investment resulted in higher product costs for these products. Because we experienced increased sales of our OmniBSI-2 products since fiscal 2013, and expect these products to continue to constitute a significant percentage of our total sales in fiscal 2016, we anticipate that our gross margins will remain at lower levels than we have experienced historically, before our introduction of OmniBSI-2. Partially offsetting this is our recent introduction of our PureCel products, which have higher gross margins than our OmniBSI-2 products and whose shipping volumes have continued to increase. If we are unable to spread the added cost of our OmniBSI-2 products over larger unit sales, successfully negotiate lower prices for these products with our suppliers, or increase sales of higher gross margin products such as our PureCel products, our gross margin may continue to stay at these lower levels for future periods as well. In addition, if we are unable to timely develop and introduce new products that can take advantage of smaller process geometries or new products that incorporate more advanced technology and include more advanced features that can be sold at higher ASPs, our gross margin may decline. Due to the foregoing factors, as well as the price erosions we experienced in the first fiscal quarter of 2016 and recent unfavorable exchange rate movements, we remain cautious regarding our expectations on our gross margin trajectory for fiscal 2016.
Having the ability to forecast customer demand correctly and to prepare the appropriate level of inventory to meet this demand is also important in the semiconductor industry. At times, the semiconductor industry may experience supply constraints, and if we were unable to manage our products appropriately to meet our customers product demands, our relations with our customers and their end-user customers may be harmed and we may be unable to achieve future sales growth, which could result in our revenues, gross margins and other financial results being materially and adversely affected. Conversely, an excess in inventory supply can also adversely affect our performance. For example, in the third quarter of fiscal 2015, demand for our products slowed down in the China market, possibly attributable to the competitive environment faced by our customers and a protracted upgrade cycle for the local wireless infrastructure. This demand slowdown in the region had negatively impacted our revenues; the demand slowdown also resulted in our inventories at the end of the third and fourth quarters of fiscal 2015 being higher than we intended them to be. However, since customer demand can be volatile, we may be unable to sell inventories that were built in excess of demand, or we may have to sell at lower prices to eliminate excess inventories. Under such circumstances, we may be required to record significant provisions for excess and obsolete inventories. This could materially and adversely affect our results of operations and financial condition. Similarly, we cannot predict what effect, if any, the devaluation of Chinas currency in August 2015 may have on our ability to sell our existing inventories or on future customer demand for our products. We expect
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
the business environment to remain volatile in fiscal 2016, especially in the consumer-oriented product markets, which could continue to affect our ability to accurately forecast customer demand.
Given the rapidly changing nature of our technology, there can be no assurance that we will not encounter delays or other unexpected production yield issues with future products. In general, during the early stages of production, production yields and gross margins for new products are typically lower than those of established products. During production, we can also encounter unexpected manufacturing issues, such as unexpected back-end yield problems.
In addition, in preparation for new product introductions, we gradually decrease production of established products. Due to our 12-14 week production cycle, it is extremely difficult to predict precisely how many units of established products we will need. It is also difficult to accurately predict the speed of the ramp of new products. Given the current economic uncertainty, the visibility of our business outlook is extremely limited and forecasting is even more difficult than under normal market conditions. As a result, it is possible that we could suffer from shortages of certain products and build inventories in excess of demand for other products. We carefully consider the risk that our inventories may be in excess of expected future demand and record appropriate reserves. If, as sometimes happens, we are subsequently able to sell these reserved products, the sales have little or no associated cost and consequently, they have a favorable impact on gross margins.
Capital Resources
As of July 31, 2015, we held approximately $434.4 million in cash and cash equivalents and approximately $159.4 million in short-term investments. To mitigate market risk related to short-term investments, we have an investment policy designed to preserve the value of capital and to generate interest income from these investments without material exposure to market fluctuations. Market risk is the potential loss due to the change in value of a financial instrument as a result of changes in interest rates or bond prices, and changes in market liquidity and in the pricing of risk. Our policy is to invest in financial instruments with short maturities, limiting interest rate exposure, and to measure performance against comparable benchmarks. We maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including both government and corporate obligations with ratings of A or better and money market funds. We do not believe that the value of our cash, cash equivalents and short-term investments will be significantly affected by current instability in the global financial markets.
Sources of Revenues
For shipments to customers without agreements that allow for returns or credits, principally OEMs and VARs, we recognize revenue using the sell-in method. Under this method, we recognize revenue when title passes to the customer provided that we have received a signed purchase order, the price is fixed or determinable, title and risk of loss has transferred to the customer, collection of resulting receivables is considered reasonably assured, product returns are reasonably estimable, there are no customer acceptance requirements and there are no remaining material obligations. We provide for future returns of potentially defective products based on historical experience at the time we recognize revenue. For cash consideration given to customers that is primarily in the form of rebates, and for which we do not receive a separately identifiable benefit or cannot reasonably estimate fair value, we record the amounts as reductions of revenue.
For shipment of products sold to distributors under agreements allowing for returns or credits, title and the risk of ownership to the products transfer to the distributor upon shipment, and the distributor is obligated to pay for the products whether or not the distributor has sold them at the time payment is due. Under the terms of our agreements with such distributors and subject to our prior approval, distributors are entitled to reclaim from us as price adjustments the difference, if any, between the prices at which we sold the product to the distributors and the prices at which the product is subsequently sold by the distributor. In addition, distributors have limited rights to return inventory that they determine is in excess of their requirements, and accordingly, in determining the appropriate level of provision for excess and obsolete inventory, we take into account the inventories held by our distributors. For these reasons, prices and revenues are not fixed or determinable until the distributor resells the products to our end-user customers and the distributor notifies us in writing of the details of such sales transactions. Accordingly, we recognize revenue using the sell-through method. Under the sell-through method, we defer the revenue, adjustments to revenue and the related costs of revenue until the final resale of such products to end customers. The amounts billed to these distributors and adjustments to revenue and the cost of inventory shipped to, but not yet sold by, the distributors are shown net on the Condensed Consolidated Balance Sheets as Deferred revenues, less cost of revenues.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In order to determine whether collection is probable, we assess a number of factors, including our past transaction history with the customer and the creditworthiness of the customer. If we determine that collection is not reasonably assured, we defer the recognition of revenue until collection becomes reasonably assured or upon receipt of payment.
Critical Accounting Policies and Estimates
For a discussion of our critical accounting policies, please refer to the discussion in our Annual Report on Form 10-K for the fiscal year ended April 30, 2015. There have been no material changes in any of our critical accounting policies since April 30, 2015.
Results of Operations
The following table sets forth the results of our operations as percentages of revenues. Our historical operating results are not necessarily indicative of the results we can expect for any future period.
|
|
Three Months Ended |
| ||
|
|
July 31, |
| ||
|
|
2015 |
|
2014 |
|
Revenues |
|
100.0 |
% |
100.0 |
% |
Cost of revenues |
|
77.4 |
|
78.3 |
|
Gross margin |
|
22.6 |
|
21.7 |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
Research, development and related |
|
11.0 |
|
8.5 |
|
Selling, general and administrative |
|
6.4 |
|
4.7 |
|
Amortization of acquired patent portfolio |
|
0.7 |
|
0.6 |
|
Total operating expenses |
|
18.1 |
|
13.8 |
|
|
|
|
|
|
|
Income from operations |
|
4.5 |
|
7.9 |
|
Equity in earnings of investee |
|
0.1 |
|
0.2 |
|
Interest expense, net |
|
(0.1 |
) |
(0.1 |
) |
Other income, net |
|
0.4 |
|
0.3 |
|
Income before income taxes |
|
4.9 |
|
8.3 |
|
|
|
|
|
|
|
Benefit from income taxes |
|
(0.6 |
) |
(2.8 |
) |
Net income |
|
5.5 |
% |
11.1 |
% |
Three Months Ended July 31, 2015 as Compared to Three Months Ended July 31, 2014
Revenues
We derive substantially all of our revenues from the sale of our image-sensor products that are used in a wide variety of consumer and commercial mass-market applications including mobile phones, entertainment devices, notebooks and webcams, commercial security and surveillance cameras, DSCs, automotive and medical products. Revenues for the three months ended July 31, 2015 decreased by 18.9% to $329.9 million, from $406.5 million for the three months ended July 31, 2014. The decrease in revenues was primarily attributable to a 13.3% decrease in unit sales, with the most significant decrease being our 2-megapixel and below products, followed by our 3 to 5-megapixel products. These decreases were partially offset by an increase in unit shipment of our 8-megapixel and above products. We also experienced a 6.1% decrease in our ASPs, reflecting general price erosions, in particular in our largest regional market of China, and an increase in shipment mix for some of our newer and lower priced products. The decrease in unit sales in the three months ended July 31, 2015, as compared to the three months ended July 31, 2014, represented reduction in unit shipments into the mobile phone market, the entertainment market, and the notebook and webcam market, partially offset by increase in unit shipments into the commercial security and surveillance market and the automotive market.
Revenues from Sales to OEMs and VARs as Compared to Distributors
We sell our image-sensor products either directly to OEMs and VARs or indirectly through distributors. The percentage of revenues from sales to OEMs and VARs was lower in the three months ended July 31, 2015 than in the prior year period. The proportional increase in sales through distributors was primarily driven by an increase in the use of distribution channels in our China market. We expect that the percentage of revenues from sales through OEMs and VARs
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
will vary from year to year in response to changes in the composition of our customer list, and that it may continue to represent a majority of our revenues. In the short-term, however, we may continue to have a lower percentage of sales to our OEMs and VARs when compared to similar periods in prior years. The gross margins that we earn on sales to OEMs and VARs or through distributors are not significantly different.
The following table shows the percentages of revenues from sales to OEMs and VARs and distributors for the periods indicated:
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|
Three Months Ended |
| ||
|
|
July 31, |
| ||
|
|
2015 |
|
2014 |
|
OEMs and VARs |
|
69.7 |
% |
79.7 |
% |
Distributors |
|
30.3 |
|
20.3 |
|
Total |
|
100.0 |
% |
100.0 |
% |
OEMs and VARs. In the three months ended July 31, 2015, two OEM customers accounted for approximately 10.3% and 10.2% of our revenues, respectively. In the three months ended July 31, 2014, two OEM customers accounted for approximately 14.2% and 11.3% of our revenues, respectively. For the three months ended July 31, 2015 and 2014, no other OEM or VAR customer accounted for 10% or more of our revenues. The change in the composition of our OEM customers accounting for 10% or more of our revenues during the three months ended July 31, 2015 was primarily attributable to changes in product volumes shipped to our key customers during this period.
Distributors. In the three months ended July 31, 2015 and 2014, one distributor customer accounted for approximately 17.0% and 12.1% of our revenues, respectively. For the three months ended July 31, 2015 and 2014, no other distributor customer accounted for 10% or more of our revenues.
Revenues from Domestic Sales as Compared to Foreign Sales
The following table shows the percentages of our revenues derived from sales of our image-sensor products to domestic customers as compared to foreign customers for the three months ended July 31, 2015 and 2014:
|
|
Three Months Ended |
| ||
|
|
July 31, |
| ||
|
|
2015 |
|
2014 |
|
Domestic sales |
|
0.9 |
% |
0.4 |
% |
Foreign sales |
|
99.1 |
|
99.6 |
|
Total |
|
100.0 |
% |
100.0 |
% |
We derive the majority of our foreign sales from customers in Asia and, to a lesser extent, in Europe. Our sales to Asia-Pacific customers remain significant primarily due to the continuing trend of outsourcing the production of consumer electronics products to Asia-Pacific manufacturers and facilities and as a result of the increasing markets in Asia for consumer products. The revenues we report by geography are based on the country or region in which our customers issue their purchase orders to us. Because of the preponderance of Asia-Pacific manufacturers and the fact that virtually all products incorporating our image-sensor products are sold globally, we believe that the geographic distribution of our sales does not accurately reflect the geographic distribution of sales into end-user markets of products which incorporate our image sensors. Over time, our domestic and foreign sales mix may fluctuate as a result of changes in the composition of our customer list that we experience in our business.
Gross Profit
Our gross margin in the three months ended July 31, 2015 increased to 22.6% from 21.7% for the three months ended July 31, 2014. The year-over-year increase in gross margin reflected the phasing out of older generation products with newer designs, particularly for native HD products in the 2-megapixel and below category. The gross margin increase also reflected a continued reduction in our production costs. These improvements were partially offset by a decrease in ASPs as a result of general price erosion and an unfavorable net effect on gross margin from the sale of previously written-down products and write-down of inventories. For the three months ended July 31, 2015, our sales of previously written-down products decreased to $2.0 million, from $4.1 million in the similar prior year period. This was partially offset by a decrease in the
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
write-down of inventories, which totaled $8.8 million during the three months ended July 31, 2015, as compared to $10.2 million in the similar prior year period. We recorded approximately $1.3 million and $1.0 million in stock-based compensation expense to cost of revenues during the three months ended July 31, 2015 and 2014, respectively.
Research, Development and Related Expenses
Research, development and related expenses consist primarily of compensation and personnel-related expenses, non-recurring engineering costs related principally to the costs of the masks we buy when we release new product designs to the manufacturing foundries, costs for purchased materials, designs, tooling, depreciation of computers and workstations, and amortization of acquired intangible intellectual property and computer aided design software. Research, development and related expenses may fluctuate significantly as the number of new designs we release to the foundries can fluctuate from period to period. Research, development and related expenses for the three months ended July 31, 2015 increased to approximately $36.1 million from approximately $34.7 million for the three months ended July 31, 2014. As a percentage of revenues, research, development and related expenses for the three months ended July31, 2015 and 2014 represented 11.0% and 8.5%, respectively.
The increase in research, development and related expenses of approximately $1.4 million, or 4.0%, for the three months ended July 31, 2015 from the similar period in the prior year resulted from: a $2.2 million increase in salary and payroll-related expenses resulting primarily from a headcount increase and a $0.5 million increase in stock-based compensation expense, partially offset by a $1.4 million decrease in non-recurring engineering expenses related to new product development. We anticipate that research, development and related expenses for our second quarter of fiscal 2016 will decrease slightly when compared to our first quarter of fiscal 2016.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of compensation and personnel-related expenses, commissions paid to distributors and manufacturers representatives, and insurance and legal expenses. Commission payments, in particular, can vary from period to period as our overall revenues change. Selling, general and administrative expenses for the three months ended July 31, 2015 increased to approximately $21.1 million from $19.2 million for the three months ended July 31, 2014. As a percentage of revenues, selling, general and administrative expenses represented 6.4% and 4.7% for the three months ended July 31, 2015 and 2014, respectively.
The increase in selling, general and administrative expenses of approximately $1.9 million, or 10.1%, for the three months ended July 31, 2015 from the similar period in the prior year resulted primarily from a $0.9 million increase in salary and payroll-related expenses resulting primarily from a headcount increase, and a $0.6 million increase in legal expenses primarily related to the merger litigation. We anticipate that our selling, general and administrative expenses for our second quarter of fiscal 2016 will decrease slightly when compared to our first quarter of fiscal 2016.
Amortization of Acquired Patent Portfolio
In March 2011, we purchased certain sensor-related patents and patent applications from Eastman Kodak Company in a cash transaction. As a result, we recorded $65.0 million in additions to intangible assets, which we began amortizing during the three months ended April 30, 2011. Consequently, amortization of acquired patent portfolio totaled approximately $2.3 million for each of the three months ended July 31, 2015 and 2014.
Equity in Earnings of Investee
Equity in earnings of investee for the three months ended July 31, 2015 totaled $373,000, as compared to $0.9 million in the prior year. Equity in earnings of investee represented our portion of the net income recorded by China WLCSP Limited, or WLCSP.
Interest Expense, Net
We invest our cash, cash equivalents and short-term investments in interest-bearing accounts consisting primarily of money market funds, commercial paper, certificates of deposit, high-grade corporate securities and government bonds. Additionally, we have obtained funds under certain long-term borrowing facilities comprised of a variable rate mortgage and a construction loan. Interest expense, net, decreased to $233,000 in the three months ended July 31, 2015 from $455,000 in the prior year period. The $222,000 decrease in interest expense, net, resulted from a $103,000 increase in interest income
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
and a $119,000 decrease in interest expense. The increase in interest income was attributable to an increase in cash, cash equivalents, and short-term investments. The decrease in interest expense was attributable to a reduction in interest expense associated with a fixed asset loan agreement that we entered into for the construction of a research center for our wholly-owned subsidiary in Shanghai, OmniVision Technologies (Shanghai) Co. Ltd., or OTC, and a reduction in interest accretion associated with a license agreement that we entered into with the California Institute of Technology in January 2014.
Other Income, Net
Other income, net, for the three months ended July 31, 2015 was $1.1 million, as compared to $1.0 million in the prior year. Other income, net, for the three months ended July 31, 2015 included $356,000 of income associated with the leasing out of our office space in Shanghai, China, $332,000 of dividends distributed by XinTec, Inc., or XinTec, a $255,000 gain on the interest rate swap agreement related to the mortgage on our complex of four buildings located in Santa Clara, California, or our Santa Clara Property, and a $144,000 gain from foreign exchange. Other income, net, for the three months ended July 31, 2014 included $351,000 of income associated with the leasing out of our office space in Shanghai, China, a $306,000 gain on the interest rate swap agreement related to the mortgage on our Santa Clara Property, a $193,000 gain from foreign exchange, and $180,000 of dividends distributed by XinTec, Inc., or XinTec.
Benefit from Income Taxes
We generated approximately $16.2 million and $33.7 million in income before income taxes for the three months ended July 31, 2015 and 2014, respectively. We recorded benefit from income taxes of approximately $2.0 million and $11.6 million for the three months ended July 31, 2015 and 2014, respectively, resulting in effective tax rates of (12.6)% and (34.6)% for the respective periods. Our effective income tax rate reflects the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate.
Our quarterly income taxes reflect an estimate of the corresponding fiscal years annual effective tax rate and include, when applicable, adjustments from discrete tax items. For the three months ended July 31, 2015, the discrete adjustments to our income taxes included the tax benefits that resulted from the reduction of unrecognized tax benefits due to the lapses of applicable statute of limitations in certain foreign jurisdictions and the reversal of deferred tax liabilities accrued on undistributed earnings for certain non-U.S. investee companies.
During the three months ended July 31, 2015, we reduced unrecognized tax benefits by approximately $3.1 million due to the lapses of applicable statute of limitations in certain foreign jurisdictions. We also accrued an additional $300,000 of interest related to our unrecognized tax benefits. As of July 31, 2015, we anticipate that the balance of gross unrecognized tax benefits will decrease by approximately $4.3 million due to the lapses of the applicable statute of limitations in certain jurisdictions over the next 12 months.
Liquidity and Capital Resources
Our principal sources of liquidity as of July 31, 2015 consisted of cash, cash equivalents and short-term investments totaling $593.8 million.
Liquidity
Our working capital increased by $36.1 million to $879.1 million as of July 31, 2015, as compared to $842.9 million as of April 30, 2015. Our working capital increased as a result of: a $69.6 million increase in cash, cash equivalents and short-term investments primarily due to cash provided by operating activities; a $15.1 million increase in prepaid expenses and other current assets due to a $12.9 million dividend receivable from VisEra; a $4.2 million decrease in accrued expenses and other current liabilities; and a $2.6 million decrease in income taxes payable. These increases in working capital were offset by: a $23.4 million decrease in inventories due to a decrease in inventory purchases; a $20.2 million increase in deferred revenues, less cost of revenues due to an increase in inventory in our distribution channels; a $3.6 million decrease in accounts receivable, net; a $3.0 million decrease in prepaid and deferred income taxes; a $2.7 million increase in accounts payable; and a $2.4 million increase in current portion of long-term debt.
Cash balances are held by our U.S. headquarters and our subsidiaries throughout the world, with the majority of cash and cash equivalents being held in the U.S., Cayman Islands, and Singapore. As of July 31, 2015, the amount of cash, cash equivalents and short-term investments held by foreign subsidiaries totaled approximately $305.2 million. In the event these funds from foreign subsidiaries are needed to fund operations in the U.S., and if U.S. tax has not already been previously
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
provided, we would be required to accrue and pay additional U.S. taxes in order to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
In March 2007, we purchased our Santa Clara Property. In connection with the purchase, we obtained from a domestic bank a mortgage loan with a principal amount of $27.9 million, or the Mortgage Loan. As of July 31, 2015, the principal amount outstanding under the Mortgage Loan was $23.0 million.
In August 2009, in order to finance costs associated with the construction of a research center for OTC, we entered into a fixed asset loan agreement with a bank in China, or the Construction Loan. We completed the construction of the research center during the three months ended October 31, 2010. As of July 31, 2015, the principal amount outstanding under the Construction Loan was $9.0 million.
Cash Flows from Operating Activities
For the three months ended July 31, 2015, net cash provided by operating activities totaled approximately $72.2 million as compared to approximately $71.5 million for the corresponding period in the prior year. The principal components of the current year amount were: net income of approximately $18.2 million for the three months ended July 31, 2015; adjustments for non-cash charges of $9.9 million in stock-based compensation, $8.8 million in write-down of inventories, $8.4 million in depreciation and amortization, and $0.6 million in loss on equity investments, net; a $20.1 million increase in deferred revenues, less cost of revenues, a $15.1 million decrease in inventories, a $11.2 million decrease in prepaid expenses and other assets, a $3.6 million decrease in accounts receivable, net, a $1.4 million increase in accounts payable, and $0.5 million decrease in prepaid and deferred income taxes. These increases were offset by: a $21.0 million decrease in accrued expenses and other liabilities and a $4.3 million decrease in income taxes payable. The $20.1 million increase in deferred revenues, less cost of revenues was caused by an increase in inventory in our distribution channels. The 15.1 million decrease in inventories was caused by a reduction in inventory purchases. The $21.0 million decrease in accrued expenses and other liabilities was primarily due to the resolution of the security litigation in June 2015 and the corresponding release of $12.5 million in litigation settlement accrual. The $4.3 million decrease in income tax payable resulted primarily from a $3.1 million reduction in our unrecognized tax benefits when the applicable statute of limitations in certain foreign jurisdictions lapsed.
The principal components of the net cash provided by operating activities during the three months ended July 31, 2014 were: net income of approximately $45.3 million for the three months ended July 31, 2014; adjustments for non-cash charges of $10.2 million in write-down of inventories, $8.9 million in depreciation and amortization, $8.4 million in stock-based compensation and $4.4 million in gain on equity investments, net; a $42.1 million increase in accounts payable; a $6.8 million increase in deferred revenues, less cost of revenues; and a $2.8 million decrease in deferred income taxes. These increases were offset by: a $24.0 million increase in inventories; a $16.1 million decrease in income taxes payable; a $4.5 million decrease in accrued expenses and other current liabilities; and a $4.3 million increase in accounts receivable, net. The $42.1 million increase in accounts payable was caused by an increase in inventory purchases. Our increase in inventory purchases also resulted in a $24.0 million increase in inventories. The $16.1 million decrease in income tax payable resulted primarily from a $15.1 million reduction in our unrecognized tax benefits when the applicable statute of limitations in certain foreign jurisdictions lapsed.
Cash Flows from Investing Activities
For the three months ended July 31, 2015, our net cash provided by investing activities totaled approximately $38.1 million, as compared to approximately $50.3 million used in for the corresponding period in the prior year. The amount of net cash provided by investing activities during the three months ended July 31, 2015 represented $88.7 million in net proceeds from sales or maturities of short-term investments, offset by $43.3 million in purchases of short-term investments, $4.8 million in purchase and deposits for intangible and other assets, and $2.5 million in purchases of property, plant and equipment, net of sales. For the three months ended July 31, 2014, our net cash used in investing activities represented the use of $116.4 million in purchases of short-term investments, and $5.2 million in purchases of property, plant and equipment, net of sales, partially offset by $71.2 million in net proceeds from sales or maturities of short-term investments.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cash Flows from Financing Activities
For the three months ended July 31, 2015, net cash provided by financing activities totaled approximately $5.2 million, as compared to approximately $7.6 million for the corresponding period in the prior year. The amount of net cash provided by financing activities during the three months ended July 31, 2015 represented $4.6 million in proceeds from the exercise of stock options and employee purchases through our employee stock purchase plan and $0.8 million in excess tax benefits from stock-based compensation, partially offset by $138,000 used to repay long-term borrowings. For the three months ended July 31, 2014, our net cash provided by financing activities represented $6.8 million in proceeds from the exercise of stock options and employee purchases through our employee stock purchase plan and $0.9 million in excess tax benefits from stock-based compensation, partially offset by $138,000 used to repay long-term borrowings.
Capital Commitments and Resources
During the three months ended July 31, 2014, we entered into a development and supply agreement with PTC pursuant to which we would deposit up to $1.0 million with PTC as prepaid wafer credit. As of July 31, 2015 we have not made any deposits under this agreement.
We currently expect our available cash, cash equivalents and short-term investments, together with cash that we anticipate generating from operating activities, will be sufficient to satisfy our capital requirements over approximately the next twelve months and the foreseeable future. Other than normal working capital requirements, we expect our capital requirements totaling approximately $40.0 million over approximately the next twelve months will consist primarily of funding capital investments in our wholly-owned subsidiaries.
Our ability to generate cash from operations is subject to substantial risks described below under the caption Part II Item 1A, Risk Factors. We encourage you to review these risks carefully.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of July 31, 2015 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future periods (in thousands):
|
|
Payments Due by Period |
| |||||||||||||
|
|
|
|
Less than |
|
|
|
|
|
More than |
| |||||
|
|
Total |
|
1 Year |
|
1 - 3 Years |
|
4 - 5 Years |
|
5 Years |
| |||||
Contractual Obligations and Commercial Commitments : |
|
|
|
|
|
|
|
|
|
|
| |||||
Operating leases |
|
$ |
11,078 |
|
$ |
5,250 |
|
$ |
3,367 |
|
$ |
1,698 |
|
$ |
763 |
|
Debt obligations(1) |
|
31,952 |
|
9,545 |
|
22,407 |
|
|
|
|
| |||||
Purchase obligations(2) |
|
178,830 |
|
178,830 |
|
|
|
|
|
|
| |||||
Other |
|
1,607 |
|
1,526 |
|
81 |
|
|
|
|
| |||||
Total contractual obligations |
|
223,467 |
|
195,151 |
|
25,855 |
|
1,698 |
|
763 |
| |||||
Other Commercial Commitments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Prepaid wafer credit(3) |
|
1,000 |
|
1,000 |
|
|
|
|
|
|
| |||||
Total commercial commitments |
|
1,000 |
|
1,000 |
|
|
|
|
|
|
| |||||
Total contractual obligations and commercial commitments |
|
$ |
224,467 |
|
$ |
196,151 |
|
$ |
25,855 |
|
$ |
1,698 |
|
$ |
763 |
|
(1) In March 2007, we entered into the Mortgage Loan with a domestic bank in the amount of $27.9 million. In August 2009, we entered into the Construction Loan with a bank in China to finance costs associated with the construction of a research center for OTC. As of July 31, 2015, our balances outstanding under the Mortgage Loan and Construction Loan were approximately $23.0 million and $9.0 million, respectively. See Note 7 - Borrowing Arrangements and Related Derivative Instruments to our condensed consolidated financial statements. The amounts as disclosed in the table above do not include any associated interest payments as the loans have variable interest rates and interests will vary accordingly.
(2) Purchase obligations represent outstanding purchase orders that we have placed with our suppliers at period-ends. The lead time for delivery is long, typically 12 to 14 weeks, and suppliers must prepare unique materials for us at the beginning of the fabrication process. Accordingly, we are precluded from cancelling our orders once placed and the production process has begun.
(3) During the three months ended July 31, 2014, we entered into a development and supply agreement with PTC pursuant to which we would deposit up to $1.0 million with PTC as prepaid wafer credit. See Note 13 - Commitments and Contingencies to our condensed consolidated financial statements.
As of July 31, 2015, the long-term income taxes payable, including estimated interest and penalties, was $53.5 million. We are unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audits, if any, or their outcomes. Also, in connection with the proposed acquisition by Hua Capital Management, CITIC Capital and GoldStone Investment, we may be obligated to pay additional transaction related expenses, depending on the outcome of the proposed transaction. We are unable to make any estimates of such additional expenses as the outcome remains uncertain. Accordingly, we have excluded this obligation from the schedule summarizing our significant obligations to make future payments under contractual obligations as of July 31, 2015 presented above.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during the periods covered by this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued new authoritative guidance for revenue recognition. The new revenue recognition guidance provides a comprehensive framework to address revenue recognition issues for all contracts with customers, and supersedes most previously-issued industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle and apply the new guidance, entities will follow a five-step approach: Step 1) identify the contracts with the customer; Step 2) identify the separate performance obligations in the contract; Step 3) determine the transaction price; Step 4) allocate the transaction price to separate performance obligations; and Step 5) recognize revenue when, or as, each performance obligation is satisfied. The new guidance is required to be applied retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The guidance is effective for us beginning in the first quarter of fiscal 2019. Early adoption is permitted for us beginning in the first quarter of fiscal 2018. We have not yet selected the transition method, and are currently evaluating the impact this guidance may have on our financial position, results of operations and cash flows.
In August 2014, the FASB issued new authoritative guidance related to the disclosures around going concern. The new guidance specifies managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures, if applicable. The new guidance is effective for us beginning in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have any material effect on our financial position, results of operations and cash flows.
In January 2015, the FASB revised the authoritative guidance on reporting extraordinary items by eliminating such concept from accounting principles generally accepted in the United States of America (GAAP). Previously, if an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax. The guidance is effective for us beginning in the first quarter of fiscal 2017. We do not expect the adoption of this guidance to have any material effect on our financial position, results of operations and cash flows.
In February 2015, the FASB revised the authoritative guidance for consolidation. The revised guidance affects reporting entities that are required to evaluate whether they should consolidate certain legal entities, and all legal entities are subject to reevaluation under the revised consolidation model. Other than modifying the evaluation guidance for limited partnerships and similar legal entities, the revised guidance also affects the consolidation analysis of reporting entities that are involved with variable-interest-entities. The guidance is effective for us beginning in the first quarter of fiscal 2017. We are currently evaluating the impact this guidance may have on our financial position, results of operations and cash flows.
In July 2015, the FASB revised the authoritative guidance for subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for us beginning in the first quarter of fiscal 2018. We are currently evaluating the impact this guidance may have on our financial position, results of operations and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
We sell our products globally, in particular to OEMs, VARs and distributors in China, Japan, Korea and Taiwan.
The great majority of our transactions with our customers and vendors are denominated in U.S. dollars. The expenses we incur in currencies other than U.S. dollars affect gross profit, research, development and related expenses, selling, general and administrative expenses and income taxes, and are primarily incurred in China, where the Chinese Yuan, or CNY, is the local currency and in Taiwan, where the New Taiwan dollar is the local currency.
As of July 31, 2015, the functional currency of all of our wholly-owned subsidiaries is the U.S. dollar. Transaction gains and losses resulting from transactions denominated in currencies other than the respective functional currencies are included in Other income, net for the periods presented. The amounts of transaction gains and losses for the three months ended July 31, 2015 were not material.
Given that the operating expenses which we incur in currencies other than U.S. dollars have not been a significant percentage of our revenues, we do not believe that our foreign currency exchange rate fluctuation risk is significant. Consequently, we do not believe that a 10% change in foreign currency exchange rates would have a significant effect on our future net income or cash flows.
In August 2009, in order to finance costs associated with the construction of a research center in OTC, we entered into the Construction Loan with a bank in China. The Construction Loan is denominated in CNY. As of July 31, 2015, the principal amount outstanding under the Construction Loan was approximately $9.0 million. As of July 31, 2015, a hypothetical 10% weakening of the U.S. dollar against CNY would result in approximately $0.9 million of additional remeasurement losses. As of July 31, 2015, a hypothetical 10% strengthening of the U.S. dollar against CNY would result in approximately $0.9 million of additional remeasurement gains.
We have not hedged exposures denominated in foreign currencies or used any other derivative financial instruments. Although we transact the overwhelming majority of our business in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the competitiveness of our products and thus may impact our results of operations.
Market Interest Rate Risk
Our cash equivalents and short-term investments are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income and, from time to time, the fair market value of our investments. We manage our exposure to financial market risk by performing ongoing evaluations of our investment portfolio. We presently invest in money market funds, certificates of deposit issued by banks, commercial paper, high-grade corporate securities and government bonds maturing approximately 18 months or less from the date of purchase.
Due to the short maturities of our investments, the carrying value should approximate the fair market value. In addition, we do not use our investments for trading or other speculative purposes. Due to the short duration of our investment portfolio, we do not expect that an immediate 10% change in interest rates would have a material effect on the fair market value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates. We do not believe that the recent instability in global financial markets has significantly affected the value of our cash equivalents and short-term investments.
During fiscal 2007, we financed the purchase of the Santa Clara Property with a $27.9 million mortgage loan. The mortgage loan is a variable rate loan which bears interest at LIBOR plus 90 basis points and changes in the interest rate affect our interest payments. However, concurrent with the mortgage loan, we also entered into an interest rate swap with a notional amount that approximates the principal outstanding under the mortgage loan. We are the fixed rate payer under the swap with a fixed rate of 5.3%. Consequently, although we are required to mark the value of the swap to market at each balance sheet date and record the associated non-cash cost or benefit as part of Other income, net, a hypothetical 10% change in LIBOR would not have a material effect on our interest expense for the three months ended July 31, 2015.
As to the Construction Loan, the interest rate is based on an indicative rate as published by the Chinese government, and will be adjusted only at the anniversary of each drawdown. Interest rate under the Construction Loan was 5.6% at
July 31, 2015. We do not hedge against the risk of interest rate changes for the Construction Loan. However, since the current interest rate is published by the Chinese government and will not be adjusted until the next anniversary of the earliest drawdown, which will be November 2015, any hypothetical 10% shifts in yield will not cause a significant adverse impact to our results of operations, cash flows or to our financial position for the three months ended July 31, 2015.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our chief executive officer and our chief financial officer, our management conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, at the level of reasonable assurance, our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
There have been no changes in our internal control over financial reporting during the three-month period ended July 31, 2015, as covered by this Quarterly Report on Form 10-Q, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we have been subject to legal proceedings and claims with respect to such matters as patents, product liabilities and other actions arising out of the normal course of business.
Ziptronix, Inc. v. OmniVision Technologies, Inc., Taiwan Semiconductor Manufacturing Company Ltd., and TSMC North America Corp.
On December 6, 2010, Ziptronix, Inc., or Ziptronix, filed a complaint alleging patent infringement against us in the District Court for the Northern District of California. The case is entitled Ziptronix, Inc. v. OmniVision Technologies, Inc., Taiwan Semiconductor Manufacturing Company Ltd., and TSMC North America Corp., Case No. CV10-05525. In its complaint, Ziptronix asserts that we have made, used, offered to sell, sold and/or imported into the United States image sensors that infringe the following six patents: U.S. Patent Nos. 7,387,944 (Method for Low Temperature Bonding and Bonded Structure), 7,335,572 (Method for Low Temperature Bonding and Bonded Structure), 7,553,744 (Method for Low Temperature Bonding and Bonded Structure), 7,037,755 (Three Dimensional Device Integration Method and Integrated Device), 6,864,585 (Three Dimensional Device Integration Method and Integrated Device), and 7,807,549 (Method for Low Temperature Bonding and Bonded Structure). The complaint seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against us. We answered the complaint on May 4, 2011 and denied each of Ziptronixs infringement claims against us.
On November 22, 2011, Defendants Taiwan Semiconductor Manufacturing Company Ltd., and TSMC North America Corp. (collectively TSMC) filed amended counterclaims asserting that Ziptronix has infringed, actively induced infringement of, and/or induced contributory infringement of the following five patents: U.S. Patent Nos. 6,682,981 (Stress Controlled Dielectric Integrated Circuit Fabrication), 7,307,020 (Membrane 3D IC Fabrication), 6,765,279 (Membrane 3D IC Fabrication), 7,385,835 (Membrane 3D IC Fabrication), and 6,350,694 (Reducing CMP Scratch, Dishing and Erosion by Post CMP Etch Back Method for Low-K Materials). Ziptronix answered the amended counterclaims on December 9, 2011 and denied each of TSMCs infringement claims against it.
On August 9, 2012, Ziptronix filed a second amended complaint adding claims that the defendants infringe the following three patents: U.S. Patent Nos. 8,153,505 (Method for Low Temperature Bonding and Bonded Structure), 8,043,329 (Method for Low Temperature Bonding and Bonded Structure), and 7,871,898 (Method for Low Temperature Bonding and Bonded Structure). We answered the second amended complaint on August 27, 2012, and denied each of Ziptronixs infringement claims against us.
Claim construction briefing has been submitted, but there is no claim construction hearing currently scheduled. On September 30, 2014, the court granted TSMCs motion for summary judgment of noninfringement based on extraterritoriality issues. On March 2, 2015, the court granted our motion for summary judgment of noninfringement of our non-U.S. sales. The courts summary judgment order addresses most of Ziptronixs infringement claims asserted in the case and we expect to vigorously defend ourselves against Ziptronixs remaining allegations of infringement. We are currently unable to predict the ultimate outcome of this case and therefore cannot determine the likelihood of loss nor estimate the loss or a range of possible loss.
Securities Litigation
On October 26, 2011, the first of several putative class action complaints was filed in the United States District Court for the Northern District of California against us and three of our executives, one of whom is a director. All of the complaints alleged that the defendants violated the federal securities laws by making misleading statements or omissions regarding our business and financial results, in particular regarding the use of our imaging sensors in Apple Inc.s iPhone. These actions have been consolidated as In re OmniVision Technologies, Inc. Litigation, Case No. 11-CV-5235 (RMW) (the Securities Case). On April 23, 2012, plaintiffs filed a consolidated complaint on behalf of a purported class of purchasers of our common stock between August 27, 2010 and November 6, 2011, seeking unspecified damages. On March 29, 2013, the court denied the defendants motion to dismiss. On December 30, 2014, the parties entered into a stipulation and agreement of settlement to resolve the litigation, which was then submitted to the court for preliminary approval. The stipulation and agreement of settlement provides for a payment of $12.5 million to the plaintiff class, which is funded solely by our insurance carriers. We also entered into a mutual release agreement with one of our insurance carriers. In March 2015, the
court entered an order granting preliminary approval of the settlement and ordering notice to the putative plaintiff class. On June 5, 2015, the court granted final approval of the settlement and entered a final judgment and order dismissing the action.
As of April 30, 2015, we reported on our balance sheet $12.5 million as Recoverable insurance proceeds within Total current assets, and $12.5 million as Litigation settlement accrual within Total current liabilities. As a result of the final judgment and order dismissing the action, we reversed the $12.5 million of recoverable insurance proceeds, and the corresponding $12.5 million of litigation settlement accrual, with no additional cash settlement payment from us, and no impact on our results of operations.
Derivative Litigation
On November 15, 2011, the first of three shareholder derivative complaints was filed in the Superior Court of California, County of Santa Clara, against several of our current and former officers and directors. These three state court actions were consolidated under the caption In re OmniVision Technologies, Inc. Derivative Litigation, Case No. 1-12-CV-216875, or the California State Action. On March 21, 2012, a fourth similar shareholder derivative complaint captioned Carpenters Pension Fund of West Virginia v. Shaw Hong, et al., Case No. 12-CV-1423, was filed in the United States District Court for the Northern District of California, or the California Federal Action. On May 10, 2012, a fifth similar shareholder derivative complaint captioned Edker Pope v. Shaw Hong, et. al., Case No. 7514, was filed in the Court of Chancery of the State of Delaware, or the Delaware Action. These complaints make allegations similar to those presented in the Securities Case, but they assert various state law causes of action, including claims of breach of fiduciary duty and unjust enrichment. All of these derivative complaints seek unspecified damages on behalf of us. We are named solely as a nominal defendant against whom no recovery is sought. The proceedings in these derivative actions had been stayed by agreement and the California Federal Action and Delaware Action remain stayed. In the California State Action, the Court has set a schedule for the filing of an amended complaint and the filing of defendants anticipated demurrers. We are currently unable to predict the outcome of these actions and therefore cannot determine the likelihood of loss nor estimate the loss or a range of possible loss.
Raytheon Company v. Sony Corporation, OmniVision Technologies, Inc., and Apple, Inc.
On March 6, 2015, Raytheon Company (Raytheon) filed a complaint alleging patent infringement against us in the District Court for the Eastern District of Texas. The case is entitled Raytheon Co. v. Sony Corp. et al., Case No. 2:15-CV-00342-JRG-RSP. In its complaint, Raytheon asserts that we have made, used, offered to sell, sold and/or imported into the United States image sensors that infringe U.S. Patent No. 5,591,678 (the 678 Patent). The complaint seeks unspecified monetary damages, interest, fees, expenses, costs and other equitable relief against us. We answered the complaint on May 1, 2015 and denied each of Raytheons infringement claims against us. In addition, we had moved to transfer the matter to the Northern District of California along with several other defendants. Notably, the 678 Patent expired in January 2014. We are currently unable to predict the ultimate outcome of this case and therefore cannot determine the likelihood of loss nor estimate the loss or a range of possible loss.
Merger Litigation
In connection with the Merger Agreement and the transactions contemplated thereby, a number of putative class action lawsuits have been filed in the Superior Court of the State of California, County of Santa Clara. The actions filed Pope v. OmniVision Technologies, Inc., et al., No. 15-CV-280161 (filed May 4, 2015); Francisco v. Xiaoying, et al., No. 15-CV-280270 (filed May 6, 2015); Agee v. OmniVision Technologies, Inc., No. 15-CV-280311 (filed May 7, 2015); Levine v. OmniVision Technologies, Inc., No. 15-CV-280344 (filed May 7, 2015); ODonnell v. OmniVision Technologies, Inc., No. 15-CV-280411 (filed May 8, 2015); Smith v. Hong, et al., No. 15-CV-280863 (filed May 19, 2015); and Nido v. OmniVision Technologies, Inc., No. 15-CV-281031 (filed May 22, 2015). In general, the various complaints assert that, among other things, the members of the Board of Directors breached their fiduciary duties to OmniVisions stockholders by engaging in a process that was not designed to, and did not, maximize the stockholders value, and that OmniVision and the proposed acquiring entities aided and abetted the Board of Directors alleged breaches of fiduciary duties. The complaints generally seek to enjoin the merger, rescission of the merger to the extent it is implemented, or alternatively, rescissionary damages. On June 2, 2015, the actions were consolidated under the caption In re OmniVision Technologies, Inc. Shareholder Litigation, No. 15-CV-280161. On June 8, 2015, a consolidated amended complaint was filed. The amended complaint adds allegations that the Board of Directors breached their fiduciary duties by issuing a false and misleading preliminary proxy statement. The amended complaint also adds allegations that J.P. Morgan aided and abetted the directors alleged breaches of fiduciary duty. On July 1, 2015, plaintiffs filed a motion for a preliminary injunction seeking to enjoin the shareholder vote on the merger. The Court held a hearing on this motion on July 16, 2015. At that hearing the Court denied plaintiffs motion for an injunction. The Court has set a schedule for the filing of an amended complaint and the filing of defendants anticipated demurrers. We are currently unable to predict the outcome of this action and therefore cannot determine the likelihood of loss nor estimate the loss or a range of possible loss.
This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition or results of operations to differ materially from our historical results or currently anticipated results, including those set forth below.
The following description of these risk factors includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Item 1A of our 2015 Annual Report on Form 10-K filed with the SEC on June 29, 2015. As a result of the following risk factors, as well as of other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
Risks Related to Our Pending Acquisition
Our pending acquisition is subject to various uncertainties, including closing conditions that are outside of our control, and there can be no assurances as to whether and when it may be completed.
On April 30, 2015, we entered into a Merger Agreement with entities that were formed on behalf of affiliates of the Consortium pursuant to which the Consortium will acquire us. The consummation of the merger is subject to customary closing conditions and a number of the conditions are not within our control, and may prevent, delay or otherwise materially adversely affect the completion of the transaction. These conditions include, among other things:
· the receipt of applicable approvals from regulatory bodies in the United States and the Peoples Republic of China;
· the absence of any legal restraints or prohibitions on the consummation of the merger; and
· our divestiture of certain of our investments in Taiwan.
In addition, it is possible that a change, event, fact, effect or circumstance could occur that could lead to a material adverse effect to us, which may give the Consortium the ability to not complete the merger. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise.
The Merger Agreement may also be terminated under specified circumstances, including by the Consortium if, among other things, an alternative proposal to acquire us is publicly commenced by a third party and we have not taken certain actions within a specified period of time.
If the merger does not receive, or timely receive, the required regulatory approvals and clearance, or if the Merger Agreement is terminated or another event occurs delaying or preventing the merger, such delay or failure to complete the merger may cause uncertainty or other negative consequences that may materially and adversely affect our sales, financial performance and operating results, and the price per share for our common stock and perceived acquisition value.
Additionally, if the merger is not completed for any reason, to the extent that the current market price of our common stock reflects an increase resulting from a market assumption that the transaction will be completed, the market price of our common stock may decline by the value attributed to this assumption, or could decline even more. Furthermore, we will be required to pay certain costs relating to the merger, whether or not it is completed, such as significant fees and expenses relating to legal, accounting and other services. In addition, we could be subject to litigation related to any failure to complete the merger. If the merger is not completed, these risks may materially and adversely affect our stock price, operating results and ongoing business.
Our obligation to pay a termination fee to the Consortium under certain circumstances could require us to use available cash that would have otherwise been available for general corporate purposes and may discourage other companies from trying to acquire us.
If the Merger Agreement is terminated, in certain circumstances, we would be required to pay the Consortium a termination fee of $28.0 million, which may require us to use available cash that would have otherwise been available for general corporate purposes. Furthermore, until the merger is completed or the Merger Agreement is terminated, with limited exceptions, we are prohibited from entering into or soliciting any acquisition proposals, and these provisions coupled with a potential termination fee, if any, could discourage other companies from trying to acquire us for a higher price. For these and other reasons, a failed merger could materially and adversely affect our business, operating results or financial condition,
which in turn would materially and adversely affect our business or financial condition, the price per share of our common stock or our perceived acquisition value.
While the merger is pending, we are subject to business uncertainties and contractual restrictions that could materially adversely affect our business relationships with our customers, vendors, suppliers and other third parties.
The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the merger, generally requiring us to conduct our business in the regular and ordinary course, consistent with past practice and policies, and subjecting us to a variety of specified limitations absent the Consortiums prior written consent. We may find that these and other contractual arrangements in the Merger Agreement may delay or prevent us from or limit our ability to respond effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management and board of directors think they may be advisable. The pendency of the merger may also divert managements attention and our resources from ongoing business and operations. Our employees, customers, vendors and suppliers may have uncertainties about the effects of the merger. In connection with the pending merger, it is possible that our business relationships with our customers, vendors, suppliers and others may be subject to disruption as these parties may elect to delay or defer certain business decisions, including purchase or design-win decisions, or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the merger. If any of these effects were to occur, it could materially and adversely impact our business, operating results and financial condition, as well as the market price of our common stock and our perceived acquisition value, regardless of whether the merger is completed. The adverse effect of any such disruptions could be exacerbated by a delay in the completion of the acquisition for any reason, including delays associated with obtaining regulatory approvals, or termination of the merger agreement. In addition, whether or not the merger is completed, while it is pending we will continue to incur costs, fees, expenses and charges related to the proposed merger, which may materially and adversely affect our business results and financial condition.
We may have difficulty motivating and retaining executives and other key employees due to the pending acquisition.
Current and prospective employees may experience uncertainty about their future roles with us following completion of the merger, which may materially adversely affect our ability to attract and retain key employees and could have an adverse effect on us while the acquisition is pending. This uncertainty may impair our ability to retain and motivate key personnel in the months leading up to the completion of the acquisition. If key employees depart because of this uncertainty or other issues related to the merger, we may incur significant costs in identifying, hiring, and retaining replacements for departing employees, which could have a material adverse effect on our business, operating results, and financial condition.
If the proposed acquisition is not completed, we will have incurred substantial costs that may adversely affect our operating results and financial condition as well as the market price of our common stock.
If the merger is not completed, the price of our common stock may decline to the extent that such market price reflects a market assumption that the merger will be completed. In addition, we have incurred and will incur substantial costs in connection with the proposed merger. These costs are primarily associated with the fees of our financial advisors, accountants, and legal counsel and will be payable regardless of whether the merger is completed. In addition, as part of preparing for the closing of the merger, we have taken actions necessary to divest certain of our investments in Taiwan. If the merger is not completed, we may not be able to unwind these actions.
We have also diverted significant management resources in an effort to complete the merger. If the acquisition is not completed, we will have received little or no benefit in respect of such costs incurred. Furthermore, if the merger is not completed, we may experience negative reactions from the financial markets and our vendors, suppliers, customers, customer prospects, and employees. Any of these factors could have an adverse effect on our business, operating results, and financial condition or on the trading price of our common stock.
In connection with the Merger Agreement, a number of lawsuits have been filed against us challenging the merger, and an unfavorable judgment or ruling in one or more of these lawsuits could prevent or delay the consummation of the merger, result in substantial costs, or have an adverse effect on our business, financial condition and operating results.
Beginning on May 4, 2015, a number of putative class action lawsuits have been filed in the Superior Court of the State of California, County of Santa Clara. In general, the lawsuits assert that, among other things, the members of our board of directors breached their fiduciary duties to stockholders by initiating a process that undervalues our company, by agreeing to a transaction that does not adequately reflect our true value, and that we and the Consortium aided and abetted the board of
directors alleged breaches of fiduciary duties. The lawsuits generally seek to enjoin the merger as contemplated by the Merger Agreement, or, alternatively, seek rescission of a consummated merger. No trial date has been set. We currently are unable to predict the outcome of this action and therefore cannot determine the likelihood of loss nor estimate the loss or a range of possible loss.
Litigation is inherently uncertain, and there can be no assurances that the defense of these stockholder lawsuits will be successful. In addition, we have obligations, under certain circumstances, to hold harmless and indemnify each of the defendant directors against judgments, fines, settlements and expenses related to claims against such directors and otherwise to the fullest extent permitted under Delaware law and our bylaws and certificate of incorporation. Such obligations may apply to these lawsuits. An unfavorable outcome in these lawsuits could prevent or delay the consummation of the merger, result in substantial costs to us, or have an adverse effect on our business, financial condition and operating results.
Risks Related to Our Business
For the majority of our revenues, we depend on a few key customers and, the loss of one or more of our key customers, or their key end-user customers, could significantly reduce our revenues.
A relatively small number of OEMs, VARs and distributors account for a significant portion of our revenues. Some of these OEMs and VARs are major producers of mobile phones, including smartphones, for some of the largest companies in the mobile phone industry and may rely upon one or more key end-user customers for a significant portion of their revenue. Any material delay, alteration, cancellation or reduction of purchase orders from or change in the purchasing patterns of one or more of our major customers or distributors, or their key end-user customers, could result in our failure to achieve our revenue forecast for a particular period. For example, in our second quarter of fiscal 2012, we experienced an unexpected cutback in orders from certain of our key customers. This reduced the unit sales of our OmniBSI and OmniPixel3-HS based products and adversely affected our revenue for that quarter.
If we are unable to retain one or more of our largest OEM, VAR or distributor customers, if we are unable to maintain our current level of revenues from one or more of these significant customers, if our OEM, VAR or distributor customers are unable to retain one or more of their key end-user customers, or if we are unable to attract new customers to replace the revenue lost from such customers, our business and results of operation would be impaired, and our stock price could decrease, potentially significantly. Such a delay, alteration, cancellation or reduction of purchase orders, a change in purchasing patterns or our inability to retain a key customer or several of our smaller customers could be caused by, among other things, failure to meet our customers, including their key end-user customers, demand for our products or to timely develop and introduce new products that meet the needs of our customers, including their key end-user customers, and that are efficiently and successfully integrated into their products. In addition, on April 30, 2015, we entered into a definitive agreement to be acquired by the Consortium. This pending transaction may create uncertainty for our current and potential customers, which could cause them to terminate, or not to renew or enter into, agreements with us.
In fiscal 2015, approximately 53.0% of our revenues came from sales to our top five customers. In addition, in the three months ended July 31, 2015, approximately 52.7% of our revenues came from sales to our top five customers, including two OEM customers that accounted for approximately 10.3% and 10.2% of our revenues, respectively, and one distributor customer that accounted for approximately 17.0% of our revenues. Our business, financial condition, results of operations and cash flows will continue to depend significantly on our ability to retain our current key customers and to attract new customers, as well as on the financial condition and success of our OEMs, VARs and distributors, including their ability to retain their key end-user customers and attract new customers.
We face foreign business, political and economic risks, because a majority of our products and those of our customers are manufactured and sold outside of the United States.
We face difficulties in managing our third party foundries, color filter application service providers, packaging and other manufacturing service providers and our foreign distributors, most of whom are located in Asia. In addition, our presence in Asia presents the challenge of managing foreign operations and maintaining good relations with our employees located there. Any political and economic instability in Asia might have an adverse impact on foreign exchange rates and could cause service disruptions for our vendors and distributors and adversely affect our customers.
Sales outside of the United States accounted for a significant portion of our revenues for fiscal 2015 and the three months ended July 31, 2015. In addition, since the third quarter of fiscal 2014, we experienced a decline in sales of products that were used in mobile phones made by end-user customers located in North America, which was partially offset by an
increase in the sale of products that were used in mobile phones made by end-user customers located in China. We anticipate that sales outside of the United States, in particular in China and the emerging market in India, will account for a substantial portion of our revenues in future periods. We continue to invest resources in China and India in anticipation of continued revenues from these markets. Dependence on sales to foreign customers, in particular in China and India, involves certain risks, including:
· increased price competition, in particular in the China market;
· longer payment cycles;
· the adverse effects of tariffs, duties, price controls or other restrictions that impair trade;
· decreased visibility as to future demand;
· difficulties in accounts receivable collections;
· volatility of the stock markets and economies in these regions of the world; and
· burdens of complying with a wide variety of foreign laws and labor practices.
Although we believe that our long standing relationships with OEMs in Asia, especially China, could assist us in sales trends favoring the Asian markets, sales driven by end-user customers in these markets could also create additional risks and challenges such as increased unpredictability of our sales because we tend to experience greater fluctuations in demand, often at a rapid pace, from end-user customers in Asia as compared to end-user customers in North America. Since a significant amount of our revenues is derived from markets outside of the United States, a slowdown in demand in these markets could have an adverse effect on our financial results. For example, in the third quarter of fiscal 2015, demand for our products slowed down in the China market, possibly attributable to the competitive environment faced by our customers and a protracted upgrade cycle for the local wireless infrastructure. This demand slowdown in the region had negatively impacted our revenues. If this slowdown in the China market continues, our future results of operation could be adversely affected as well.
Sales of our products have to date been denominated principally in U.S. dollars. Over the last several years, the value of the U.S. dollar has fluctuated when compared with other currencies. Future increases in the value of the U.S. dollar, if any, would increase the price of our products in the currency of the countries in which our customers are located. This may result in our customers seeking lower-priced suppliers, which could adversely impact our operating results. If a larger portion of our international revenues were to be denominated in foreign currencies in the future, we would be subject to increased risks associated with fluctuations in foreign currency exchange rates.
We face intense competition in our markets from CMOS and CCD image-sensor manufacturers, and if we are unable to compete successfully we may not be able to maintain or grow our business.
The image-sensor market is intensely competitive, and we expect competition in this industry to continue to increase. This competition has resulted in rapid technological change, evolving standards, reductions in product selling prices and rapid product obsolescence. If we are unable to successfully meet these competitive challenges, we may be unable to maintain and grow our business. Any inability on our part to compete successfully would also adversely affect our results of operations and impair our financial condition.
Our image-sensor products face competition from other companies that sell CMOS image sensors and from companies that sell CCD image sensors. Many of our competitors have longer operating histories, greater presence in key markets, greater name recognition, larger customer bases, more established strategic and financial relationships and significantly greater financial, sales and marketing, distribution, technical and other resources than we do. Many of them also have their own manufacturing facilities, which may give them a competitive advantage. As a result, they may be able to adapt more quickly to new or emerging technologies and customer requirements or devote greater resources to the promotion and sale of their products. Our competitors include established CMOS image-sensor manufacturers such as ON Semiconductor, Samsung, Sharp, Sony, STMicroelectronics and Toshiba as well as CCD image-sensor manufacturers such as Panasonic, Sharp and Sony. Many of these competitors own and operate their own fabrication facilities, which in certain circumstances may give them the ability to price their products more aggressively than we can, respond more rapidly than we can to changing market opportunities or more easily meet increased demands for their products. In addition, we compete with a large number of smaller CMOS manufacturers that has required, and in the future may require, us to reduce our prices. For instance, we have seen increased competition in the markets for VGA image-sensor products with resulting pressures on product pricing. Downward pressure on pricing could result both in decreased revenues and lower gross margins, which would adversely affect our profitability. From time to time, other companies enter the CMOS image-sensor market by using obsolete and available manufacturing equipment. These new entrants gain market share in the short-term by pricing their
products significantly below current market levels, which puts additional downward pressure on the prices we can obtain for our products.
Our competitors may acquire or enter into strategic or commercial agreements or arrangements with foundries or providers of color filter application, wafer probe testing, assembly or packaging services. These strategic arrangements between our competitors and third party service providers could involve preferential or exclusive arrangements for our competitors. Such strategic alliances could impair our ability to secure sufficient capacity from foundries and service providers to meet our demand for wafer manufacturing, color filter application, wafer probe testing, assembly or packaging services, adversely affecting our ability to meet customer demand for our products. In addition, competitors may enter into exclusive relationships with distributors, which could reduce available distribution channels for our products and impair our ability to sell our products and grow our business. Further, some of our customers could also become developers of image sensors, and this could potentially adversely affect our results of operations, business and prospects.
The development of new and more complex products can increase our cost of revenue and adversely affect our gross margins.
A key component of our future success is the continued development of new and innovative products and technologies. These new products and technologies are often times very complex and may require additional equipment and resources to develop and manufacture. In addition, for these new products, we may initially experience lower production yields than our other more established products. These new products and technologies also often have a higher cost structure than our existing products and technologies because we must devote more time and effort to developing the products and technologies and our suppliers and manufacturers may incur additional costs by acquiring new equipment or components in order to meet our design specification and capacity requirements. As our product mix shifts to include a higher volume of these new products and technologies, our gross margins may be lower than in comparable historical periods. For example, our OmniBSI-2 products have very different production requirements when compared to our previous generation products and we had to request our suppliers to install new equipment and tooling, which increased the production costs for these new products. Because we experienced increased sales of our OmniBSI-2 products since fiscal 2013 and expect these products to continue to constitute a significant percentage of our total sales in fiscal 2016, we anticipate that our gross margins will remain at lower levels than we have experienced historically, before our introduction of OmniBSI-2. If we are unable to sufficiently increase our ASPs to offset these higher production costs, increase our yields or lower the costs associated with the development and manufacture of these new products and technologies, our gross margins could continue to be negatively affected.
Reductions in our average selling prices may lower our revenues and, as a result, may reduce our gross margins.
We have experienced and expect to continue to experience pressure to reduce the selling prices of our products, and our ASPs have generally declined over time as a result. Competition in our product markets is intense and as competition continues to intensify, we anticipate that these pricing pressures will increase. Consequently, we expect that the ASPs for many of our products will continue to decline over time. If sales of mobile phones that use our products continue to shift from those made by end-user customers located in North America to those made by end-user customers located in Asia, we anticipate that this trend will place additional pressure on the pricing of our products due to the strong pricing pressure that we continue to experience in Asia. Unless we can increase unit sales sufficiently to offset these declines in our ASPs, our revenues will decline. Reductions in our ASPs have adversely affected our gross margins, and unless we can reduce manufacturing costs to compensate, additional reductions in our ASPs will continue to adversely affect our gross margins and could materially and adversely affect our operating results and impair our financial condition. Historically, we have increased and are likely to continue to increase our research, development and related expenses in the long-term to continue the development of new image-sensor products that can be sold at higher selling prices and/or manufactured at lower cost. If we are unable to timely introduce new products that incorporate more advanced technology and include more advanced features that can be sold at higher ASPs, or if we are unable to successfully develop more cost-effective technologies, our financial results could be adversely affected.
Sales of our image-sensor products for mobile phones, including smartphones, account for a large portion of our revenues, and any decline in sales to the mobile phone market or failure of this market and other emerging markets to continue to grow as expected could adversely affect our results of operations.
Sales to the mobile phone market, including smartphones, account for a large portion of our revenues. Although we can only estimate the percentages of our products that are used in the mobile phone market due to the significant number of our image-sensor products that are sold to module makers or through distributors and VARs, we believe that the mobile
phone market accounted for approximately 68% of our revenues in fiscal 2015. We expect that revenues from sales of our image-sensor products to the mobile phone market will continue to account for a significant portion of our revenues during fiscal 2016 and beyond. Any factors adversely affecting the demand for our image sensors in this market could cause our business to suffer and adversely affect our financial condition, operating results and cash flows. The digital image-sensor market for mobile phones is extremely competitive, and we expect to face increased competition in this market in the future. In addition, we continue to believe the market for mobile phones is also relatively concentrated and the top five producers account for approximately 50% of the annual unit sales of these products. If we do not continue to achieve design wins with key mobile phone manufacturers or if we experience a cutback in orders from our key customers, our market share or revenues could decrease. The mobile phone image-sensor market is also subject to rapid technological change. In order to compete successfully in this market, we will have to correctly forecast customer demand for technological improvements and be able to deliver such products on a timely basis at competitive prices. If we fail to correctly forecast customer demand in our target markets and timely deliver products at competitive prices, our results of operations, business and prospects would be materially and adversely affected. In addition, current domestic and global economic conditions could negatively affect the mobile phone market if consumers and/or businesses defer purchases in response to tighter credit, negative financial news, and/or decreased corporate or consumer spending.
We also expect that image sensors will continue to be incorporated into products for and become more important in the notebook and webcam, entertainment, commercial security and surveillance, medical and automotive industries. As image sensors begin to fill a greater role in these other markets, the challenges and risks that we face in these other markets could increase and could be similar to some of the challenges and risks that we face in the mobile phone market. If our sales to the mobile phone market and other emerging markets do not increase and/or the mobile phone market and other emerging markets do not grow as expected, our results of operations, business and prospects would be materially adversely affected.
If we do not forecast customer demand correctly, our business could be impaired and our stock price may decline.
Our sales are generally made on the basis of purchase orders rather than long-term purchase commitments; however, we manufacture products and build inventory based on our estimates of customer demand. Accordingly, we must rely on multiple assumptions to forecast customer demand. Various external factors that are outside of our control can make it difficult to accurately make such forecasts. For example, the domestic and global economic conditions that have existed since fiscal 2009 have made it extremely challenging to accurately predict customer demand, which has demonstrated increased volatility. There is no guarantee that customer demand will increase or will remain at current levels. If customer demand continues to be volatile, historical models for predicting customer demand may no longer be reliable. In addition, our customers may cancel or defer orders at any time by mutual written consent. If we overestimate customer demand, we may manufacture products that we may be unable to sell, or we may have to sell at lower prices. For example, in the third quarter of fiscal 2015, demand for our products slowed down in the China market, possibly attributable to the competitive environment faced by our customers and a protracted upgrade cycle for the local wireless infrastructure. This demand slowdown in the region had negatively impacted our revenues; the demand slowdown also resulted in our inventories at the end of the third and fourth quarters of fiscal 2015 being higher than we intended them to be. Under such circumstances, we may be required to record significant provisions for excess and obsolete inventories. This could materially and adversely affect our results of operations and financial condition. Similarly, we cannot predict what effect, if any, the devaluation of Chinas currency in August 2015 may have on our ability to sell our existing inventories or on future customer demand for our products.
We need to accurately predict customer demand because we must often place noncancelable orders with our manufacturers to have products manufactured before we receive firm purchase orders from our customers. Conversely, if we underestimate customer demand, we may be unable to manufacture sufficient products quickly enough to meet actual demand, which could damage our reputation, impair our relationships with our customers, cause us to lose one or more customers and impair our ability to grow our business. In preparation for new product introductions, we gradually ramp down production of established products. With our 12-14 week production cycle, it is extremely difficult to predict precisely how many units of established products we will need. It is also difficult to accurately predict the speed of the ramp of our new products and the impact on inventory levels presented by the shorter life cycles of end-user customers products. The shorter product life cycle is a result of an increase in competition and the growth of various consumer-product applications for image sensors. Under these circumstances, it is possible that we could underestimate market demand, suffer from shortages of certain products, and face the risk of being unable to fulfill customer orders.
We also face the risk of excess inventory and product obsolescence if we overestimate market demand for our products and build inventories in excess of demand, especially if our customer demand were to become volatile. We may be unable to sell inventories that were built in excess of demand, or we may have to sell at lower prices to eliminate excess inventories. Under such circumstances, we may be required to record significant provisions for excess and obsolete inventories. This could materially and adversely affect our results of operations and financial condition. We expect the
business environment to remain volatile in fiscal 2016, especially in the consumer-oriented product markets, which can continue to affect our ability to accurately forecast customer demand. Our ability to accurately forecast sales is also a critical factor in our ability to meet analyst expectations for our quarterly and annual operating results. Any failure to meet these expectations would likely lead to a substantial decline in our stock price.
Our future success depends on the timely development, introduction, marketing and selling of new products, which we might not be able to achieve.
Our failure to successfully develop new products that achieve market acceptance in a timely fashion and that can be efficiently and successfully integrated with our customers, including their key end-user customers, products could adversely affect our ability to grow our business and improve our operating results. The development, introduction and market acceptance of new products is critical to our ability to sustain and grow our business. Any failure to successfully develop, introduce, market and sell new products could materially adversely affect our business and operating results. The development of new products is highly complex, and we have experienced delays in completing the development and introduction of new products. For example, during the first half of fiscal 2012, we experienced an unanticipated extension in the product development cycle of our OV8830 product. This delayed the production ramp up of this new sensor. By the end of our second quarter of fiscal 2012, we only shipped this product in very limited quantities, which had an adverse effect on our revenues. From time to time, we have also encountered unexpected manufacturing problems as we increase the production of new products. Consumers continue to expect the sophistication of image sensors in consumer products to increase, and the number of consumer products that use image sensors has continued to grow. This results in a requirement for us to continue to build and develop image sensors with advanced technologies that can be used in a variety of consumer products. As our products integrate new and more advanced technologies and functions, they become more complex and increasingly difficult to design, debug and produce. Successful product development and introduction depends on a number of factors, including:
· accurate prediction of market requirements and evolving standards, including imaging pixel resolution, output interface standards, power requirements, optical lens size, input standards and operating systems for webcams and other platforms;
· development of advanced technologies and capabilities, including our CameraCubeChip, OmniBSI, OmniBSI+ and OmniBSI-2 technologies;
· the extension of our product offerings with adjacent technologies such as ASICs, ISPs and LCoS;
· timely development completion and introduction of new CMOS image sensors that satisfy our customers, including their key end customers, requirements and specifications;
· development of products that maintain technological advantages over the products of our competitors, including advantages with respect to the functionality and imaging pixel capability of our image-sensor products and our proprietary testing processes; and
· market acceptance of the new products, including our PureCel and PureCel-S sensors.
Accomplishing all of these steps is difficult, time consuming and expensive. We may be unable to develop new products or product enhancements in time to capture market opportunities, satisfy the requirements and specifications of our customers, including their key end customers, or achieve significant or sustainable acceptance in new and existing markets. If our competitors develop new products or technologies on a more expedited basis than us or are successful in developing products that are accepted more rapidly and broadly by the market than our products, we could lose market share. Matching or surpassing technological advances that may be developed by our competitors could require an extended period of time. In addition, our products could become obsolete sooner than anticipated because of a rapid change in one or more of the technologies related to our products or the reduced life cycles of consumer products.
Design wins are a key determinant of future revenues, and failure to obtain design wins adversely affects our revenues and impairs our ability to grow our business.
Our success has been, and will continue to be, dependent upon manufacturers and their customers designing our image-sensor products into their products. To achieve design wins, which are decisions by manufacturers and their customers to design our products into their systems, we must define and deliver cost effective and innovative image-sensor solutions on a timely basis that satisfy the manufacturers and their customers requirements and specifications. Our ability to achieve design wins is subject to numerous risks including competitive pressures, the compatibility of our products with newly developed technologies or designs used in our customers products, as well as delays in our product development cycle. Even if our products meet the manufacturers and their customers requirements and specifications, we may not succeed in achieving a particular design win due to factors out of our control, such as customers preferences or other business decisions
that determine the components to be used in a product. If we do not achieve a design win with a prospective customer, it may be difficult to sell our image-sensor products to such prospective customer in the future because once a manufacturer has designed a suppliers products into its systems, the manufacturer may be reluctant to change its source of components due to the significant costs, time, efforts and risks associated with qualifying a new supplier and modifying its design platforms. In addition, there is no guarantee that we will be able to continue to achieve design wins with manufacturers with which we have achieved design wins in the past. As manufacturers take on new projects for their customers, there is no obligation on their part to continue to design our products into their customers new products. Accordingly, if we fail to achieve design wins with key device manufacturers that embed image sensors in their products, our market share or revenues could decrease. Furthermore, to the extent that our competitors secure design wins, our ability to grow our business in the future will be impaired.
We depend on a limited number of third party wafer foundries, which reduces our ability to control our manufacturing process.
Unlike some of our larger competitors, we do not own or operate a semiconductor fabrication facility. Instead, we rely on TSMC, PTC, Huali and XMC to produce all of our wafers. Historically, we have relied on TSMC to provide us with a substantial majority of our wafers. As a part of our joint venture agreement with TSMC, TSMC has agreed to commit substantial wafer manufacturing capacity to us in exchange for our commitment to purchase a substantial portion of our wafers from TSMC, subject to pricing and technology requirements.
We secure manufacturing capacity in any particular period on a purchase order basis. The foundries have no obligation to supply products to us for any specific period, in any specific quantity or at any specific price, except as set forth in a particular purchase order. In general, our reliance on third party foundries involves a number of significant risks, including:
· reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;
· lack of guaranteed production capacity or product supply;
· unavailability of, or delayed access to, next generation or key process technologies; and
· financial difficulties or disruptions in the operations of third party foundries due to causes beyond our control.
The size of the orders we place with our foundries depends on actual or anticipated sales volumes of our products. Because our foundries provide services to a number of companies, in the event they receive increased orders from us or one or more of the other companies that they service, they may be unable to provide us with the requested quantity of products, may subordinate our request to the requests of other larger companies or may increase the prices they charge us. In fiscal 2011, the entire semiconductor industry, including us, experienced supply constraints. Due to the lack of availability of products, supply constraints forced companies in the industry to be unable to meet customers product demands and to take certain actions such as allocating available products among their customers or, in some cases, increasing the prices of their products. This resulted in harm to customer relations, the loss of sales to customers and, in some cases, the loss of future business with those customers. We faced these same challenges then as we sought to meet our customers demand for our products. If constraints in supply were to happen again or if for any reason our foundries are unable to provide a sufficient number of products to us on a timely basis and at acceptable yields and cost, we may be unable to achieve future growth, which could result in our revenues, gross margins and other financial results being materially and adversely affected.
The current global economic conditions could materially affect our foundries and cause them to be unable to provide necessary services to us. In addition, the pending acquisition by the Consortium may create uncertainty for our foundries, which could cause them to terminate, or not to renew or enter into, agreements with us, or to otherwise change the way in which they have historically provided services to us. If TSMC, PTC, or any of our other foundries were unable to continue manufacturing our wafers in the required quantities, at acceptable quality, yields and costs, or in a timely manner, we would have to identify and qualify substitute foundries, which would be time consuming and difficult, and could increase our costs or result in unforeseen manufacturing problems. In addition, if competition for foundry capacity increases, we may be required to pay increased amounts for manufacturing services. We are also exposed to additional risks if we transfer our production of semiconductors from one foundry to another, as such transfer could interrupt our manufacturing process. Further, some of our foundries may also develop their own image-sensor products and we would have to identify and qualify other sources for these products.
We rely on a joint venture company for color filter application and on third party service providers for packaging and other back-end services, which reduces our control over delivery schedules, product quality and cost, and could adversely affect our ability to deliver products to customers.
We rely on VisEra for the color filter application of our completed wafers. In addition, we rely on Lingsen and Tong Hsing for substantially all of our ceramic chip packages. We rely on XinTec and WLCSP, both being investee companies, for chip scale package, or CSP, packaging, which are generally used in our products designed for the smallest form factor applications. We rely on several specialized service providers, one of which is Tong Hsing, to perform the necessary wafer probe tests and prepare good die for use in chip-on-board, or COB, packaging, a delivery format referred to as reconstructed wafer. If the current global economic conditions do not continue to improve or remain stable, these service providers ability to continue to fulfill our packaging, color filter processing and related requirements could be adversely affected. If for any reason one or more of these service providers were to become unable or unwilling to continue to provide services of acceptable quality, at acceptable costs or in a timely manner, our ability to deliver our products to our customers could be severely impaired. We would have to identify and qualify substitute service providers, which could be time consuming and difficult and could result in unforeseen operational problems. Substitute service providers might not be available or, if available, might be unwilling or unable to offer services on acceptable terms.
In addition, if competition for color filter application, packaging, or other back-end services increases, we may be required to pay or invest significant amounts to secure access to these services, which could adversely impact our operating results. The number of companies that provide these services is limited and some of them have limited operating histories and financial resources. In the event our current providers refuse or are unable to continue to provide these services to us, we may be unable to procure services from alternate service providers. Furthermore, if customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current service providers on commercially reasonable terms, if at all. These factors may cause unforeseen product shortages or may increase our costs of manufacturing, which would adversely affect our operating results and cash flows.
Recent domestic and worldwide economic conditions adversely affected and could have future adverse effects on our business, results of operations, financial condition and cash flows.
Since the latter part of fiscal 2009, we have experienced fluctuations in our financial results due in part to changing macroeconomic conditions. As macroeconomic conditions have improved, our sales have also generally tended to improve and when macroeconomic uncertainties have returned, our sales have generally tended to be negatively impacted, although that has not always been the case. For example, in fiscal 2014, macroeconomic conditions appeared to continue to improve, and our annual sales increased slightly when compared to fiscal 2013. However, for the second half of fiscal 2014, we actually experienced a decline in sales when compared to the similar period in fiscal 2013. Given the continuing uncertainties in the current economic environment and the volatility in our business, we remain cautious and we expect our customers to be cautious as well, which could affect our future results. If the economic recovery slows down or even dissipates, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Fluctuations in our quarterly operating results have caused volatility in the market price of our common stock and also make it difficult to predict our future operating results.
Our quarterly operating results have varied significantly from quarter to quarter in the past and are likely to vary significantly in the future based on a number of factors, many of which are beyond our control. These factors and other industry risks, many of which are more fully discussed in our other risk factors, include, but are not limited to:
· our gain or loss of a large customer, or cutbacks in orders from such customers;
· the timing and size of orders from our customers;
· the volume and mix of our product sales;
· competitive pricing pressures and ASPs, in particular in the China market;
· volatility and lack of visibility in the markets in which we sell our products, in particular in the China market;
· production costs for our products;
· our ability to accurately forecast demand for our products;
· our ability to achieve acceptable wafer manufacturing or back-end processing yields;
· our ability to achieve design wins;
· our ability to manage our product transitions;
· the availability of production capacity at the suppliers that manufacture our products or process our products;
· the growth of the market for products and applications using CMOS image sensors;
· the volume of our product returns;
· the seasonal nature of customer demand for our products;
· the deferral of customer orders in anticipation of new products, product designs or enhancements;
· the announcement and introduction of products and technologies by our competitors;
· adverse changes in domestic or global economic conditions;
· the fair value of our interest rate swaps;
· the impairment of our intangible assets or other long-lived assets;
· the level of our operating expenses; and
· fluctuations in our effective tax rate from quarter to quarter.
Our introduction of new products and our product mix have affected, and may continue to affect, our quarterly operating results. Changes in our product mix could adversely affect our operating results, because some products provide higher margins than others. We typically experience lower yields when manufacturing new products through the initial production phase, and consequently our gross margins on new products have historically been lower than our gross margins on our more established products. We also anticipate that the rate of orders from our customers may vary significantly from quarter to quarter. Our operating expenses are relatively fixed in the short-term, and our inventory levels are based on our expectations of future revenues. Consequently, if we do not achieve the revenues we expect in any quarter, expenses and inventory levels could be disproportionately high, adversely impacting our operating results and cash flows for that quarter, and potentially in future quarters.
All of these factors are difficult to forecast and could result in fluctuations in our quarterly operating results. Our operating results in any given quarter could be substantially less than anticipated, and, if we fail to meet market analysts expectations, a substantial decline in our stock price could result. Fluctuations in our quarterly operating results could adversely affect the price of our common stock in a manner unrelated to our long-term operating performance.
Litigation regarding intellectual property could divert management attention, be costly to defend and prevent us from using or selling the challenged technology.
In recent years, there has been significant litigation in the United States involving intellectual property rights, including the semiconductor industry. We have in the past been, currently are and may in the future be, subject to legal proceedings and claims with respect to our intellectual property, including such matters as trade secrets, patents, product liabilities and other actions arising out of the normal course of business. These claims may increase as our intellectual property portfolio becomes larger and/or more valuable. Intellectual property claims against us, and any resulting lawsuit, may cause us to incur significant expenses, subject us to liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation against us would likely be time-consuming and expensive to resolve and would divert managements time and attention and could also force us to take actions such as:
· ceasing the sale or use of products or services that incorporate the infringed intellectual property;
· obtaining from the holder of the infringed intellectual property a license to sell or use the relevant technology, which license may not be available on acceptable terms, if at all; or
· redesigning those products or services that incorporate the disputed intellectual property, which could result in substantial unanticipated development expenses and delay and prevent us from selling the products until the redesign is completed, if at all.
If we are subject to a successful claim of infringement and we fail to develop non-infringing intellectual property or license the infringed intellectual property on acceptable terms and on a timely basis, we may be unable to sell some or all of our products, and our operating results could be adversely affected. We may in the future initiate claims or litigation against third parties for infringement of our intellectual property rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could also result in significant expense and the diversion of technical and management attention.
In addition, third parties may assert claims of infringement and misappropriation of proprietary rights based on the use or resale of our products against our suppliers or the OEMs, VARs or distributors with whom we do business. In addition, the end-user customers of these OEMs, VARs or distributors may also be named as parties in these claims. Under our agreements with these parties, we may be required to defend protracted and costly litigation on their behalf, regardless of the merits of these claims, or to indemnify these parties for such claims. Because our suppliers and our customers and their end-user customers are often times much larger than we are and have much greater resources than we do, they may be more likely
to be the target of an infringement or misappropriation of proprietary rights claim by third parties than we would be, which could increase our chances of becoming involved in a future lawsuit or of being required to indemnify these parties. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. Recently, infringement claims relating to our image sensors were brought against some of the end-user customers of our customers. These customers or their applicable end-user customers have requested indemnification from us for this matter. Although we are unable at this time to estimate any possible loss and it is uncertain whether this matter will result in any material expense to us, if we are ultimately required to make indemnification payments to these customers or their end-user customers, it could result in us being forced to pay significant damages on behalf of our customers or their end-user customers that could increase our expenses, disrupt our ability to sell our products and reduce our revenue. A party making an infringement or misappropriation of proprietary rights claim against our customers or their end-user customers, if successful, could also secure an injunction or other court order that could prevent our customers or their end-user customers from selling their products that incorporate our image sensors. If we are required or agree to defend or indemnify any of our suppliers, customers or their end-user customers in connection with any claims of infringement or misappropriation of proprietary rights or injunctions are secured by third parties that prevent the sale of products that incorporate our image sensors, we could incur significant costs and expenses and experience a significant decrease in our revenue that could adversely affect our business, operating results or financial condition.
We may be unable to adequately protect our intellectual property, and therefore we may lose some of our competitive advantage.
We rely on a combination of patent, copyright, trademark and trade secret laws as well as nondisclosure agreements and other methods to protect our proprietary technologies. We have been issued patents and have a number of pending United States and foreign patent applications. However, we cannot provide assurance that any patent will be issued as a result of any applications or, if issued, that any claims allowed will be sufficiently broad to protect our technology. It is possible that existing or future patents may be challenged, invalidated or circumvented. We have experienced the cancellation of a patent in the past and although we do not believe this cancellation had a material adverse effect on our business or prospects, there may be other situations where our inability to adequately protect our intellectual property rights could materially and adversely affect our competitive position and operating results. If a third party can copy or otherwise obtain and use our products or technology without authorization, develop corresponding technology independently or design around our patents, this could materially adversely affect our business and prospects. Effective patent, copyright, trademark and trade secret protection may be unavailable or limited in foreign countries. Any disputes over our intellectual property rights, whatever the ultimate resolution of such disputes, may result in costly and time-consuming litigation or require the license of additional elements of intellectual property for a fee.
Our use of derivative financial instruments to reduce interest rate risk may result in added volatility in our quarterly operating results
We do not hold or issue derivative financial instruments for trading purposes. However, we do utilize derivative financial instruments to reduce interest rate risk. We have a variable rate mortgage loan that totaled $23.0 million as of July 31, 2015. To manage the related interest rate risk, we entered into an interest rate swap agreement, effectively converting our mortgage loan into a fixed rate loan. Under generally accepted accounting principles, the fair values of the swap contract, which will either be amounts receivable from or payable to counterparties, are reflected as either assets or liabilities on our Condensed Consolidated Balance Sheets. We record its fair value change in our Condensed Consolidated Statements of Income, in Other income, net. The associated impact on our quarterly operating results is directly related to changes in prevailing interest rates. If interest rates increase, we would have a non-cash gain on the swap, and vice versa. Consequently, this swap contract will introduce volatility to our operating results.
We are also exposed to credit loss in the event of non-performance by the counterparty to the interest rate swap agreement. However, we do not anticipate non-performance by the counterparty.
Our business is subject to seasonal fluctuations which may in turn cause fluctuations in our results of operations and cash flows from period to period.
Many of the products using our image sensors, such as mobile phones, cameras for entertainment applications, such as tablets and wearable devices, notebooks and webcams, and DSCs are consumer electronics goods. These mass-market camera devices generally have seasonal cycles which historically have caused the sales of our customers to fluctuate quarter-to-quarter. In addition, since a very large number of the manufacturers who use our products are located in China and Taiwan, the pattern of demand for our image sensors has been influenced by the timing of the extended lunar or Chinese New
Year holiday, a period in which the factories which use our image sensors generally close. Consequently, demand for our image sensors has historically been stronger in the second and third quarters of our fiscal year and weaker in the first and fourth quarters of our fiscal year. However, due to macroeconomic uncertainties and changes in our end-user customer demands in the past several years, the seasonal cycle of our business has been less predictable. Given the current economic environment and continued changes in our end-user demands, we remain cautious towards the return of the historical seasonal cycle of our business. If our historical cycle resumes and continues in future years, it could result in the fluctuation of our results of operations and cash flows from period to period. Alternatively, if we experience future events, such as the recent macroeconomic uncertainties or other events outside of our control, our historical seasonal cycle could be disrupted and our results of operations and cash flows could differ from our historical seasonal cycles.
There are risks associated with our operations in China.
In December 2000, we established OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, primarily for the testing of our image-sensor products. In October 2008, we formed Shanghai OmniVision Semiconductor Technology Co. Ltd., or OST, for the purpose of expanding our testing capabilities. In October 2010, through OTC, we constructed research facilities in Shanghai. In April 2011, we also formed OmniVision Optoelectronics Technologies (Shanghai) Co. Ltd. for the purpose of expanding our manufacturing capabilities for CameraCubeChip production. Then in July 2013, we formed OmniVision Technologies (Wuhan) Co. Ltd. to support our growing research and development efforts. There are certain administrative, legal and governmental risks to operating in China that could result in increased operating expenses or could hamper us in the development of our operations in China. The risks from operating in China that could increase our operating expenses and adversely affect our operating results, financial condition and ability to deliver our products and grow our business include, without limitation:
· difficulties in staffing and managing foreign operations, particularly in attracting and retaining personnel qualified to design, sell, test and support our products;
· difficulties in managing employee relations;
· implications of the ongoing general labor disputes in China;
· increases in the value of the Chinese Yuan, or CNY;
· difficulties in coordinating our operations in China with those in California;
· difficulties in enforcing contracts in China;
· difficulties in protecting intellectual property;
· diversion of management attention;
· imposition of burdensome governmental regulations;
· difficulties in maintaining uniform standards, controls, procedures and policies across our global operations, including inventory management and financial consolidation;
· political and economic instability, which could have an adverse impact on foreign exchange rates in Asia and could impair our ability to conduct our business in China; and
· inadequacy of the local infrastructure to support our operations.
Problems with wafer manufacturing and/or back-end processing yields could result in higher product costs and could impair our ability to meet customer demand for our products.
If the foundries manufacturing the wafers used in our products cannot achieve the yields we expect, we could incur higher unit costs and reduced product availability. Foundries that supply our wafers have experienced problems in the past achieving acceptable wafer manufacturing yields. Wafer yields are a function of both our design technology and the particular foundrys manufacturing process technology. These risks increase with our introduction of more advanced and novel products and technology, as well as with increased customer demand that requires these new products to be produced more quickly and in greater quantities than our historical volume. Certain risks are inherent in the introduction of new products and technology. Low yields may result from design errors or manufacturing failures in new or existing products. During the early stages of production, production yields for new products are typically lower than those of established products. Unlike many other semiconductor products, optical products can be effectively tested only when they are complete. Accordingly, we perform final testing of our products only after they are assembled. As a result, yield problems may not be identified until our products are well into the production process. The risks associated with low yields could be increased because we rely on third party offshore foundries for our wafers, which can increase the effort and time required to identify, communicate and resolve manufacturing yield problems. In addition to wafer manufacturing yields, our products are subject to yield loss in subsequent manufacturing steps, often referred to as back-end processing, such as the application of color filters and micro-lenses, dicing (cutting the wafer into individual devices, or die) and packaging. Any of these potential problems with wafer manufacturing and/or back-end processing yields could result in a reduction in our gross margins and/or
our ability to timely deliver products to customers, which could adversely affect our customer relations and make it more difficult to sustain and grow our business.
We depend on the increased acceptance of mass-market image-sensor applications to grow our business and increase our revenues.
Our business strategy depends in large part on the continued growth of the various markets into which we sell our image-sensor products, including the markets for mobile phones, entertainment devices such as tablets and wearable devices, notebook and webcams, digital still and video cameras, commercial security and surveillance applications, automotive and medical applications. If these markets do not grow and develop as we anticipate, we may be unable to sustain or grow the sales of our products. Each of these markets has already been, and may continue to be, adversely impacted by current global economic conditions where consumers and businesses have deferred purchases of products in these markets as a result of tighter credit, negative financial news, and decreased corporate or consumer spending. Such conditions have negatively affected, and may continue to negatively affect our business.
In addition, the market price of our common stock may be adversely affected if certain of these new markets do not emerge or develop as expected. Securities analysts may already factor revenue from such new markets into their future estimates of our financial performance and should such markets not develop as expected by such securities analysts the trading price of our common stock could be adversely affected.
Our lengthy manufacturing, packaging and assembly cycle, in addition to our customers design cycle, may result in uncertainty and delays in generating revenues.
The production of our image sensors requires a lengthy manufacturing, packaging and assembly process, typically lasting approximately 12-14 weeks. Additional time may pass before a customer commences taking volume shipments of products that incorporate our image sensors. Even when a manufacturer decides to design our image sensors into its products, the manufacturer may never ship final products incorporating our image sensors. Given this lengthy cycle, we experience a delay between the time we incur expenditures for research and development and sales and marketing efforts and the time we generate revenue, if any, from these expenditures. This delay makes it more difficult to forecast customer demand, which adds uncertainty to the manufacturing planning process and could adversely affect our operating results. In addition, the product life cycle for certain of our image-sensor products designed for use in certain applications can be relatively short. If we fail to appropriately manage the manufacturing, packaging and assembly process, our products may become obsolete before they can be incorporated into our customers products and we may never realize a return on investment for the expenditures we incur in developing and producing these products.
Our ability to deliver products that meet customer demand is dependent upon our ability to meet new and changing requirements for color filter application and image-sensor packaging.
We expect that as we develop new products to meet technological advances and new and changing industry and customer demands, our color filter application and ceramic, plastic and chip scale packaging requirements will also evolve. Our ability to continue to profitably deliver products that meet customer demand is dependent upon our ability to obtain third party services that meet these new requirements on a cost-effective basis. There can be no assurances that any of these parties will be able to develop enhancements to the services they provide to us to meet these new and changing industry and customer requirements. Furthermore, even if these service providers are able to develop their services to meet new and evolving requirements, these services may not be available at a cost that enables us to sustain our profitability.
The high level of complexity and integration of our products increases the risk of latent defects, which could damage customer relationships and increase our costs.
Our products are based upon evolving technology, and because we integrate many functions on a single chip, are highly complex. The integration of additional functions into already complex products could result in a greater risk that customers or end-users could discover latent defects or subtle faults after we have already shipped significant quantities of a product. Although we test our products, we have in the past and may in the future encounter defects or errors. Delivery of products with defects or reliability, quality or compatibility problems may damage our reputation and ability to retain existing customers and attract new customers. In addition, product defects and errors could result in additional development costs, diversion of technical resources, delayed product shipments, increased product returns, product warranty costs for recall and replacement and product liability claims against us which may not be fully covered by insurance.
We may be required to record a significant charge to earnings if our goodwill, intangible assets or long-term investments become impaired.
Under generally accepted accounting principles, we are required to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include a decline in stock price and market capitalization, and slower growth rates in our industry.
We may be required to record a significant charge to earnings in our financial statements during the period in which we determine that our intangible assets or long-term investments have been impaired. Any such charge would adversely impact our results of operations. As of July 31, 2015, our goodwill totaled approximately $10.2 million, our intangible assets totaled approximately $49.1 million and our long-term investments totaled approximately $151.6 million.
If we need additional capital in the future, it may not be available to us on favorable terms, or at all.
Our cash, cash equivalents and short-term investments, in total, has increased over the three months ended July 31, 2015, primarily from cash provided by operating activities. Although we currently expect our available cash, cash equivalents and short-term investments, together with cash we anticipate generating from operating activities, will be sufficient to satisfy our capital requirements over approximately the next twelve months and foreseeable future, if we are unable to sell our inventories or collect on our accounts receivable as anticipated, we may be required to raise additional capital through equity or debt financing. Such additional financing may not be available on acceptable terms, or at all, and could have a material adverse effect on our business, financial condition, operating results and cash flows. If we raise additional funds through issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.
We maintain a backlog of customer orders that is subject to cancellation or delay in delivery schedules, and any cancellation or delay may result in lower than anticipated revenues.
Our sales are generally made pursuant to standard purchase orders. We include in our backlog only those customer orders for which we have accepted purchase orders and assigned shipment dates within the upcoming 12 months. Orders constituting our current backlog are subject to cancellation or changes in delivery schedules, and backlog may not necessarily be an indication of future revenue. Any cancellation or delay in orders which constitute our current or future backlog may result in lower than expected revenues.
If we are unable to maintain processes and procedures to sustain effective internal control over our financial reporting, our ability to provide reliable and timely financial reports could be harmed and this could have a material adverse effect on our stock price.
We are required to comply with the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Section 404 requires that we prepare an annual management report assessing the effectiveness of our internal control over financial reporting, and requires a report by our independent registered public accounting firm addressing the effectiveness of our internal control over financial reporting.
We have in the past discovered, and may in the future discover, areas of our internal control that need improvement. If issues were to arise with respect to our internal controls in future periods, they could impair our ability to produce accurate and timely financial reports.
As our business changes, ongoing compliance with the provisions of Section 404 of the Sarbanes-Oxley Act and maintenance of effective internal control over financial reporting may require that we hire additional qualified finance and accounting personnel. Because other businesses face similar challenges, there is significant competition for such personnel, and there can be no assurance that we will be able to attract and/or retain suitably qualified employees.
Corporate governance regulations have increased our compliance costs and could further increase our expenses if changes occur within our business.
We are subject to corporate governance laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act and the Dodd-Frank Act of 2010 that impose certain requirements on us and on our officers, directors, attorneys and independent registered public accounting firm. In order to comply with these rules, we added internal
resources and have utilized additional outside legal, accounting and advisory services, which increased our operating expenses. We expect to incur ongoing operating expenses as we maintain compliance with Section 404. In addition, if we undergo significant modifications to our structure through personnel or system changes, acquisitions, or otherwise, it may be increasingly difficult to maintain compliance with the existing and evolving corporate governance regulations.
We hold a significant amount of marketable securities which are subject to general market risks over which we have no control.
As of July 31, 2015, we held cash and cash equivalents totaling $434.4 million, and short-term investments totaling $159.4 million. These assets are managed on our behalf by unrelated third parties in accordance with a cash management policy that has been approved by our board of directors and restricts our investments to a maximum maturity of 18 months and to investment-grade instruments. As of July 31, 2015, we did not hold any illiquid investments and we have not realized any losses. In the past, uncertainties in global capital markets associated with a repricing of risk had caused disruptions in the orderly function of markets which are ordinarily characterized by virtually unlimited liquidity. If we were to make a future investment in certain illiquid securities that are dependent on the orderly functioning of the capital markets, and if we were required to liquidate these types of securities at short notice, such liquidation could result in losses of principal, which would have a negative impact on our results of operations and cash flows.
We may experience integration or other problems with potential future acquisitions, which could have an adverse effect on our business or results of operations. New acquisitions could dilute the interests of existing stockholders, and the announcement of new acquisitions could result in a decline in the price of our common stock.
We may acquire, or invest in, businesses that offer products, services and technologies that we believe would complement our products, including CMOS image-sensor manufacturers. We may also make acquisitions of, or investments in, businesses that we believe could expand our distribution channels. Even if we were to announce an acquisition, we may not be able to complete it. In addition, any future acquisition or substantial investment could present numerous risks, including:
· difficulty in realizing the potential technological benefits of the transaction;
· difficulty in integrating the technology, operations or work force of the acquired business with our existing business;
· unanticipated expenses related to technology integration;
· disruption of our ongoing business;
· difficulty in realizing the potential financial or strategic benefits of the transaction;
· difficulty in maintaining uniform standards, controls, procedures and policies;
· possible impairment of relationships with employees, customers, suppliers and strategic partners as a result of integration of new businesses and management personnel;
· reductions in our future operating results from amortization of intangible assets;
· impairment of resulting goodwill; and
· potential unknown or unexpected liabilities associated with acquired businesses.
We expect that any future acquisitions could include consideration to be paid in cash, shares of our common stock or a combination of cash and our common stock. If and when consideration for a transaction is paid in common stock, it will result in dilution to our existing stockholders.
We may not achieve continued benefits from our joint venture with TSMC.
In October 2003, together with TSMC, we formed VisEra, a joint venture in Taiwan, for the purposes of providing manufacturing services. Since its formation, TSMC and we have expanded the scope of VisEras activities through the provision of additional funding.
In January 2006, VisEra acquired certain color filter application equipment from TSMC and assumed direct responsibility for providing the color filter application services that had previously been provided to us by TSMC. We expect that VisEra will be able to provide us with a committed supply of high quality manufacturing services at competitive prices. However, there are significant legal, governmental and relationship risks to managing the business scope of VisEra, and we cannot ensure that we will continue to receive the expected benefits from the joint venture. For example, VisEra may not be able to provide manufacturing services that have competitive technology or prices, which could adversely affect our product offerings and our ability to meet customer requirements for our products. In addition, the existence of VisEra may also make
it more difficult for us to secure dependable services from competing merchant vendors who provide similar manufacturing services.
In August 2015, we entered into an agreement with TSMC whereby TSMC agreed to acquire all of the shares we own in our joint ventures with TSMC, including VisEra. The sale of such shares is contingent upon the closing of our pending acquisition. If our pending acquisition has not closed prior to April 30, 2016, such agreement with TSMC will automatically terminate without liability or further obligation to any of the parties.
We may not achieve all of the anticipated benefits of our alliances with, and strategic investments in, third parties.
We expect to develop our business partly through forming alliances or joint ventures with and making strategic investments in other companies, some of which may be companies at a relatively early stage of development. For example, we have made an investment in XinTec, a company that provides CSP packaging services, and WLCSP, a company that also provides chip scale packaging services.
Our investments in these and other companies may negatively impact our operating results, because, under certain circumstances, we are required to recognize our portion of any loss recorded by each of these companies or to consolidate them into our operating results. We expect to continue to utilize partnerships, strategic alliances and investments, particularly those that enhance our manufacturing capacity and those that provide manufacturing services and testing capability. These investments and partnering arrangements are crucial to our ability to grow our business and meet the increasing demands of our customers. However, we cannot ensure that we will achieve the benefits we expect from these alliances. For example, we may not be able to obtain acceptable quality and/or wafer manufacturing yields from these companies, which could result in higher operating costs and could impair our ability to meet customer demand for our products. In addition, certain of these investments or partnering relationships may place restrictions on the scope of our business, the geographic areas in which we can sell our products and the types of products that we can manufacture and sell. For example, our agreement with TSMC provides that we may not engage in business that will directly compete with the business of VisEra. This type of non-competition provision may impact our ability to grow our business and to meet the demands of our customers.
In August 2015, we entered into an agreement with TSMC whereby TSMC agreed to acquire all of the shares we own in our joint ventures with TSMC, including VisEra. The sale of such shares is contingent upon the closing of our pending acquisition. If our pending acquisition has not closed prior to April 30, 2016, such agreement with TSMC will automatically terminate without liability or further obligation to any of the parties.
Changes in our relationships with our joint venture and/or companies in which we hold less than a majority interest could change the way we account for such interests in the future.
As part of our strategy, we have formed a joint venture with one of our foundry partners, and we hold equity interests in other companies from which we purchase certain manufacturing services. For the investments that we account for under the equity method, we record as part of income or expense our share of the increase or decrease in the equity of the companies in which we have invested. It is possible that, in the future, our relationships and/or our interests in or with our joint venture or other investees could change. Such changes have resulted in the past, and could result in the future, in deconsolidation or consolidation of such entities, as the case may be, which could result in changes in our reported results.
The use of our image sensors in end-user products in the medical and automotive industries could result in us being named as a defendant in product liability claims, which could adversely affect our business and reputation.
Our image sensors have been incorporated into certain end-user products in the medical and automotive industries, and we expect that they will continue to increase as a percentage of our overall business. The use of the medical and automotive industry products into which our image sensors are designed could result in an unsafe condition, injury, or even death as a result of, among other factors, component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information. These factors could result in product liability claims seeking damages for personal injury, and we could be named as a defendant in such claims. Because the outcome of product liability claims is not predictable and is difficult to assess or quantify, we cannot provide assurance that such claims will not materially adversely affect our business or damage the reputation of our products or our company.
If we do not effectively manage our growth, our ability to increase our revenues and improve our earnings could be adversely affected.
Our growth has placed, and will continue to place, a significant strain on our management and other resources. To manage our growth effectively, we must, among other things:
· continuously improve our operational, financial and accounting systems;
· train, manage and maintain good relations with our existing employee base in both our U.S. and international locations;
· attract and retain qualified personnel with relevant experience; and
· effectively manage accounts receivable and inventory.
For example, our failure to effectively manage our inventory levels could result either in excess inventories, which could adversely affect our gross margins and operating results, or lead to an inability to fill customer orders, which would result in lower sales and could harm our relationships with existing and potential customers.
We must also manage multiple relationships with customers, business partners and other third parties, such as our foundries and process and assembly vendors. Moreover, future growth could significantly overburden our management and financial systems and other resources. We may not make adequate allowances for the costs and risks associated with our expansion. In addition, our systems, procedures or controls may not be adequate to support our operations, and we may not be able to expand quickly enough to capitalize on potential market opportunities. Our future operating results will also depend, in part, on our ability to expand sales and marketing, research and development, accounting, finance and administrative support.
Our future tax rates and tax payments could be higher than we anticipate and may harm our results of operations.
As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. The application of tax law is subject to legal and factual interpretation, judgment and uncertainty. For example, we were under tax examination in a foreign jurisdiction starting from the fiscal year ended April 30, 2004. This tax examination was concluded in November 2014. We may be involved in similar tax examinations in the future that could result in additional expense and time spent cooperating with such examinations, and may have a negative effect on our financial results depending on the outcome of such examinations.
Furthermore, tax laws themselves are subject to change. For example, the U.S. Congress may introduce tax reform proposals that will affect the taxation of foreign earnings. The Group of Twenty Finance Ministers and Central Bank Governors, or G-20, has also approved an action plan from the Organization for Economic Co-operation and Development to address perceived problems of corporate income tax avoidance through aggressive tax planning. Consequently, taxing authorities may impose tax assessments or judgments against us that could result in a significant charge to our earnings or otherwise negatively impact our financial results.
A number of other factors will also affect our future tax rate, and some of these factors could increase our effective tax rate in future periods, which could adversely impact our operating results. These factors include changes in non-deductible stock-based compensation, changes in tax laws or the interpretation of tax laws, changes in the proportion and geographic mix of our revenue or earnings, changes in the valuation of our deferred tax assets and liabilities, changes in available tax credits, the resolution of issues arising from tax audits, and the repatriation of non-U.S. earnings for which we have not previously provided U.S. taxes.
We continually review our tax positions and provide for, or reverse, unrecognized tax benefits as issues arise.
Tax benefits that we receive may be terminated or revoked in the future and, as a result, may harm our results of operations.
In fiscal 2013, we obtained a partial tax holiday from the Singapore Economic Development Board, an agency of the Government of Singapore. This partial tax holiday allows for reduced rates of Singapore income tax on certain classes of income generated from our business operations in Singapore from September 1, 2012 through August 31, 2022. As a result, we anticipate that a significant portion of the income we earn in Singapore during this period will be taxed at the reduced rates of Singapore income tax. For fiscal 2015, the effect of the Singapore partial tax holiday, in the aggregate, was
increasing the overall benefit from income taxes from what it otherwise would have been by $25.0 million, thus increasing diluted net income per share by $0.42.
In order to retain these tax benefits in Singapore, we must meet several requirements as to capital and business spending, headcount and activities. If we fail to meet these requirements or if the Singapore government enacts changes to existing tax laws or regulations, the tax benefits that we have received may be terminated, revoked, or reduced, which could adversely affect our results of operations.
Our sales through distributors increase the complexity of our business and may reduce our ability to forecast revenues.
During fiscal 2015 and the three months ended July 31, 2015, approximately 24.7% and 30.3%, respectively, of our revenues came from sales through distributors. We expect that revenues from sales through distributors will vary from year to year, but will continue to represent a significant proportion of our total revenues. Selling through distributors reduces our ability to accurately forecast sales and increases the complexity of our business, requiring us to, among other matters:
· manage a more complex supply chain;
· manage the level of inventory at each distributor;
· provide for credits, return rights and price protection;
· estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and
· monitor the financial condition and creditworthiness of our distributors.
Any failure to manage these challenges could cause us to inaccurately forecast sales and carry excess or insufficient inventory, thereby adversely affecting our operating results and cash flows.
Our business could be harmed if we lose the services of one or more members of our senior management team, or if we are unable to attract and retain qualified personnel.
The loss of the services of one or more of our executive officers or key employees, which has occurred from time to time, or the decision of one or more of these individuals to join a competitor, could adversely affect our business and harm our operating results and financial condition. Our success depends to a significant extent on the continued service of our senior management and certain other key technical personnel. None of our senior management is bound by an employment or non-competition agreement. We do not maintain key man life insurance on any of our employees.
Our success also depends on our ability to identify, attract and retain qualified sales, marketing, finance, management and technical personnel. We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. The pending acquisition by the Consortium may create uncertainty for our employees, which could adversely affect our ability to retain key employees and hire new talents. If we do not succeed in hiring and retaining candidates with appropriate qualifications, our revenues, operations and product development efforts could be harmed.
We substantially completed the implementation of a new enterprise resource planning system, a process which presents a number of significant operational risks.
As our business grows and becomes more complex, it is necessary that we expand and upgrade our enterprise resource planning system, or ERP, and other management information systems which are critical to the operational, accounting and financial functions of our company. We evaluated alternative solutions, both short-term and long-term, to meet the operating, administrative and financial reporting requirements of our business. We have made and will continue to make further enhancements and upgrades to the ERP, as necessary. Significant management attention and resources have been used and extensive planning has occurred to support effective implementation of the new ERP system. However, such implementation, as well as enhancements or upgrades to the system carries certain risks, including the risk of significant design errors that could materially and adversely affect our operating results and impact our ability to manage our business. As a result, there is a risk that deficiencies may exist in the future and that they could constitute significant deficiencies, or, in the aggregate, a material weakness in internal control over financial reporting.
Our operations may be impaired as a result of disasters, business interruptions or similar events.
Disasters and business interruptions such as earthquakes, water, fire, electrical failure, accidents and epidemics affecting our operating activities, major facilities, and employees and customers health could materially and adversely affect our operating results and financial condition. In particular, our Asian operations and most of our third party service
providers involved in the manufacturing of our products are located within relative close proximity. Therefore, any disaster that strikes within or close to that geographic area, such as the earthquake and flooding that occurred in China, could be extremely disruptive to our business and could materially and adversely affect our operating results and financial condition. We are currently developing and implementing a disaster recovery plan.
Acts of war and terrorist acts may seriously harm our business and revenue, costs and expenses and financial condition.
Acts of war or terrorist acts, wherever they occur around the world, may cause damage or disruption to our business, employees, facilities, suppliers, distributors or customers, which could significantly impact our revenue, costs, expenses and financial condition. In addition, as a company with significant operations and major distributors and customers located in Asia, we may be adversely impacted by heightened tensions and acts of war that occur in locations such as the Korean Peninsula, Taiwan and China. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot presently be predicted. We are uninsured for losses and interruptions caused by terrorist acts and acts of war.
New regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in the manufacturing of our products.
As a public company, we are subject to new requirements under the Dodd-Frank Act of 2010 that require us to exercise due diligence, disclose and report whether or not our products contain conflict minerals The implementation of these new requirements could adversely affect the sourcing, availability and pricing of the minerals used in the manufacture of our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used or necessary to the production of our products and, if applicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to alter our products, processes or sources of supply to avoid such materials.
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our stock has been and will likely continue to be subject to substantial price and volume fluctuations due to a number of factors, many of which are beyond our control that may prevent our stockholders from selling our common stock at a profit.
The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Since the beginning of fiscal 2002 through September 1, 2015, the closing sales price of our common stock has ranged from a high of $36.42 per share to a low of $1.18 per share. The closing sales price of our common stock on September 1, 2015 was $23.90 per share. The securities markets have experienced significant price and volume fluctuations in the past, and the market prices of the securities of semiconductor companies have been especially volatile. This market volatility, as well as the outcome of the pending acquisition by the Consortium, and general economic, market or political conditions, including the current global economic situation, could reduce the market price of our common stock in spite of our operating performance. The market price of our common stock may fluctuate significantly in response to a number of factors, including:
· developments with respect to the pending acquisition by the Consortium;
· actual or anticipated fluctuations in our operating results;
· changes in expectations as to our future financial performance;
· changes in financial estimates of securities analysts;
· release of lock-up or other transfer restrictions on our outstanding shares of common stock or sales of additional shares of common stock;
· sales or the perception in the market of possible sales of shares of our common stock by our directors, officers, employees or principal stockholders;
· changes in market valuations of other technology companies; and
· announcements by us or our competitors of significant technical innovations, design wins, contracts, standards or acquisitions.
Due to these factors, the price of our stock may decline and investors may be unable to resell their shares of our stock for a profit. In addition, the stock market experiences extreme volatility that often is unrelated to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance.
Provisions in our charter documents and Delaware law could prevent or delay a change in control of our company and may reduce the market price of our common stock.
Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include:
· adjusting the price, rights, preferences, privileges and restrictions of preferred stock without stockholder approval;
· providing for a classified board of directors with staggered, three-year terms;
· requiring supermajority voting to amend some provisions in our certificate of incorporation and bylaws;
· limiting the persons who may call special meetings of stockholders; and
· prohibiting stockholder actions by written consent.
Provisions of Delaware law also may discourage, delay or prevent another company from acquiring or merging with us. Our board of directors could adopt a preferred stock rights agreement. If adopted, the exercise of rights under the rights agreement could have the effect of delaying, deferring or preventing a change of control of our company, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The rights agreement could also limit the price that investors might be willing to pay in the future for our common stock.
Exhibit |
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Description |
31.1 |
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Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
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Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 |
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Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS |
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XBRL Instance Document |
101.SCH |
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XBRL Taxonomy Extension Schema Document |
101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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OMNIVISION TECHNOLOGIES, INC. | |
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(Registrant) | |
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Dated: September 4, 2015 |
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By: |
/s/ SHAW HONG |
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Shaw Hong |
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Chief Executive Officer and Director |
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(Principal Executive Officer) |
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Dated: September 4, 2015 |
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By: |
/s/ ANSON CHAN |
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Anson Chan |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
Exhibit |
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Description |
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101.INS |
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XBRL Instance Document |
101.SCH |
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XBRL Taxonomy Extension Schema Document |
101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
CERTIFICATION
I, Shaw Hong, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of OmniVision Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 4, 2015
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By: |
/s/ SHAW HONG |
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Shaw Hong |
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Chief Executive Officer and Director |
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(Principal Executive Officer) |
CERTIFICATION
I, Anson Chan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of OmniVision Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 4, 2015
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By: |
/s/ ANSON CHAN |
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Anson Chan |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Shaw Hong, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of OmniVision Technologies, Inc. for the quarterly period ended July 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of OmniVision Technologies, Inc. A signed original of this written statement required by Section 906 has been provided to OmniVision Technologies, Inc. and will be retained by OmniVision Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Dated: September 4, 2015
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By: |
/s/ SHAW HONG |
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Shaw Hong |
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Chief Executive Officer and Director |
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(Principal Executive Officer) |
I, Anson Chan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of OmniVision Technologies, Inc. for the quarterly period ended July 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of OmniVision Technologies, Inc. A signed original of this written statement required by Section 906 has been provided to OmniVision Technologies, Inc. and will be retained by OmniVision Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Dated: September 4, 2015
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By: |
/s/ ANSON CHAN |
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Anson Chan |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
Net Income Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | |
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Jul. 31, 2015 |
Jul. 31, 2014 |
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Net Income Per Share | ||
Antidilutive common stock subject to outstanding options (in shares) | 508 | 1,683 |
Basic Numerator: | ||
Net income | $ 18,242 | $ 45,327 |
Basic Denominator: | ||
Weighted average common shares for net income per share | 58,584,000 | 56,583,000 |
Basic net income per share | $ 0.31 | $ 0.80 |
Diluted Numerator: | ||
Net income | $ 18,242 | $ 45,327 |
Diluted Denominator: | ||
Denominator for basic net income per share | 58,584,000 | 56,583,000 |
Weighted average effect of dilutive securities: | ||
Stock options, restricted stock units and employee stock purchase plan shares | 1,155,000 | 1,575,000 |
Weighted average common shares for diluted net income per share | 59,739,000 | 58,158,000 |
Diluted net income per share | $ 0.31 | $ 0.78 |
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