UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 20, 2012
Semtech Corporation
(Exact name of registrant as specified in its charter)
Delaware | 1-6395 | 95-2119684 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) | ||
200 Flynn Road Camarillo, California |
93012-8790 | |||
(Address of principal executive offices) | (Zip Code) |
805-498-2111
Registrants telephone number, including area code
Not applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.01 | Completion of Acquisition or Disposition of Assets. |
As disclosed in the Current Report on Form 8-K filed with the Securities and Exchange Commission by Semtech Corporation (Semtech) on March 23, 2012 (the Original Form 8-K), Semtech, through its wholly-owned subsidiary Semtech Canada Inc. completed the acquisition of Gennum Corporation (Gennum) on March 20, 2012.
As part of the Original Form 8-K, the Company indicated that the financial statements and pro forma financial information under Item 9.01 would be filed no later than 71 days following the date that the Form 8-K was required to be filed. This Form 8-K/A contains the required financial statements and pro forma financial information.
Item 9.01 | Financial Statements and Exhibits. |
(a) | Financial Statements of Businesses Acquired |
The audited consolidated balance sheets of Gennum as of November 30, 2011 and 2010, and the related consolidated statements of earnings, changes in shareholders equity, comprehensive income, and cash flows for each of the three years in the period ended November 30, 2011, and the notes related thereto, are attached hereto as Exhibit 99.1 and incorporated herein by reference.
(b) | Pro Forma Financial Information |
The unaudited pro forma condensed consolidated financial information as of and for the year ended January 29, 2012, and the notes related thereto, that gives effect to the acquisition of Gennum is attached hereto as Exhibit 99.2 and incorporated herein by reference.
(d) | Exhibits |
Exhibit No. | Description | |
23.1 | Consent of Ernst & Young LLP, Independent Auditors | |
99.1 | The audited consolidated balance sheets of Gennum as of November 30, 2011 and 2010, and the related consolidated statements of earnings, changes in shareholders equity, comprehensive income, and cash flows for each of the three years in the period ended November 30, 2011 | |
99.2 | The unaudited pro forma combined condensed financial statements as of and for the year ended January 29, 2012 that gives effect to the acquisition of Gennum |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SEMTECH CORPORATION | ||||||
Date: June 1, 2012 | By: | /s/ Emeka Chukwu | ||||
Name: Emeka Chukwu | ||||||
Title: Chief Financial Officer |
2
EXHIBIT INDEX
Exhibit No. | Description | |
23.1 | Consent of Ernst & Young LLP, Independent Auditors | |
99.1 | The audited consolidated balance sheets of Gennum as of November 30, 2011 and 2010, and the related consolidated statements of earnings, changes in shareholders equity, comprehensive income, and cash flows for each of the three years in the period ended November 30, 2011 | |
99.2 | The unaudited pro forma combined condensed financial statements as of and for the year ended January 29, 2012 that gives effect to the acquisition of Gennum |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
| the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-44033), filed January 9, 1998 with respect to registration of 800,000 shares of the Companys common stock for the Companys 1994 Long-Term Stock Incentive Plan; |
| the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-80319), filed June 9, 1999 with respect to registration of 2,150,868 shares of the Companys common stock for the Companys Long-Term Stock Incentive Plan; |
| the Registration Statement on Form S-3 of Semtech Corporation (File No. 333-95183), filed January 21, 2000 with respect to registration of 495,403 shares of the Companys common stock in conjunction with the acquisition of USAR Systems, Incorporated; |
| the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-50448) filed November 22, 2000 with respect to registration of 4,000,000 shares of the Companys common stock for the Companys Non-Director and Non-Executive Officer Long-Term Stock Incentive Plan; |
| the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-118802) filed September 3, 2004 with respect to registration of 550,000 shares of the Companys common stock for Non-Qualified Stock Option Grants made to certain executive officers in November 2002 and April 2004; |
| the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-142153) filed April 16, 2007 with respect to registration of 600,000 shares of the Companys common stock for Non-Qualified Stock Option Grants and Restricted Stock Awards to Chief Executive Officer Maheswaran; and |
| the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-152939) filed August 11, 2008 with respect to registration of 11,791,337 shares of the Companys common stock for the Companys 2008 Long-Term Equity Incentive Plan. |
| the Registration Statement on Form S-8 of Semtech Corporation (File No. 333-163780) filed December 16, 2009 with respect to registration of 796,661 shares of Semtechs common stock for Semtechs 2009 Long- Term Equity Inducement Plan, 266,020 shares of Semtechs common stock for Semtechs 2000 SMI Assumed Plan and 683,205 shares of Semtechs common stock for Semtechs 2007 SMI Assumed Plan. |
of our report dated June 1, 2012, with respect to the consolidated financial statements for the years ended November 30, 2011, 2010 and 2009 of Gennum Corporation, included in this Current Report (Form 8-K) dated June 1, 2012.
/s/ Ernst & Young LLP
Toronto, Canada
June 1, 2012
Exhibit 99.1
GENNUM CORPORATION
Audited Consolidated Financial Statements
For the Years ended November 30, 2011, 2010 and 2009
(Amounts in thousands of U.S. Dollars)
INDEPENDENT AUDITORS REPORT
To the Directors of Semtech Corporation
We have audited the accompanying consolidated balance sheets of Gennum Corporation as of November 30, 2011 and 2010, and the related consolidated statements of earnings, changes in shareholders equity, comprehensive income, and cash flows for each of the three years in the period ended November 30, 2011. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gennum Corporation at November 30, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2011 in conformity with Canadian generally accepted accounting principles.
Toronto, Canada,
June 1, 2012
Gennum Corporation
CONSOLIDATED BALANCE SHEETS
As of November 30 (U.S. dollars, amounts in thousands)
2011 | 2010 | |||||||
ASSETS |
||||||||
Current |
||||||||
Cash and cash equivalents |
20,686 | 52,732 | ||||||
Investments |
43 | 81 | ||||||
Accounts receivable, net (note 10) |
24,425 | 21,924 | ||||||
Inventories (note 3) |
24,857 | 21,406 | ||||||
Prepaid expenses and other assets |
3,382 | 3,733 | ||||||
Consideration receivable (note 5) |
1,105 | | ||||||
Income taxes receivable |
1,330 | 1,201 | ||||||
Future income taxes (note 17) |
5,935 | 10,043 | ||||||
|
|
|
|
|||||
Total current assets |
81,763 | 111,120 | ||||||
|
|
|
|
|||||
Capital assets, net (note 4) |
16,562 | 14,639 | ||||||
Intangible assets, net (note 7) |
42,390 | 25,293 | ||||||
Consideration receivable (note 5) |
| 981 | ||||||
Goodwill (note 7) |
45,879 | 22,292 | ||||||
Future income taxes (note 17) |
21,538 | 15,372 | ||||||
|
|
|
|
|||||
208,132 | 189,697 | |||||||
|
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|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current |
||||||||
Accounts payable and accrued liabilities (note 6) |
26,188 | 17,685 | ||||||
Deferred revenue (note 8) |
1,128 | 971 | ||||||
Income taxes payable |
376 | 768 | ||||||
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|
|
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Total current liabilities |
27,692 | 19,424 | ||||||
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|
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Deferred revenue (note 8) |
3,225 | 3,503 | ||||||
Future income taxes (note 17) |
1,674 | 347 | ||||||
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|
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Commitments and contingencies (note 19) |
||||||||
Shareholders equity |
||||||||
Capital stock (note 9) |
9,455 | 8,893 | ||||||
Deferred compensation |
(5,990 | ) | (2,909 | ) | ||||
Retained earnings |
129,898 | 120,758 | ||||||
Contributed surplus |
6,849 | 5,610 | ||||||
Accumulated other comprehensive income |
35,329 | 34,071 | ||||||
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|
|
|
|||||
Total shareholders equity |
175,541 | 166,423 | ||||||
|
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|
|
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208,132 | 189,697 | |||||||
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|
|
|
See accompanying notes
Gennum Corporation
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
Years ended November 30 (U.S. dollars, amounts in thousands except per share data)
2011 | 2010 | 2009 | ||||||||||
Revenue (note 11) |
137,164 | 128,893 | 85,240 | |||||||||
Cost of goods sold |
39,362 | 34,739 | 24,343 | |||||||||
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|
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Gross margin |
97,802 | 94,154 | 60,897 | |||||||||
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Sales, marketing and administration expense |
35,805 | 32,677 | 30,577 | |||||||||
Research and development expense |
42,507 | 37,003 | 30,567 | |||||||||
Amortization of intangible assets |
3,676 | 1,765 | 1,767 | |||||||||
Less government assistance |
(5,744 | ) | (4,673 | ) | (4,496 | ) | ||||||
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|
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Operating expenses before restructuring charge and related deferred development charge impairment |
76,244 | 66,772 | 58,415 | |||||||||
Restructuring charge and related deferred development impairment (note 14 and 15) |
1,543 | | 5,934 | |||||||||
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|
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Operating income (loss) |
20,015 | 27,382 | (3,452 | ) | ||||||||
Investment income |
251 | 315 | 324 | |||||||||
Other expense (note 16) |
(638 | ) | (1,009 | ) | (4,643 | ) | ||||||
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|
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Earnings (loss) before income taxes |
19,628 | 26,688 | (7,771 | ) | ||||||||
(Provision for) recovery of income taxes (note 17) |
(5,438 | ) | (8,124 | ) | 5,166 | |||||||
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Net earnings (loss) for the year |
14,190 | 18,564 | (2,605 | ) | ||||||||
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Net earnings (loss) per sharebasic and diluted (note 9) |
0.41 | 0.54 | (0.07 | ) | ||||||||
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|
Gennum Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended November 30 (U.S. dollars, amounts in thousands)
2011 | 2010 | 2009 | ||||||||||
Capital stock |
||||||||||||
Balance at beginning of the year |
8,893 | 8,576 | 8,576 | |||||||||
Shares issued on exercise of options |
562 | 317 | | |||||||||
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|
|||||||
Balance at end of the year |
9,455 | 8,893 | 8,576 | |||||||||
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|
|||||||
Deferred compensation |
||||||||||||
Balance at beginning of the year |
(2,909 | ) | (2,350 | ) | (2,092 | ) | ||||||
New awards |
(7,029 | ) | (3,184 | ) | (2,014 | ) | ||||||
Forfeitures |
804 | 522 | 338 | |||||||||
Amortization |
3,144 | 2,103 | 1,418 | |||||||||
|
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|
|||||||
Balance at end of the year |
(5,990 | ) | (2,909 | ) | (2,350 | ) | ||||||
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|
|
|||||||
Retained earnings |
||||||||||||
Balance at beginning of the year |
120,758 | 106,994 | 113,658 | |||||||||
Transitional adjustment on adoption of new accounting policies |
| | 212 | |||||||||
Net earnings (loss) |
14,190 | 18,564 | (2,605 | ) | ||||||||
Dividends |
(5,050 | ) | (4,800 | ) | (4,271 | ) | ||||||
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|
|||||||
Balance at end of the year |
129,898 | 120,758 | 106,994 | |||||||||
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|
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Contributed surplus |
||||||||||||
Balance at beginning of the year |
5,610 | 3,956 | 2,493 | |||||||||
Stock option amortization |
1,385 | 1,735 | 1,463 | |||||||||
Stock option exercises |
(146 | ) | (81 | ) | | |||||||
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|
|
|
|||||||
Balance at end of the year |
6,849 | 5,610 | 3,956 | |||||||||
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|
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Accumulated other comprehensive income, net of income taxes |
||||||||||||
Balance at beginning of the year |
34,071 | 29,920 | 7,075 | |||||||||
Other comprehensive income for the year |
1,258 | 4,151 | 22,845 | |||||||||
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|
|||||||
Balance at end of the year |
35,329 | 34,071 | 29,920 | |||||||||
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|
|||||||
Total shareholders equity at end of the year |
175,541 | 166,423 | 147,096 | |||||||||
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|
|
|
See accompanying notes
Gennum Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended November 30 (U.S. dollars, amounts in thousands)
2011 | 2010 | 2009 | ||||||||||
Net earnings (loss) for the year |
14,190 | 18,564 | (2,605 | ) | ||||||||
Other comprehensive income, net of income taxes |
||||||||||||
Change in unrealized gains on translating financial statements |
1,270 | 4,132 | 19,907 | |||||||||
Reclassification to earnings of losses on available for sale financial assets |
(12 | ) | 19 | | ||||||||
Change in gains on derivative instruments designated as cash flow hedges |
| | 170 | |||||||||
Reclassification to earnings of losses on settled cash flow hedges |
| | 2,554 | |||||||||
Reclassification to earnings of losses on available for sale financial assets |
| | 214 | |||||||||
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|
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Total other comprehensive income, net of income taxes |
1,258 | 4,151 | 22,845 | |||||||||
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|
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Comprehensive income for the year |
15,448 | 22,715 | 20,240 | |||||||||
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See accompanying notes
Gennum Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars except as noted, amounts in thousands except per share data)
2011 | 2010 | 2009 | ||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net earnings (loss) for the year |
14,190 | 18,564 | (2,605 | ) | ||||||||
Items not affecting cash |
||||||||||||
Depreciation and amortization |
10,409 | 7,567 | 7,017 | |||||||||
Impairment of deferred development costs and other intangible assets |
467 | 1,213 | 1,928 | |||||||||
Deferred compensation and stock option amortization |
4,529 | 3,838 | 2,881 | |||||||||
Provisions on loans and investments |
| | 1,069 | |||||||||
Gain on sale of land and building (note 16) |
| | (1,000 | ) | ||||||||
Gain on sale of BST technology group (note 6 and 16) |
| | (1,601 | ) | ||||||||
Gain on sale of Toumaz investment |
| | (268 | ) | ||||||||
Government assistance |
(5,744 | ) | (4,673 | ) | (4,496 | ) | ||||||
Future income taxes |
3,580 | 7,461 | (6,636 | ) | ||||||||
Other |
268 | 1,311 | 929 | |||||||||
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27,699 | 35,281 | (2,782 | ) | |||||||||
Net change in non-cash working capital balances |
(1,253 | ) | 1,562 | (1,939 | ) | |||||||
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Cash provided by (used in) operating activities |
26,446 | 36,843 | (4,721 | ) | ||||||||
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INVESTING ACTIVITIES |
||||||||||||
Purchase of capital assets and software intangible assets |
(6,954 | ) | (6,871 | ) | (4,608 | ) | ||||||
Payment of license fees and deferred development charges |
(7,158 | ) | (8,144 | ) | (6,102 | ) | ||||||
Acquisition, cash acquired (note 6) |
783 | | | |||||||||
Acquisition, other than cash acquired (note 6) |
(30,153 | ) | | (491 | ) | |||||||
Proceeds on sale of BST technology group (note 5) |
| 248 | 2,276 | |||||||||
Proceeds on sale of Toumaz investment |
| | 1,019 | |||||||||
Proceeds on sale of land and building |
| | 1,437 | |||||||||
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Cash used in investing activities |
(43,482 | ) | (14,767 | ) | (6,469 | ) | ||||||
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FINANCING ACTIVITIES |
||||||||||||
Deferred compensation paid, net of forfeitures |
(6,225 | ) | (2,662 | ) | (1,676 | ) | ||||||
Proceeds received on exercise of stock options |
416 | 236 | | |||||||||
Repayment of debt assumed in acquisition (note 6) |
(5,755 | ) | | | ||||||||
Dividends paid |
(5,050 | ) | (4,800 | ) | (4,271 | ) | ||||||
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Cash used in financing activities |
(16,614 | ) | (7,226 | ) | (5,947 | ) | ||||||
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Effect of exchange rate changes on cash and cash equivalents |
1,604 | 924 | 5,347 | |||||||||
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Net increase (decrease) in cash and cash equivalents during the year |
(32,046 | ) | 15,774 | (11,790 | ) | |||||||
Cash and cash equivalents, beginning of the year |
52,732 | 36,958 | 48,748 | |||||||||
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Cash and cash equivalents, end of the year |
20,686 | 52,732 | 36,958 | |||||||||
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Dividends declared per share 1 |
$ | 0.14 | $ | 0.14 | $ | 0.12 | ||||||
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During the year, interest expense paid was nil (2010 and 2009nil) and income taxes paid was $2,381 (2010$717, 2009$3,244). Cash and cash equivalents were comprised entirely of cash (2010cash$40,855 and cash equivalents$11,877, 2009cash$23,726 and cash equivalents$13,232).
1 Dividends were paid in Canadian dollars at a rate of $0.14 per share per year.
See accompanying notes
GENNUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars except as noted, amounts in thousands except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Gennum Corporation (the Company or Gennum) have been prepared in accordance with Canadian generally accepted accounting principles and within the framework of the significant accounting policies summarized below:
Principles of consolidation These consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated.
Translation of foreign currencies The Companys functional currency is the Canadian dollar. Transactions in foreign currencies are translated into Canadian dollars at rates in effect at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the exchange rates in effect at each accounting period end date. Exchange gains or losses are included in net earnings.
For foreign subsidiaries that are considered self-sustaining, the current rate method of translating foreign currencies has been used. Under this method, assets and liabilities are translated into Canadian dollars at the exchange rates in effect at each accounting period end date and revenue and expenses are translated at average exchange rates during the period. Gains or losses arising from the translation of the financial statements of these foreign subsidiaries are included in other comprehensive income.
For foreign subsidiaries that are considered integrated, the temporal method of translating foreign currencies has been used. Under this method, monetary items are translated into Canadian dollars at the exchange rates in effect at each accounting period end date. Non-monetary items and their related amortization are translated at their historical exchange rates. Revenue and expenses are translated at average exchange rates during the period. Gains or losses arising from the translation of the financial statements of these foreign subsidiaries are included in net earnings.
The Company uses the U.S. dollar as its reporting currency. Therefore the Canadian dollar balances are converted to the U.S. dollar using the current rate method for reporting purposes (see note 2).
Financial assets and financial liabilities The Companys financial instruments are classified into one of the following five categories: held for trading; held to maturity investments; loans and receivables; available for sale financial assets; and other financial liabilities. All financial instrument transactions are recorded at the settlement date, which is the date that an asset is delivered to or by the Company. All financial instruments, including derivatives, are included in the consolidated balance sheet and are measured at fair value except for held to maturity investments, loans and receivables and other financial liabilities, which are measured at amortized cost. Financial assets and financial liabilities that are purchased and incurred with the intention of generating profits in the near term are classified as held for trading. These financial instruments are recorded at fair value on inception and are subsequently measured at fair value at each period end. Revaluation gains and losses are included in net earnings in the period in which they arise. Available for sale financial instruments are also recorded at fair value on inception and are subsequently measured at fair value at each period end and revaluation gains and losses related to fair value are included in other comprehensive income in the period in which they occur.
Derivatives and hedge accounting The Company enters into foreign currency forward contracts to reduce its exposure to foreign currency denominated balances. All derivative instruments are recorded on the consolidated balance sheet at fair value. All changes in fair value are recorded in net earnings. There are currently no cash flow hedges.
The Company has derivative instruments to manage its exposure associated with changes in the fair value of its deferred share unit (DSU) plan. Changes in the fair value of these instruments are recorded to sales, marketing and administration expense.
Derivatives may be embedded in any contract (the host contract). Embedded derivatives are separated from the host contract when their economic characteristics and risks are not clearly and closely related to
those of the host contract. Embedded derivatives are measured at fair value with subsequent changes recognized in net earnings.
Cash and cash equivalents Cash and cash equivalents include cash on deposit and investments with remaining maturities of three months or less on inception.
Inventories Inventories are recorded at the lower of cost and net realizable value. Inventory cost is based on weighted average cost and includes material, labour, transportation and handling costs and manufacturing overhead where applicable.
The Company adopted CICA (as defined below) Section 3031, Inventories beginning December 1, 2008 and adjusted opening inventory on this date by $234 with an adjustment of $212 net of tax made as an increase to retained earnings for additional transportation costs that are required to be included in inventory. The prior period was not restated.
Capital assets Capital assets are recorded at cost, net of related government assistance and accumulated depreciation.
Equipment and furniture are depreciated using the straight-line method over estimated useful lives ranging from five to seven years. Computer hardware is depreciated using the straight-line method over the estimated useful life of three years. Leasehold improvements are amortized using the straight-line method over the term of the lease, including one renewal period.
Research and development costs The Company follows the guidance in the Canadian Institute of Chartered Accountants (the CICA) Handbook Section 3064, Goodwill and Intangible Assets. Until February 29, 2008, expenditures such as research and development costs were expensed as incurred since the criteria for deferment of such costs were not met. However, effective March 1, 2008, the criteria for deferment of eligible costs were met. These criteria include whether the product and cost are clearly defined, the technical feasibility has been established, management has indicated its intention to produce and market the product, the future market is clearly defined and adequate resources are expected to be available to complete the product. These deferred development costs are included in intangible assets (see note 7). Upon commercial launch of the product, these costs are amortized over the number of expected product life unit sales over a maximum of five years. Research costs continue to be expensed as incurred.
Government assistance The Company receives financial assistance under available government incentive programs including investment tax credits related to research and development activities. Government assistance relating to capital expenditures and deferred development costs included in intangible assets are reflected as a reduction of the cost of such assets. Government assistance relating to research and development expense are recorded as a reduction of expenses when the related expenditures are incurred.
Business combinations, goodwill and intangible assets The Company follows the guidance in the CICA Handbook Section 1581, Business Combinations, which requires all business combinations to be accounted for using the purchase method. In addition, any goodwill and intangible assets acquired in a business combination are accounted for under CICA Handbook Section 3064, Goodwill and Intangible Assets. This section requires that goodwill not be amortized, while identified intangible assets with finite useful lives be amortized over their useful lives.
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired. Goodwill and indefinite life intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that those assets might be impaired. The impairment test is carried out in two steps. In the first step, the identification of a potential impairment is determined by comparing the fair value of the reporting unit to its carrying value. Fair value is based on estimates of discounted future cash flows. When the fair value of the reporting unit is less than its carrying value, the fair value is allocated to all its assets and liabilities based on their fair values. The amount that the fair value of the reporting unit exceeds the amounts assigned to its assets and liabilities is the fair value of goodwill. In the second step, impairment is determined by comparing the fair value of goodwill to its carrying value. Any shortfall is charged to earnings.
Intangible assets with finite useful lives acquired through business combinations are recorded at their fair value at the date of acquisition. An impairment loss on an intangible asset with a finite useful life is recognized when its carrying value exceeds the total undiscounted cash flows expected from its use and disposition. The amount of loss is determined by deducting its fair value based on discounted cash flows expected from its use and disposition from its carrying value. The Company reviews definite life intangible assets for impairment whenever events or changes indicate that the carrying value may not be recoverable.
Asset impairment The Company follows the guidance in CICA Handbook Section 3063, Impairment of Long-Lived Assets and CICA Handbook Section 3855, Financial InstrumentsRecognition and Measurement. The Company evaluates the carrying value of long-lived and intangible assets for potential impairment annually or more frequently if events or circumstances warrant a review. The carrying value of such assets is considered impaired when the anticipated net recoverable amount of the asset is less than its carrying value or when the change in value is other than temporary. In that event, the carrying value of the asset is adjusted to fair value and an impairment loss is charged to earnings. The Company reviews long-lived assets for impairment whenever events or changes indicate that the carrying value may not be recoverable.
Revenue recognition Revenue from sales of products to customers is recognized when title and risk of ownership are transferred to customers; when persuasive evidence of an arrangement exists; when the price to the buyer is fixed or determinable; and when collection is reasonably assured.
Revenue is recognized net of estimated product returns due to stock rotation and the product warranty program. Reductions to revenue for expected and actual payments to resellers for price adjustments are based on actual adjustments incurred during the period, on estimates of what is due to resellers for estimated credits earned during the period and any adjustments for credits based on actual activity. The estimated adjustments are based on contract terms or historical patterns. The Company reviews actual adjustments on a quarterly basis to ensure they are consistent with the estimates.
For the performance of service contracts, revenue has been recognized using the percentage of completion method based on labour hours. Billings for time-based contracts are done monthly. Unbilled receivables are created when the Company accrues revenue before the contract terms permit billing the customer. Deferred revenue is created when the Company bills a customer in accordance with the contract, prior to having met the requirements for revenue recognition.
On March 1, 2011, the Company early adopted Emerging Issues Committee (EIC) Abstract No. 175 (EIC-175), Revenue Arrangements with Multiple Deliverables issued by the CICA in December 2009 which amends the EIC Abstract No. 142, Revenue Arrangements with Multiple Deliverables. The new guidance changes the requirements for establishing separate deliverables in a multiple-deliverable arrangement and requires the allocation of arrangement consideration to each separately identified deliverable based on the relative selling price. Based on this method, the selling price of each separately identified deliverable is determined using vendor-specific objective evidence (VSOE) of selling price if available, otherwise third-party evidence (TPE) of selling price, or estimated selling price (ESP) if neither VSOE nor TPE of selling price is available. The residual method of allocating arrangement consideration is no longer permitted. EIC-175 also expands the disclosure required for multiple-deliverable arrangements which are reflected below.
The Company early adopted EIC-175 in its second quarter of 2011, which is applied prospectively from the beginning of Gennums fiscal year. The early adoption of EIC-175 did not have a material impact on the Companys first quarter consolidated financial statements. Previously, the Company had not applied EIC-142 as it was not able to determine selling price using VSOE or TPE for undelivered items and ESP was not an acceptable method. As a result, intellectual property (IP) contracts were considered one unit of accounting and revenue was recorded using the percentage of completion method. With the adoption of EIC-175, the Company has established that there are up to three units of accounting in an IP contract and revenue is recorded separately for each unit of accounting which more closely matches activity. The timing of revenue recognition under both methods is dependent on the timing of the contracts and the magnitude of effort required to complete the deliverable under each unit of accounting. IP revenue would have been lower by $1,724 in 2011 had the Company not adopted EIC 175.
The Company revised its previously disclosed revenue recognition policy to reflect changes resulting from the adoption of EIC-175 which applies to multiple-deliverable arrangements entered into or materially modified on or after December 1, 2010. The changes to the revenue recognition policy are disclosed below. The previously disclosed revenue recognition policy remains effective for multiple-deliverable arrangements that were in place as of, and were not materially modified after, November 30, 2010.
Multiple-deliverable arrangements The Company enters into arrangements with multiple deliverables that generally include a design package, characterization and post-contract support (PCS). Under the new guidance, the total arrangement value is allocated to each element as a separate unit of accounting if: (1) the delivered item has value to the client on a stand-alone basis; and (2) in an arrangement that includes a general right of return relative to the delivered item, the delivery or performance of the undelivered item is considered probable and substantially in the control of the Company. If these criteria are met, then the total consideration of the arrangement is allocated among the separate units of accounting based on their relative selling price. Based on this method, the selling price of each separately identified deliverable is determined using VSOE of selling price, if available, otherwise TPE of selling price, or ESP if neither VSOE nor TPE of selling price is available. VSOE of selling price is established using the price charged for a deliverable when sold separately by the Company. TPE of selling price is established using the Companys or competitors prices for similar deliverables. ESP is the price at which the Company would offer the service if the deliverable were sold regularly on a stand-alone basis. ESP is established by considering a number of internal and external factors including, but not limited to, geographies, the Companys pricing policies, internal costs and margins.
Consideration allocated to the design package and characterization is recognized using the percentage of completion method based on labour hours, whereas consideration allocated to PCS is recognized straight-line over the service period or as service is provided where the maximum PCS hours are likely to be used prior to the end of the term. Billings for time-based contracts are done monthly. Unbilled receivables are created when the Company accrues revenue before the contract terms permit billing the customer. Deferred revenue is created when the Company bills a customer in accordance with the contract, prior to having met the requirements for revenue recognition.
Leases Leases are classified as capital or operating leases. A lease that transfers substantially all the benefits and risks incident to the ownership of property is classified as a capital lease. All other leases are accounted for as operating leases.
Deferred gain Deferred gain represents the unamortized portion of the gain arising on the sale of property, which was subsequently leased back. The deferred gain is amortized using the straight-line method over the term of the lease. The deferred gain is included in deferred revenue.
Stock-based compensation plan The Company follows the guidance in the CICA Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments, which includes the fair-value based method of accounting for all its stock-based compensation. For stock options granted on or after December 1, 2003, the options are measured on the grant date using a fair-value based method and expensed over the vesting period.
In addition, the Company has employee incentive plans which contain two components. The first is a stock option component, which is measured on the grant date using a fair-value based method and expensed over the vesting period. The second component is a restricted share component, which is recorded as deferred compensation as a charge to shareholders equity at the time of the grant and is expensed over the vesting period. The shares required for the restricted share component are acquired in the secondary market.
Deferred share units (DSUs) The Company grants DSUs to directors as described in note 13. The number of DSUs issued is calculated by dividing the compensation by the fair market value of the Companys shares on the date of grant. The DSUs outstanding are recorded as accrued liabilities and are re-evaluated quarterly at the share market price, with all changes recorded to sales, marketing and administration expense.
Income taxes The Company follows the liability method of income tax allocation. Under this method, future tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Earnings (loss) per share The calculation of earnings per share is based on reported net earnings (loss) divided by the weighted average number of shares outstanding during the year. Diluted earnings per share reflect the assumed conversion of all dilutive securities using the treasury stock method.
Use of estimates The preparation of the consolidated financial statements, in conformity with Canadian generally accepted accounting principles, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent; however, actual results could differ from these estimates.
2. REPORTING CURRENCY
Effective December 1, 2007, the Company adopted the U.S. dollar as its reporting currency, but has retained the Canadian dollar as its functional currency. Management believes that reporting in U.S. dollars improves the comparability of the Companys financial position and results of operations to others in its industry.
During the year, revenue and expenses have been translated from Canadian dollars to U.S. dollars at the monthly average rates, and cash flows at the quarterly average rates. Assets and liabilities have been translated at the year-end rate of $0.9807 Canadian dollars to U.S. dollars (2010$0.9743).
3. INVENTORIES
As of November 30 | ||||||||
2011 | 2010 | |||||||
Raw materials and supplies |
209 | 242 | ||||||
Work in process |
14,803 | 14,209 | ||||||
Finished goods |
9,845 | 6,955 | ||||||
|
|
|
|
|||||
24,857 | 21,406 | |||||||
|
|
|
|
Inventory is reviewed at least quarterly for obsolescence. The Company recorded a write-down of $769 during the year (2010$1,605, 2009$853). The inventory write-down in 2009 was included in restructuring activity (see note 15).
Included in the inventory balance at November 30, 2011 was $6,375 in end-of-life inventory (2010$8,434), a significant portion of which is expected to be sold more than one year out.
4. CAPITAL ASSETS
As of November 30 | ||||||||
2011 | 2010 | |||||||
Cost: |
||||||||
Land |
994 | 992 | ||||||
Equipment and furniture |
33,055 | 28,499 | ||||||
Computer hardware |
7,808 | 7,448 | ||||||
Leasehold improvements |
3,697 | 3,350 | ||||||
|
|
|
|
|||||
Total cost |
45,554 | 40,289 | ||||||
|
|
|
|
|||||
Less accumulated depreciation: |
||||||||
Equipment and furniture |
21,940 | 19,601 | ||||||
Computer hardware |
5,972 | 5,406 | ||||||
Leasehold improvements |
1,080 | 643 | ||||||
|
|
|
|
|||||
Total accumulated depreciation |
28,992 | 25,650 | ||||||
|
|
|
|
|||||
Capital assets, net |
16,562 | 14,639 | ||||||
|
|
|
|
The cost of capital asset additions for 2011 was reduced by government assistance of $193 (2010$114). Included in capital assets were new assets valued at $491 mainly related to information technology infrastructure and manufacturing equipment that were not in use as of November 30, 2011 and therefore are not being depreciated (2010$2,576).
Depreciation expense for the years ended November 30, 2011, 2010 and 2009 was as follows:
2011 | 2010 | 2009 | ||||||||||
Building |
| | 16 | |||||||||
Equipment and furniture |
3,206 | 3,238 | 3,398 | |||||||||
Computer hardware |
817 | 609 | 617 | |||||||||
Leasehold improvements |
598 | 377 | 224 | |||||||||
|
|
|
|
|
|
|||||||
4,621 | 4,224 | 4,255 | ||||||||||
|
|
|
|
|
|
5. CONSIDERATION RECEIVABLE
On March 4, 2009, the Company completed the sale of its barium strontium titanate (BST) technology group and associated assets to Paratek Microwave, Inc. (Paratek) for cash on closing of $1,526 and future cash payments totaling $2,150. The consideration receivable is non interest bearing with $250 payable quarterly until December 31, 2009, which has been received in full and a long-term portion of $1,150 payable by March 4, 2012. The receivable was discounted to $1,105 as of November 30, 2011 using a rate of 12%.
The Company is also entitled to royalty payments based on Parateks sales of BST related products through March 2014, but royalty payments could terminate earlier if Paratek were to undergo a change of control in that time frame. In the event that a change of control occurred on or before March 4, 2012, the royalty payments may be terminated upon the payment of $2,000 to the Company. Royalty payments are recorded to revenue as they are received from Paratek as an estimate of future royalty payments cannot be made at this time.
The Company does not have any continuing involvement in or ownership interest in these operations.
The sale of the BST technology group and associated assets resulted in a gain of $1,601 in 2009, calculated as follows:
Capital assets |
1,436 | |||
Inventory |
164 | |||
Transaction costs |
121 | |||
|
|
|||
1,721 | ||||
|
|
|||
Less proceeds: |
||||
Cash |
1,526 | |||
Consideration receivable |
1,796 | |||
|
|
|||
Gain on sale recognized in 2009 |
1,601 | |||
|
|
6. ACQUISITION NANOTECH SEMICONDUCTOR LIMITED
On April 6, 2011, the Company acquired all of the outstanding shares of Nanotech Semiconductor Limited (Nanotech), a fabless semiconductor company that designs and sells analog and mixed-signal integrated circuits principally for fiber-optic based communications, for a total initial cash consideration of $30,153, which includes transaction related costs of $1,315, and potential future cash consideration. Earn-out payments aggregating up to $6,000 are required to be made based on attaining certain revenue targets in the first twelve months after the closing. This contingent consideration was fully accrued and recorded in accounts payable and accrued liabilities in November 2011 as management became virtually certain at that point that the terms will be met. This earn-out accrual, made subsequent to closing, was treated as a purchase price adjustment, resulting in a revised purchase price of $36,153.
In addition, the Company repaid a loan payable of Nanotech of $5,755 immediately following the closing of the acquisition.
The acquisition was accounted for under the purchase method from the acquisition date. The purchase price allocation was assigned to the net identifiable assets acquired based on their fair values as follows:
Cash |
783 | |||
Accounts receivable |
1,644 | |||
Prepaid expenses and other assets |
281 | |||
Inventories |
2,256 | |||
Income taxes receivable |
122 | |||
Capital assets |
596 | |||
Identifiable intangible assets subject to amortization |
16,599 | |||
Future income tax asset |
1,370 | |||
Accounts payable and accrued liabilities |
(1,384 | ) | ||
Assumed capital lease obligations |
(424 | ) | ||
Future income tax liability |
(4,316 | ) | ||
Loan payable |
(5,755 | ) | ||
Intercompany loan payable to Gennum |
458 | |||
Excess of adjusted purchase price over fair value of identifiable net assets acquired (goodwill) (note 7) * |
23,923 | |||
|
|
|||
Total purchase price, including transaction costs |
36,153 | |||
|
|
* | Goodwill is not deductible for tax purposes |
The results of Nanotech from April 7, 2011 to November 30, 2011 have been included in these consolidated results.
7. GOODWILL AND INTANGIBLE ASSETS
(i) Goodwill
For reconciliation purposes only, the following table summarizes goodwill balances translated to U.S. dollars at the historical exchange rates in effect at the dates of acquisition and the adjustment required to translate from historical rates to the respective balance sheet rates:
As of November 30 | ||||||||
2011 | 2010 | |||||||
SiGe Semiconductor Inc. |
1,889 | 1,889 | ||||||
Snowbush Microelectronics Inc. |
19,072 | 19,072 | ||||||
ASIC Architect, Inc. |
1,066 | 1,009 | ||||||
Nanotech Semiconductor Limited (note 6) |
23,923 | | ||||||
Exchange translation |
(71 | ) | 322 | |||||
|
|
|
|
|||||
45,879 | 22,292 | |||||||
|
|
|
|
Earn-out payments related to the ASIC Architect, Inc. acquisition were required to be made based on attaining certain annual IP thresholds. The earn-out period ended in 2011. Goodwill is reviewed at least annually for impairment.
(ii) Intangible Assets
As of November 30 | ||||||||
2011 | 2010 | |||||||
License fees |
172 | 276 | ||||||
Less accumulated amortization |
(32 | ) | (165 | ) | ||||
|
|
|
|
|||||
140 | 111 | |||||||
SiGe acquired in 2004 |
||||||||
Technology |
| 2,164 | ||||||
Less accumulated amortization |
| (2,035 | ) | |||||
|
|
|
|
|||||
| 129 | |||||||
Snowbush acquired in 2007 |
||||||||
Technology |
4,021 | 3,995 | ||||||
Supplier relationships |
1,275 | 1,267 | ||||||
|
|
|
|
|||||
5,296 | 5,262 | |||||||
Less accumulated amortization |
(4,325 | ) | (3,245 | ) | ||||
|
|
|
|
|||||
971 | 2,017 | |||||||
ASIC Architect acquired in 2008 |
||||||||
Technology |
242 | 239 | ||||||
In process development |
77 | 77 | ||||||
Customer value |
209 | 208 | ||||||
Contracts in process |
226 | 225 | ||||||
|
|
|
|
|||||
754 | 749 | |||||||
Less accumulated amortization |
(478 | ) | (376 | ) | ||||
|
|
|
|
|||||
276 | 373 |
Nanotech acquired in 2011 (note 6) |
||||||||
Technology |
15,193 | | ||||||
Order backlog |
788 | | ||||||
|
|
|
|
|||||
15,981 | | |||||||
Less accumulated amortization |
(2,195 | ) | | |||||
|
|
|
|
|||||
13,786 | | |||||||
Computer software |
1,031 | 596 | ||||||
Less accumulated amortization |
(587 | ) | (417 | ) | ||||
|
|
|
|
|||||
444 | 179 | |||||||
Business systems |
11,477 | 11,119 | ||||||
Less accumulated amortization |
(3,022 | ) | (1,923 | ) | ||||
|
|
|
|
|||||
8,455 | 9,196 | |||||||
Deferred development costs |
19,701 | 13,883 | ||||||
Less accumulated amortization |
(1,383 | ) | (595 | ) | ||||
|
|
|
|
|||||
18,318 | 13,288 | |||||||
|
|
|
|
|||||
42,390 | 25,293 | |||||||
|
|
|
|
License fees are amortized using the straight-line method over the estimated useful lives ranging from three to five years. New license fees of $78 were incurred in 2011 (2010$70).
The intangible assets resulting from the SiGe Semiconductor Inc. acquisition in May 2004 were amortized using the straight-line method over the estimated useful life of seven years. These intangible assets have now been fully amortized.
Intangible assets resulting from the Snowbush Microelectronics Inc. acquisition in October 2007 are amortized using the straight-line method over the estimated useful lives ranging from one to five years.
Intangible assets resulting from the ASIC Architect, Inc. acquisition in July 2008 are amortized using the straight-line method over the estimated useful lives ranging from five to seven years.
Order backlog and technology intangibles represent those intangible assets resulting from the Nanotech acquisition in April 2011 as described in note 6. Order backlog is amortized as the orders are filled and delivered to customers and is expected to be fully amortized within a year from the date of acquisition. Technology intangibles are amortized using the straight-line method over an estimated useful life of seven years.
Intangible assets related to computer software and business systems are recorded at cost, net of related government assistance and accumulated amortization. Computer software is amortized using the straight-line method over the estimated useful life of three to five years. Capitalized expenditures related to business systems are amortized using the straight-line method over their estimated useful life of up to ten years.
Deferred development costs represent expenditures that are directly related to placing a new product into commercialization when the expenditure is incremental in nature and it is probable that the expenditure is recoverable from future sales of the associated product. Upon commercial launch of the product, these costs are amortized to cost of goods sold over the number of expected unit sales to a maximum of five years.
Additional deferred development costs of $7,137 were capitalized in the year (2010$8,074). These additions were partially offset by government assistance of $740 in 2011 (2010$1,389).
Impairments related to deferred development costs that are no longer expected to provide future benefit were $467 in the year (2010$1,053, 2009$1,743 most of which were included as part of the Companys restructuring activity in 2009 and was therefore under restructuring charge and related
deferred development impairment). There were no other intangible asset impairments in 2011 (2010$160 related to ASIC Architect, Inc., 2009$167 related to ASIC Architect, Inc. and $18 related to license fees). Intangible asset impairments are charged to research and development expense in the consolidated statements of earnings (loss), except when included as part of restructuring activity.
Amortization expense related to total intangible assets in 2011 was $5,788 (2010$3,343, 2009$2,741). License fees and other acquired intangible assets amortization is recorded as a separate line item on the consolidated statements of earnings. Computer software and operating system amortization is allocated according to usage to cost of goods sold; sales, marketing and administration expense; and research and development expense. Deferred development cost amortization, net of related investment tax credits, is charged to cost of goods sold.
Intangible asset amortization |
2011 | 2010 | 2009 | |||||||||
License fees and other acquired intangible assets |
3,676 | 1,765 | 1,767 | |||||||||
Computer software and business systems |
1,298 | 1,054 | 930 | |||||||||
Deferred development costs |
814 | 524 | 65 | |||||||||
|
|
|
|
|
|
|||||||
5,788 | 3,343 | 2,762 | ||||||||||
|
|
|
|
|
|
8. DEFERRED REVENUE
Deferred revenue is comprised of two components. The largest is the unamortized gain created by the sale leaseback of the corporate headquarters. On August 15, 2008, the Company sold land and an office building for net proceeds of $13,161 and concurrently entered into a fifteen-year leaseback arrangement with the purchaser of the property. The $4,518 gain arising on the disposal of the property was recorded as deferred revenue and is being amortized over the lease term, partially to sales, marketing and administration expense and partially to research and development expense.
The provisions of the lease provide for a fifteen-year term with an option to extend for two five-year terms, at the election of the Company. The lease has been accounted for as an operating lease as the criteria for such a lease under CICA Handbook Section 3065, Leases have been met.
Minimum lease payments in Canadian dollars for the first five years, the second five years and the final five years are $5,270, $5,610, and $5,950, respectively.
The second component is created by IP revenue when differences occur between the timing of customer payments and the recognition of revenue using the percentage of completion method.
As of November 30, 2011, deferred revenue related to the unamortized gain was $3,526, of which $301 was classified as current and the balance of $3,225 as long term (2010$299 current and $3,503 long term), and deferred revenue related to collections in excess of earned IP revenue was $827, all classified as current (2010$672).
9. CAPITAL STOCK
The Company has authorized an unlimited number of common shares with no par value, of which 35,560,199 common shares (201035,476,909) were issued and outstanding as of November 30, 2011 with a stated value of $9,455 (2010$8,893). An unlimited number of preferred shares have also been authorized, none of which have been issued.
Reconciliation of common shares outstanding |
Number of Shares | Stated Value | ||||||
Number of shares outstanding, November 30, 2008 and 2009 |
35,429,086 | 8,576 | ||||||
Stock options exercised in 2010 |
47,823 | 317 | ||||||
|
|
|
|
|||||
Number of shares outstanding, November 30, 2010 |
35,476,909 | 8,893 | ||||||
Stock options exercised in 2011 |
83,290 | 562 | ||||||
|
|
|
|
|||||
Number of shares outstanding, November 30, 2011 |
35,560,199 | 9,455 | ||||||
|
|
|
|
Options to purchase common shares
The Company has an incentive stock option plan which provides for the granting of options for the benefit of employees and officers. The total number of common shares that may be issued upon the exercise of options granted under the stock option plan is 2,700,000 common shares. To date, 489,075 common shares have been issued upon the exercise of options granted under the stock option plan, leaving 2,210,925 common shares available for issue under options currently outstanding, or which may be granted in the future, under the stock option plan. Options to purchase 2,368,640 common shares were outstanding under the stock option plan at year end.
An additional 965,000 options are outstanding as of November 30, 2011, which were issued outside the stock option plan to new officers upon hiring at exercise prices ranging from Canadian $6.13$13.27. This includes 150,000 options issued outside the stock option plan in 2010 (no stock options were issued outside the stock option plan in 2011 or in 2009).
All options have been granted for a term of seven years from the grant date with vesting as to 25% of the option entitlement at the end of each of the first, second, third and fourth years from the date of grant. All options allow the holder to purchase common shares at the exercise price of the options, which is set at the closing price of a trade of at least a board lot of the common shares on the Toronto Stock Exchange on the trading day preceding the date of grant, unless otherwise determined by the Company, but in no event may the option exercise price be less than the fair market value of a common share on the date of grant of the option. The following table presents a comparative summary of options outstanding as of November 30. All exercise prices are presented in Canadian dollars.
2011 | 2010 | 2009 | ||||||||||||||||||||||
Number of shares |
Weighted average exercise price (Cdn.$) |
Number of shares |
Weighted average exercise price (Cdn.$) |
Number of shares |
Weighted average exercise price (Cdn.$) |
|||||||||||||||||||
Outstanding, beginning of year |
3,122,393 | 8.02 | 2,500,086 | 9.24 | 2,117,077 | 10.99 | ||||||||||||||||||
Granted |
697,131 | 7.33 | 1,098,500 | 5.71 | 695,150 | 4.54 | ||||||||||||||||||
Forfeited |
(402,594 | ) | 7.85 | (418,370 | ) | 9.43 | (282,641 | ) | 10.52 | |||||||||||||||
Expired |
| | (10,000 | ) | 13.49 | (29,500 | ) | 12.11 | ||||||||||||||||
Exercised |
(83,290 | ) | 4.99 | (47,823 | ) | 5.10 | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Outstanding, end of year |
3,333,640 | 7.97 | 3,122,393 | 8.02 | 2,500,086 | 9.24 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Options exercisable at year end |
1,689,379 | 9.41 | 1,338,113 | 10.33 | 984,334 | 11.02 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about all options outstanding to purchase common shares at November 30, 2011. Note all exercise prices are presented in Canadian dollars:
Options Outstanding |
Options Exercisable | |||||||||
Range of exercise prices (Cdn.$) |
Number outstanding |
Weighted average remaining contractual life |
Weighted average exercise price (Cdn.$) |
Number exercisable |
Weighted average exercise price (Cdn.$) | |||||
$ 4.55$ 6.04 |
1,052,450 | 4.9 years | 5.17 | 345,881 | 5.01 | |||||
$ 6.05$ 8.54 |
920,524 | 5.9 years | 7.09 | 75,875 | 6.49 | |||||
$ 8.55$13.27 |
1,360,666 | 2.3 years | 10.74 | 1,267,623 | 10.78 |
The estimated weighted average fair value of stock options granted during 2011 was Canadian $2.48 (2010Canadian $1.91, 2009Canadian $1.67) per share using the Black-Scholes option-pricing model with the following weighted average assumptions:
2011 | 2010 | 2009 | ||||||||||
Risk-free interest rate |
2.4 | % | 2.1 | % | 2.0 | % | ||||||
Expected dividend yield |
1.9 | % | 2.5 | % | 3.1 | % | ||||||
Expected volatility |
46.7 | % | 48.5 | % | 51.1 | % | ||||||
Expected time until exercise |
4.0 years | 4.0 years | 5.5 years |
Restricted share plan
The number and weighted average fair value of restricted common shares granted under employee incentive plans of the Company in 2011 were 914,734 and Canadian $7.60 respectively (2010574,574 and Canadian $5.84, 2009490,641 and Canadian $5.07).
The Company recorded compensation expense and credited to contributed surplus $1,385 related to stock options during the year (2010$1,735, 2009$1,463). Compensation expense of $3,144 in 2011 related to the amortization of prior period restricted share plan awards (2010$2,103, 2009$1,418).
Earnings per share
The Company uses the treasury stock method of calculating the dilutive effect of options on earnings per share. The following is a reconciliation of the numerator and denominator of earnings per share computations:
2011 | 2010 | 2009 | ||||||||||
Net earnings (loss) for the year |
14,190 | 18,564 | (2,605 | ) | ||||||||
|
|
|
|
|
|
|||||||
Weighted average shares outstanding (numbers in thousands) |
35,542 | 35,443 | 35,429 | |||||||||
Shares held in restricted share plan trust fund |
(1,178 | ) | (852 | ) | (602 | ) | ||||||
|
|
|
|
|
|
|||||||
Basic weighted average shares outstanding |
34,364 | 34,591 | 34,827 | |||||||||
Effect of dilutive stock options |
187 | 97 | | |||||||||
|
|
|
|
|
|
|||||||
Diluted weighted average shares outstanding |
34,551 | 34,688 | 34,827 | |||||||||
|
|
|
|
|
|
|||||||
Earnings (loss) per sharebasic and diluted |
0.41 | 0.54 | (0.07 | ) | ||||||||
|
|
|
|
|
|
Under the treasury stock method for calculating diluted earnings per share, options to purchase 2,256,190 common shares were not included in the computation of diluted earnings per share for the year ended November 30, 2011 because they were anti-dilutive. In net loss per common share situations, the diluted loss per common share amount is the same as that for basic, as all factors are anti-dilutive.
10. FINANCIAL INSTRUMENTS
Categories of financial assets and liabilities
Under Canadian generally accepted accounting principles, financial instruments are classified into one of the following five categories: held for trading; held to maturity investments; loans and receivables; available for sale financial assets; and other financial liabilities. The carrying values of the Companys financial instruments, including those held for sale on the consolidated balance sheet, are classified into the following categories:
As of November 30 | ||||||||
2011 | 2010 | |||||||
Held for trading 1 |
20,655 | 52,807 | ||||||
Available for sale 2 |
37 | 49 | ||||||
Loans and receivables 3 |
25,530 | 22,905 | ||||||
Other financial liabilities 4 |
26,151 | 17,685 |
1 | Includes cash and cash equivalents and foreign exchange forward contracts that are not effective hedges |
2 | Includes an investment in common shares designated as available for sale |
3 | Includes accounts receivable and consideration receivable Includes accounts payable and accrued liabilities |
The Company, through its financial assets and liabilities, is exposed to various risks. The Companys overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Companys financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. The Company does not purchase any derivative financial instruments for speculative purposes.
Risk management is the responsibility of the corporate finance function. The Companys domestic and foreign operations along with the corporate finance function identify, evaluate and, where appropriate, hedge financial risks. Material risks are monitored and are discussed with the audit committee. The following analysis provides information regarding certain financial risks as of November 30, 2011:
(a) Fair Value
The carrying amounts for cash and cash equivalents, accounts receivable, other assets and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments.
Instruments held for trading and investments classified as available for sale are recorded at fair value based on the quoted share prices and foreign exchange rates as of November 30, 2011.
(b) Foreign Exchange Rate Risk
The objective of the Companys foreign exchange risk management activities is to minimize translation exposures related to working capital and the resulting volatility of the Companys earnings. The Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange rates by entering into foreign exchange forward contracts as described below.
The Companys revenue is mainly denominated in U.S dollars, whereas operating expenses (including salaries) are incurred mainly in Canadian dollars. Cost of goods sold is a combination of U.S. and Canadian dollars. As a result of the Companys U.S. dollar profile, cash, receivables and trade payables on the Companys books are primarily denominated in U.S. dollars while the functional currency of the Company is Canadian dollars. Therefore, translation gains or losses can occur when these net monetary assets are translated to the Canadian dollar functional currency at the exchange rate in effect on the balance sheet date. A volatile exchange rate can create significant swings in periodic income. Similarly, the Companys U.K. subsidiary has mainly U.S. dollar revenue, whereas its expenditures are incurred primarily in British pounds. To mitigate these risks, the Company has a foreign exchange risk management program. The Companys policy is to enter into foreign exchange forward contracts equal to the forecasted level of U.S. dollar denominated net monetary assets. These contracts mature in one month and mitigate the impact of translation gains or losses due to currency movements from one balance sheet date to the next. In accordance with this policy, the Company entered into a foreign exchange forward contract on November 30, 2011 to sell $16,000 U.S in exchange for Canadian dollars, $4,400 U.S. in exchange for British pounds and $2,800 U.S. in exchange for Japanese yen. These contracts matured on December 30, 2011 at exchange rates of Canadian $1.0193 against the U.S. dollar, GBP 0.6371 against the U.S. dollar and Japanese yen 77.41 against the U.S. dollar.
The Company also generates revenue in Japanese yen in excess of the Japanese yen expenditures. The Japanese yen net current asset positions are hedged on a monthly basis in a similar fashion to the U.S. foreign exchange contracts referred to above. The Company entered into a foreign exchange forward contract on November 30, 2011 to sell 40,000 Japanese yen in exchange for Canadian dollars. This contract matured on December 30, 2011 at an exchange rate of Canadian $0.01313 against the Japanese yen.
The Company estimates that a before tax loss of $37 would have been realized if the U.S. dollar and Japanese yen contracts had been terminated on November 30, 2011. The fair values of the foreign exchange forward contracts are based on market information from major financial institutions. These forward contracts are not considered hedges for accounting purposes and therefore the gains or losses
are included in other income on the consolidated statement of earnings. The net impact of these realized foreign exchange losses was $112 in 2011 (2010loss of $799, 2009loss of $1,809) recorded to other expense (see note 16). In addition, the Company realized foreign exchange losses of $452 in the second quarter of 2011 related to the acquisition of Nanotech (see note 6).
The Company also recognizes unrealized foreign exchange gains and losses recorded to the consolidated statement of earnings mainly as a result of converting U.S. dollar denominated balances to the Companys Canadian dollar functional currency. The exchange rate used to convert U.S. dollar balances on the balance sheet to the Companys Canadian dollar functional currency was Canadian $1.0197 against the U.S. dollar on November 30, 2011 compared to Canadian $1.0264 against the U.S. dollar on November 30, 2010 and Canadian $1.0574 against the U.S. dollar on November 30, 2009. The net impact on the Companys U.S.-based net monetary assets was a foreign exchange translation loss of $74 in 2011 (2010loss of $67, 2009loss of $3,455) recorded to other expense (see note 16). The net impact of the realized and unrealized foreign exchange gains and losses to the consolidated statement of earnings was a loss of $638 in the year (2010loss of $866, 2009loss of $5,264) (see note 16).
The Companys reporting currency is the U.S. dollar. Therefore, financial results are first consolidated into the Canadian dollar functional currency and then translated into U.S. dollars using the current rate method. The translation to the reporting currency does not generate a cash impact and is not hedged by the Company. Gains or losses created by translating from the functional currency to the reporting currency are captured as a change in unrealized gains (losses) on translating financial statements and are captured in the consolidated statement of comprehensive income. The Company reported a foreign currency translation gain in 2011 of $1,270 (2010a translation gain of $4,132, 2009a translation gain of $19,907) due mainly from converting the Canadian dollar consolidation for U.S. dollar reporting. This translation gain is recorded in other comprehensive income and is due to a strengthening of the Canadian dollar compared to the U.S. dollar over the year.
(c) Credit Risk
The Company is exposed to commercial credit risk from its customers in the normal course of business, which is mitigated by the Companys credit management policies. The Company is also exposed to credit risk from potential default by any of its counterparties on its foreign exchange and DSU derivative financial instrument contracts and manages these credit risks by dealing only with major financial institutions with acceptable credit ratings. Credit risks associated with Paratek on the consideration receivable are managed through regular communication with this company.
As of November 30, 2011, one customer accounted for 11% of revenue (2010three customers, two of which are distributors, accounted for 33% of revenue); no customers accounted for greater than 10% of receivables (2010two customers accounted for 24% of receivables).
The aging of trade receivable balances as of November 30 were as follows:
As of November 30 | ||||||||
2011 | 2010 | |||||||
Not past due |
19,142 | 17,464 | ||||||
Past due 0-30 days |
3,826 | 3,386 | ||||||
Past due 31-60 days |
617 | 431 | ||||||
Past due over 61 days |
840 | 643 | ||||||
|
|
|
|
|||||
Accounts receivable, net |
24,425 | 21,924 | ||||||
|
|
|
|
These balances are net of provisions of $1,319 against past due over 61 days (2010$1,159 against past due over 61 days).
(d) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. As of November 30, 2011, the Company was holding cash and cash equivalents
of $20,686 and accounts receivable of $24,425. The Company used approximately $36,000 of its cash to purchase all of the shares of Nanotech and repay Nanotech debt in the second quarter of 2011 (see note 6). The Company has undiscounted contractual maturities related to accounts payable and accrued liabilities as of November 30, 2011 of $26,188. All of the Companys financial liabilities have contractual maturities of less than one year and are subject to normal trade terms.
The current ratio, calculated as current assets divided by current liabilities, for the Company as of November 30, 2011 was 3.0.
(e) Interest Rate Risk
Interest rate risk is the risk that interest-bearing financial instruments will vary in value due to the variability of the interest rates. The Company is not exposed to any material interest rate risk on its financial instruments.
(f) Price Risk
Price risk is the risk that the value of an investment will decline in the future. The Company does not believe it currently has any significant price risks with the exception of its DSU program. Fluctuations in Gennum share prices impact the DSU expense recognized as outstanding DSU awards are marked to market. Beginning late in 2010, the Company implemented a DSU derivative financial instrument to partially offset fluctuations in the mark to market of DSUs (see note 13).
11. SEGMENTED INFORMATION
The Company operates and tracks its results in one reportable segment, consisting of numerous product areas. The Companys chief operating decision maker is its Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level.
The revenue by product portfolio within the single reportable segment and revenue by geographic area is as follows:
Revenue by product portfolio is as follows:
2011 | 2010 | 2009 | ||||||||||
Analog and Mixed Signal |
92,508 | 95,783 | 60,995 | |||||||||
Optical * |
31,797 | 22,454 | 12,408 | |||||||||
IP |
12,859 | 10,656 | 11,837 | |||||||||
|
|
|
|
|
|
|||||||
137,164 | 128,893 | 85,240 | ||||||||||
|
|
|
|
|
|
* | Nanotech revenue is included in the Optical product portfolio. |
Revenue by principal markets is as follows:
2011 | 2010 | 2009 | ||||||||||
North America |
32,134 | 35,776 | 34,700 | |||||||||
Europe |
12,830 | 12,443 | 7,543 | |||||||||
Japan |
31,589 | 33,864 | 17,342 | |||||||||
Pacific Rim |
60,611 | 46,810 | 25,655 | |||||||||
|
|
|
|
|
|
|||||||
137,164 | 128,893 | 85,240 | ||||||||||
|
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|
|
|
|
The methodology for attributing revenue to principal markets is based on the billing location of the customer.
Capital assets and goodwill per country are as follows:
2011 | 2010 | |||||||
Canada |
34,716 | 34,219 | ||||||
United States |
1,115 | 1,051 | ||||||
UK |
26,158 | 1,050 | ||||||
Other |
452 | 611 | ||||||
|
|
|
|
|||||
62,441 | 36,931 | |||||||
|
|
|
|
Goodwill of $21,381 (November 30, 2010$21,241) is located in Canada, $1,115 (November 30, 2010$1,051) is located in the United States and $23,383 (November 30, 2010nil), which is related to the acquisition of Nanotech, is located in the U.K. (see note 6).
12. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan pursuant to which the Company contributes, for the benefit of each employee enrolled in the plan, 5% of such employees annual base salary earnings. The total cost incurred in 2011 was $1,489 (2010$1,445, 2009$1,151).
13. DEFERRED SHARE UNITS (DSUs)
The Company has a DSU plan for the benefit of the directors under which directors receive an initial award and an annual award in DSUs and can elect to receive up to 100% of their annual retainer or total compensation in the form of DSUs. Under the terms of the DSU plan, the DSU award is credited to an account maintained for each director. At such time as any director leaves the board of directors, such director will receive a lump sum cash payment equal to his unit balance under the DSU plan multiplied by the then current trading prices for the Companys common shares.
As of November 30, 2011, 259,347 units were outstanding under the DSU plan at a value of $1,464 (November 30, 2010198,144 units, value $1,353). This liability will be paid to directors when they leave the board of directors. No units were paid out in 2010 or 2011.
The sales, marketing and administration expense is impacted by the expensing of DSU awards and the re-evaluation of the liability based on the Companys share value. In November 2010, the Company units issued under its DSU plan. The derivative instrument is settled quarterly and, as of November 30, 2011, the derivative instrument offset 245,000 units (November 30, 201031,800 units). The net impacts to the consolidated statement of earnings (loss) are as follows:
2011 | 2010 | 2009 | ||||||||||
Expensing of new awards |
391 | 369 | 180 | |||||||||
Re-evaluation of the liability based on the Companys shares |
(389 | ) | 387 | 181 | ||||||||
Derivative instrument offset |
396 | 3 | | |||||||||
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|
|
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|
|||||||
398 | 759 | 361 | ||||||||||
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14. RESTRUCTURING CHARGE
On June 22, 2011, Gennum announced a restructuring program to complete the outsourcing of its manufacturing operations with the outsourcing of its product testing resources and inventory management.
This plan is expected to result in a restructuring charge of approximately $2,000 to $3,000, of which $1,543 has been accrued to date. Restructuring charges incurred to date are as follows:
Severance costs |
777 | |||
Contract termination costs |
493 | |||
Other |
273 | |||
|
|
|||
Total restructuring charge to date |
1,543 | |||
|
|
Contract termination costs of $493 are related to accrued fees on the closure of the Companys operations facility in Burlington, Ontario. Additional contract termination fees may be incurred as the Company negotiates an earlier termination of the lease; however, these costs are unknown at this time. Other costs include career counseling, with further costs expected over the next year related to the relocation of equipment and rental fees on the early abandonment of the operations facility. These actions are expected to be completed over the next few quarters.
The severance costs are related to the termination of approximately 10% of the Companys employees through the end of 2012. As of year-end, $657 of the severance costs have not been paid and are included in accounts payable and accrued liabilities.
15. RESTRUCTURING CHARGE AND DEFERRED DEVELOPMENT IMPAIRMENT
During 2009, the Company announced the implementation of a restructuring plan to improve profitability and cash flow. The Companys plans included realigning its investment to maintain its research and development programs while reducing corporate infrastructure and business operations costs and capital expenditures. Additionally, Gennum focused its marketing, sales and administrative investment on short-term and mid-term customer revenue generation activities and new product development.
This plan resulted in a restructuring charge and deferred development impairment of $5,934 incurred in 2009 related to the termination of approximately 10% of the Companys workforce. The plan has been substantially completed.
Severance costs |
3,584 | |||
Deferred development cost impairment (net of investment tax credits) |
1,200 | |||
Inventory and other asset impairments |
1,150 | |||
|
|
|||
Total restructuring charge and deferred development impairment |
5,934 | |||
|
|
|||
Severance costs incurred in 2009 |
3,584 | |||
Severance costs paid in 2009 |
(1,809 | ) | ||
Severance costs paid in 2010 |
(1,775 | ) | ||
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|
|||
Severance costs included in accounts payable and accrued liabilities as of November 30, 2010 |
| |||
|
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16. OTHER EXPENSE
2011 | 2010 | 2009 | ||||||||||
Realized losses on foreign exchange contracts |
(564 | ) | (799 | ) | (1,809 | ) | ||||||
Foreign exchange loss on translation |
(74 | ) | (67 | ) | (3,455 | ) | ||||||
|
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|
|
|
|
|||||||
Loss on foreign exchange, net |
(638 | ) | (866 | ) | (5,264 | ) | ||||||
|
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|
|
|
|
|||||||
Corporate development charges |
| (121 | ) | (2,448 | ) | |||||||
Gain on sale of land and building 1 |
| | 1,000 | |||||||||
Tundra termination fee, net 2 |
| | 2,205 | |||||||||
Gain on sale of BST technology group (note 5) |
| | 1,601 | |||||||||
Provision on long-term investment 3 |
| | (844 | ) | ||||||||
Other |
| (22 | ) | (893 | ) | |||||||
|
|
|
|
|
|
|||||||
| (143 | ) | 621 | |||||||||
|
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|
|||||||
(638 | ) | (1,009 | ) | (4,643 | ) | |||||||
|
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|
|
1 | On August 14, 2009, the Company sold its land and vacant building located at 980 Fraser Drive in Burlington, Ontario for proceeds of $1,437, which resulted in a gain of $1,000. |
2 | On March 19, 2009, Gennum Corporation announced it had entered into a definitive agreement providing for the acquisition by Gennum of all of the issued and outstanding shares of Tundra Semiconductor Corporation (Tundra). Tundra subsequently received an acquisition proposal which it determined to be a superior proposal and, therefore, the agreement was terminated. Pursuant to the terms of the agreement, Tundra paid Gennum a fee of $4,188 (CDN. $5,000) upon the termination of the agreement. Transaction costs such as legal, financial advisory and consulting fees have been netted against this fee, which resulted in income of $2,205. |
3 | As part of the Company sale of its Consumer Headset product line in 2007, the Company received shares of CellPoint Connect (CellPoint) as partial consideration. 1.1 million of these shares were classified as available for sale. During 2009, management considered the decrease in fair value of the shares to be significant and prolonged and as a result wrote the balance off to nil and recorded a cumulative impairment charge of $844 to earnings. |
17. INCOME TAXES
Provision for income taxes consists of the following:
2011 | 2010 | 2009 | ||||||||||
Future income taxes |
(3,580 | ) | (7,461 | ) | 6,636 | |||||||
Current income taxes |
(1,858 | ) | (663 | ) | (1,470 | ) | ||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
(5,438 | ) | (8,124 | ) | 5,166 | |||||||
|
|
|
|
|
|
The following is a reconciliation of the expected income tax expense obtained by applying the combined corporate tax rates to earnings before income taxes:
2011 | 2010 | 2009 | ||||||||||
Expected income tax expense using statutory tax rates |
(5,579 | ) | (8,273 | ) | 2,564 | |||||||
Permanent differences |
(340 | ) | (626 | ) | (219 | ) | ||||||
Different income tax rates on earnings of foreign subsidiaries |
51 | 75 | 30 | |||||||||
Changes in tax rates |
514 | 519 | 668 | |||||||||
Adjustment of tax provision |
(84 | ) | 181 | (94 | ) | |||||||
Impact of provincial harmonization |
| | 2,217 | |||||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
(5,438 | ) | (8,124 | ) | 5,166 | |||||||
|
|
|
|
|
|
|||||||
Effective tax rate |
27.7 | % | 30.4 | % | 66.5 | % | ||||||
|
|
|
|
|
|
Components of future income taxes by jurisdiction are summarized as follows:
As of November 30 | ||||||||
2011 | 2010 | |||||||
Canada |
||||||||
Future income tax assetcurrent |
||||||||
Research and development incentives |
5,507 | 9,650 | ||||||
Various accounting expenses not currently deductible for tax purposes |
1,025 | 570 | ||||||
Accounting revenue not currently taxable |
(764 | ) | (448 | ) | ||||
|
|
|
|
|||||
5,768 | 9,772 | |||||||
|
|
|
|
|||||
Future income tax assetlong-term |
||||||||
Research and development incentives |
25,523 | 18,908 | ||||||
Tax depreciation in excess of book depreciation |
(2,702 | ) | (2,531 | ) | ||||
Provincial corporate minimum tax carryforward balance |
1,406 | 524 | ||||||
Deferred gain on sale of buildinglong-term portion |
807 | 890 | ||||||
Intangible asset amortization not deductible for tax purposes |
(252 | ) | (550 | ) | ||||
Various accounting expenses not currently deductible for tax purposes |
1,534 | 1,609 | ||||||
Deferred development costs deductible for tax, not currently amortized for accounting |
(5,105 | ) | (3,819 | ) | ||||
|
|
|
|
|||||
21,211 | 15,031 | |||||||
|
|
|
|
|||||
Foreign |
||||||||
Future income tax assetcurrent |
||||||||
Accounting expense not currently deductible for tax purposes |
167 | 271 | ||||||
|
|
|
|
|||||
Future income tax assetlong-term |
||||||||
Accounting expense not currently deductible for tax purposes |
327 | 341 | ||||||
|
|
|
|
|||||
Future income tax liabilitieslong-term |
||||||||
Intangible asset amortization not deductible for tax purposes |
(3,695 | ) | (149 | ) | ||||
Loss carryforwards |
2,139 | | ||||||
Various accounting expenses not currently deductible for tax purposes |
165 | | ||||||
Tax depreciation in excess of book depreciation |
(283 | ) | (198 | ) | ||||
|
|
|
|
|||||
(1,674 | ) | (347 | ) | |||||
|
|
|
|
18. CAPITAL RISK MANAGEMENT
The Companys objectives when managing capital are to ensure that there is adequate capital to achieve its business objectives in order to provide returns for shareholders and benefits for other stakeholders. The Companys capital is composed of shareholders equity, and is not subject to any capital requirements imposed by a regulator.
The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue or re-acquire shares, acquire or dispose of assets and raise capital through debt facilities.
19. COMMITMENTS AND CONTINGENCIES
The Company is committed to future minimum payments under operating leases for software design tools and buildings and equipment as of November 30, 2011 as follows:
Design Tools | Buildings and Equipment | Total | ||||||||||
2012 |
2,391 | 3,545 | 5,936 | |||||||||
2013 |
774 | 2,831 | 3,605 | |||||||||
2014 |
| 1,982 | 1,982 | |||||||||
2015 |
| 1,946 | 1,946 | |||||||||
2016 and beyond |
| 13,280 | 13,280 | |||||||||
|
|
|
|
|
|
|||||||
3,165 | 23,584 | 26,749 | ||||||||||
|
|
|
|
|
|
The Company has committed to approximately $11.4 million in purchase obligations as of November 30, 2011, of which $0.7 million is related to authorized capital projects. The remaining purchase obligations relate primarily to inventory, product development and general operating costs. The majority of purchase obligations, $10.1 million, are expected to be incurred within the next year.
In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers, former employees and third parties. Management believes that adequate provisions have been recorded in the accounts where required. Although it may not be possible to accurately estimate the extent of potential costs and losses, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Company.
20. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNITNG PRINCIPLES
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP), which differ in certain respects from those principles that the Company would have followed if its consolidated financial statements had been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP).
A reconciliation of net earnings for the years ended November 30, 2011 and 2010, from Canadian GAAP to conform with U.S. GAAP is as follows:
2011 | 2010 | |||||||||||
Net earnings for the year based on Canadian GAAP |
14,190 | 18,564 | ||||||||||
Deferred development costs excluding amortization |
A | (7,137 | ) | (8,074 | ) | |||||||
Investment tax credit (ITCs) offset against deferred development costs |
A | 740 | 1,389 | |||||||||
Amortization of deferred development costs, net of ITCs |
A | 814 | 524 | |||||||||
Impairment of deferred development costs, net of ITCs |
A | 467 | 1,053 | |||||||||
Acquisition related costs |
B | (1,315 | ) | | ||||||||
Nanotech earn out accrual |
B | (180 | ) | | ||||||||
Future income tax related to the above adjustments |
1,294 | 1,332 | ||||||||||
|
|
|
|
|||||||||
Net earnings for the year based on U.S. GAAP |
8,873 | 14,788 | ||||||||||
|
|
|
|
|||||||||
Basic and fully diluted comprehensive net earnings per share based on U.S. GAAP |
0.26 | 0.43 | ||||||||||
|
|
|
|
|||||||||
Weighted average number of shares used in calculating comprehensive net earnings per share (number in thousands) |
34,551 | 34,688 | ||||||||||
|
|
|
|
A reconciliation of Shareholders equity for the year from Canadian GAAP to conform with U.S. GAAP is as follows:
2011 | 2010 | |||||||||||
Shareholders equity based on Canadian GAAP |
175,541 | 166,423 | ||||||||||
Deferred development costs (net of offsetting investment tax credits) |
A | (18,318 | ) | (13,288 | ) | |||||||
Acquisition related costs |
B | (1,315 | ) | | ||||||||
Nanotech earn out accrual |
B | (180 | ) | | ||||||||
Future income tax related to the above adjustments |
4,737 | 3,443 | ||||||||||
|
|
|
|
|||||||||
Shareholders equity based on U.S. GAAP |
160,465 | 156,578 | ||||||||||
|
|
|
|
Reconciling items
A) Deferred development costs
Under Canadian GAAP, certain development costs are capitalized to intangible assets on the balance sheet and amortized to cost of goods sold over their estimated useful lives if they meet the criteria for deferral. These capitalized deferred development costs are subject to impairment analysis, which may result in a related impairment charge to research and development expense in net earnings. Under U.S. GAAP, development costs are expensed as incurred.
Under Canadian GAAP, the Company records its investment tax credits arising from research and development activities on a net basis against costs to which they relate, including deferred development costs. Under U.S. GAAP, when the Company recognizes its investment tax credits into earnings, the credit is reflected as a reduction of tax expense.
The resulting reclassification to the provision for income taxes in the statement of earnings is as follows:
2011 | 2010 | |||||||
Investment tax credits offset against deferred development costs |
740 | 1,389 | ||||||
Investment tax credits offset against research and development expense |
5,744 | 4,673 | ||||||
|
|
|
|
|||||
Total investment tax credits |
6,484 | 6,062 | ||||||
Income tax adjustments related to the above changes |
1,294 | 1,332 | ||||||
Provision for income taxes under Canadian GAAP |
(5,438 | ) | (8,124 | ) | ||||
|
|
|
|
|||||
Recovery (provision) of income taxes under U.S. GAAP |
2,340 | (730 | ) | |||||
|
|
|
|
Balance sheet
As a result of the change under U.S. GAAP to expense development costs as they are incurred, intangible assets on the balance sheet are reduced by $18,318 to $24,072 (2010reduced by $13,288 to $12,005). Future income tax assets are also increased by $4,737 to $26,275 (2010an increase of $3,443 to $18,815) as there is no longer a timing difference on the deductibility of development costs between accounting and tax.
Cash flow
In addition, the consolidated statement of cash flow under U.S. GAAP would have the effects of net cash provided by operating activities being lower and the net cash used in investing activities being lower by $7,137 (2010$8,074).
B) Business combinations
Under Canadian GAAP, the Company includes, in the determination of a purchase price, acquisition-related costs incurred in the pre-acquisition period. This increase in purchase price increases goodwill on the balance sheet. Under U.S. GAAP, these costs are expensed.
Under Canadian GAAP, the Company recognizes contingent consideration as adjustments to the purchase price when it can be reasonably estimated and determined beyond reasonable doubt. The additional purchase price increases goodwill on the balance sheet. Under U.S. GAAP, contingent consideration are initially measured at fair value and remeasured to fair value at each balance sheet date. Subsequent adjustments to fair value are charged to net earnings.
Balance sheet
Under U.S. GAAP, as acquisition related costs and changes to contingent consideration are expensed to the net earnings, goodwill on the balance sheet in 2011 is reduced by $1,315 and $180 to $44,384.
Operating income
As a result of the deferred development cost, business combination and investment tax credit changes discussed in (A) and (B) above, operating income was reduced from $20,015 to $6,920 in 2011 and from $27,382 to $16,212 in 2010.
21. COMPARATIVE AMOUNTS
Certain of the comparative amounts have been reclassified to conform to the presentation adopted in the current year.
22. SUBSEQUENT EVENT
a) | On March 20, 2012, Semtech Corporation (Semtech) (Nasdaq: SMTC), a leading supplier of analog and mixed signal semiconductors, acquired all of the outstanding shares of Gennum for a total consideration of approximately $506 million. Upon completion of the acquisition, Gennums stock option awards and restricted shares became fully vested. Semtech acquired 100% of the outstanding shares and vested stock options and restricted shares of Gennum for CDN $13.55 per share. Subsequent to the acquisition, the operations of Gennum were integrated into the operations of Semtech and Gennum ceased to be listed on the Toronto Stock Exchange. |
b) | On May 7, 2012, Semtech Corporation signed a settlement agreement with a third party in relation to the settlement of lawsuits by the third party against Gennum customers. The settlement included a $3,225 payment from the Company to the third party. No amount was previously accrued as at November 30, 2011. |
c) | On May 15, 2012, following additional information as a result of a hearing in March 2012, Semtech management settled an outstanding patent infringement lawsuit that existed at year end for $1,000. No amount was previously accrued as at November 30, 2011. |
Exhibit 99.2
SEMTECH CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
On March 20, 2012, Semtech Corporation (Semtech or the Company), through its wholly-owned subsidiary Semtech Canada Inc., completed the acquisition of all outstanding equity interests of Gennum Corporation (Gennum) pursuant to a plan of arrangement under the Business Corporations Act (Ontario) dated January 23, 2012 (the Agreement).
Upon consummation of the acquisition, which constituted a change in control, Gennums stock option awards and restricted shares became fully vested. Semtech acquired 100% of the outstanding shares, vested stock options and restricted shares of Gennum for a total purchase price of $506.5 million. The acquisition was financed with a combination of cash from Semtechs international cash reserves and $350 million of five-year, floating rate secured term loans.
The acquisition is accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification Topic 805, Business Combinations. As such, the Gennum assets acquired and liabilities assumed are recorded at their acquisition-date fair values. Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an expense in the period in which the costs are incurred. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The Company expects that all such goodwill will not be deductible for tax purposes. The acquired in-process research and development is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts.
The allocation of the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed, based on their respective fair values, requires extensive use of accounting estimates and judgments. The more significant assumptions included determining the timing of projected revenues, earnings and costs required to complete the in-process projects, estimating future cash flows, and developing appropriate discount rates. To the extent that preliminary estimates have been used, such estimates are subject to change during the measurement period as such estimates, analysis and valuations are finalized.
The following unaudited pro forma combined condensed financial statements are based on the separate historical financial statements of Semtech and Gennum after giving effect to the acquisition and related financing and the assumptions and preliminary pro forma adjustments described in the accompanying notes to the unaudited pro forma combined condensed financial statements. As Semtech and Gennum have different fiscal year ends, the unaudited pro forma combined condensed balance sheet as of January 29, 2012 combines Semtechs historical unaudited balance sheet as of January 29, 2012 with Gennums historical unaudited balance sheet as of November 30, 2011 as if the acquisition had occurred on January 29, 2012. The unaudited pro forma combined condensed statement of operations for the year ended January 29, 2012 is presented as if the acquisition had occurred on January 31, 2011 and combines the historical results of Semtech for year ended January 29, 2012 and the historical results of Gennum for the year ended November 30, 2011. The historical financial results have been adjusted to give effect to pro forma events that are i) directly attributable to the acquisition, ii) factually supportable, and, in case of the statement of operations, iii) expected to have a continuing impact on the combined results of the companies.
The unaudited pro forma combined condensed financial statements are provided for informational purposes only. The unaudited pro forma combined condensed financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the acquisition been completed as of the dates indicated or that may be achieved in the future and should not be taken as representative of future consolidated results of operations or financial condition of Semtech. Furthermore, no effect has been given in the unaudited pro forma combined condensed statement of operations for synergistic benefits and potential cost savings, if any, that may be realized through the combination of the two companies or the costs that may be incurred in integrating their operations.
The unaudited pro forma combined condensed financial statements should be read together with the accompanying notes to the unaudited pro forma combined condensed financial statements, the historical consolidated financial
statements of Semtech and accompanying notes included in the Semtech Annual Report on Form 10-K for the year ended January 29, 2012 and the historical consolidated financial statements of Gennum and accompanying notes for the year ended November 30, 2011, included in Exhibit 99.1 to this Current Report on Form 8-K/A. The Gennum financial information included in the unaudited pro forma combined condensed financial statements is prepared in accordance with accounting principles generally accepted in the United States.
Semtech Corporation
Unaudited Pro Forma Combined Condensed Statement of Income
Year Ended January 29, 2012
(In thousands, except per share amounts)
Historical year ended | ||||||||||||||||||
January 29, 2012 Semtech |
November 30, 2011 Gennum |
Pro Forma Adjustments |
Notes | Pro Forma Combined |
||||||||||||||
Net Sales |
$ | 480,601 | $ | 137,164 | $ | (12,859 | ) | (a) | $ | 604,906 | ||||||||
Cost of Sales |
194,956 | 38,548 | (483 | ) | (b) | 233,021 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Gross Profit |
285,645 | 98,616 | (12,376 | ) | 371,885 | |||||||||||||
Operating costs and expenses: |
||||||||||||||||||
Selling, general, and administrative |
100,629 | 37,300 | (316 | ) | (b) | 135,991 | ||||||||||||
307 | (d) | |||||||||||||||||
(1,929 | ) | (e) | ||||||||||||||||
Product development & engineering |
80,577 | 49,177 | (12,859 | ) | (a) | 116,288 | ||||||||||||
(607 | ) | (b) | ||||||||||||||||
Intangible amortization and impairments |
10,853 | 3,676 | 14,456 | (c) | 28,985 | |||||||||||||
Restructuring charge |
| 1,543 | | 1,543 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total operating costs and expenses |
192,059 | 91,696 | (948 | ) | 282,807 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
93,586 | 6,920 | (11,428 | ) | 89,078 | |||||||||||||
Interest and other income (expense), net |
593 | (387 | ) | (16,619 | ) | (f) | (17,054 | ) | ||||||||||
(642 | ) | (g) | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
94,179 | 6,533 | (28,688 | ) | 72,024 | |||||||||||||
Provision (benefit) for income taxes |
5,092 | (2,340 | ) | (9,726 | ) | (h) | (6,974 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME |
$ | 89,087 | $ | 8,873 | $ | (18,963 | ) | $ | 78,997 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Earnings per share: |
||||||||||||||||||
Basic |
$ | 1.37 | $ | 1.21 | ||||||||||||||
Diluted |
$ | 1.32 | $ | 1.17 | ||||||||||||||
Weighted average number of shares used in computing earnings per share: |
||||||||||||||||||
Basic |
65,099 | 65,099 | ||||||||||||||||
Diluted |
67,350 | 67,350 |
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements.
Semtech Corporation
Unaudited Pro Forma Combined Condensed Balance Sheet
As of January 29, 2012
(In thousands)
Historical as of | ||||||||||||||||||
January 29, 2012 | November 30, 2011 | Pro Forma | Pro Forma | |||||||||||||||
Semtech | Gennum | Adjustments | Notes | Combined | ||||||||||||||
Assets |
||||||||||||||||||
Cash and cash equivalents |
$ | 227,022 | $ | 20,686 | $ | 338,038 | (i) | $ | 69,199 | |||||||||
(506,547 | ) | (j) | ||||||||||||||||
(10,000 | ) | (k) | ||||||||||||||||
Temporary investments |
83,121 | 43 | | 83,164 | ||||||||||||||
Accounts receivable |
49,644 | 24,425 | | 74,069 | ||||||||||||||
Inventories |
46,995 | 24,857 | 38,143 | (l) | 109,995 | |||||||||||||
Other current assets |
20,530 | 11,752 | 7,550 | (v) | 39,832 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
427,312 | 81,763 | (132,816 | ) | 376,259 | |||||||||||||
Property, plant, and equipment |
69,713 | 16,562 | 9,902 | (m) | 96,177 | |||||||||||||
Goodwill |
129,651 | 44,384 | 218,120 | (n) | 392,155 | |||||||||||||
Other intangibles, net |
66,720 | 24,072 | 140,728 | (m) | 231,520 | |||||||||||||
Investments and other assets |
32,925 | 26,275 | 8,962 | (i) | 69,941 | |||||||||||||
1,779 | (v) | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
TOTAL ASSETS |
$ | 726,321 | $ | 193,056 | $ | 246,675 | $ | 1,166,052 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and stockholders equity |
||||||||||||||||||
Current portion of long-term debt |
$ | | $ | | $ | 16,875 | (i) | $ | 16,875 | |||||||||
Accounts payable and accrued liabilities |
59,088 | 26,188 | 9,789 | (o) | 108,664 | |||||||||||||
5,111 | (p) | |||||||||||||||||
1,913 | (q) | |||||||||||||||||
4,225 | (r) | |||||||||||||||||
2,350 | (s) | |||||||||||||||||
Other current liabilities |
7,894 | 1,504 | (1,128 | ) | (t) | 8,270 | ||||||||||||
10,711 | (v) | 10,711 | ||||||||||||||||
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|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
66,982 | 27,692 | 49,845 | 144,519 | ||||||||||||||
Long-term debt |
| | 330,125 | (i) | 330,125 | |||||||||||||
Deferred tax liabilities |
1,000 | 1,674 | 42,663 | (v) | 45,337 | |||||||||||||
Other long-term liabilities |
28,151 | 3,225 | (3,225 | ) | (t) | 28,151 | ||||||||||||
Stockholders equity |
||||||||||||||||||
Common stock |
785 | 9,455 | (9,455 | ) | (u) | 785 | ||||||||||||
Treasury stock |
(225,822 | ) | (5,990 | ) | 5,990 | (u) | (225,822 | ) | ||||||||||
Additional paid-in capital |
358,327 | 6,849 | (6,849 | ) | (u) | 358,327 | ||||||||||||
Retained earnings |
496,363 | 114,822 | (114,822 | ) | (u) | 484,095 | ||||||||||||
(7,500 | ) | (k) | ||||||||||||||||
(4,768 | ) | (p) | ||||||||||||||||
Accumulated other comprehensive income |
535 | 35,329 | (35,329 | ) | (u) | 535 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 726,321 | $ | 193,056 | $ | 246,675 | $ | 1,166,052 | ||||||||||
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|
|
|
|
|
|
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Statements.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
Note 1Basis of Pro Forma Presentation
On March 20, 2012, Semtech acquired all outstanding equity interests of Gennum, a leading supplier of high speed analog and mixed-signal semiconductors serving the optical communications and video broadcast markets. Under the terms of the acquisition, the Company paid an aggregate of $506.5 million in cash in exchange for all the outstanding shares of Gennum common stock.
Upon consummation of the acquisition, which constituted a change in control, Gennums stock option awards and restricted shares became fully vested. Semtech acquired 100% of the outstanding shares, vested stock options and restricted shares of Gennum for a total purchase price of $506.5 million. The acquisition was financed with a combination of cash from Semtechs international cash reserves and $350 million of five-year, floating rate secured term loans.
Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Gennum based on their estimated fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. For the purposes of the unaudited pro forma combined condensed financial statements, Semtech has made a preliminary allocation of the acquisition consideration as follows (in thousands):
Cash |
$ | 20,686 | ||
Inventories |
63,000 | |||
Other current assets |
40,927 | |||
Property, plant and equipment |
26,464 | |||
Amortizable intangible assets: |
||||
Developed technology |
95,100 | |||
Customer relationships |
28,000 | |||
Backlog and other intangible assets |
6,600 | |||
In-process research and development |
35,100 | |||
Goodwill |
262,504 | |||
Other noncurrent assets |
28,054 | |||
Deferred tax liabilities |
(55,048 | ) | ||
Other current and noncurrent liabilities |
(44,840 | ) | ||
|
|
|||
Total preliminary acquisition consideration |
$ | 506,547 | ||
|
|
Approximately $129.7 million has been preliminarily allocated to amortizable intangible assets acquired. The amortization related to the preliminary fair value of amortizable intangible assets, except backlog, is reflected as a pro forma adjustment to the unaudited pro forma combined condensed statements of operations. Semtech expects to amortize these intangible assets on a straight-line basis ranging from six to eight years for developed technology, seven years for customer relationships, and one to three years for backlog and other intangible assets. In-process research and development, with an approximate value of $35.1 million, is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts. Upon completion of development, acquired in-process research and development assets are generally considered amortizable, finite-lived assets.
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill amounts are not amortized, but rather are tested for impairment at least annually. In the event that Semtech determines that the value of goodwill has become impaired, Semtech will incur an accounting charge for the amount of impairment during the fiscal quarter in which such determination is made.
The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma condensed combined financial statements.
On March 20, 2012, Semtech entered into a credit agreement consisting of senior secured first lien credit facilities in an aggregate principal amount of $350.0 million, consisting of Term A loans in an aggregate principal amount of $100.0 million and Term B loans in an aggregate principal amount of $250.0 million. A portion of the proceeds of the loans was used to finance the acquisition of Gennum and fees, costs and expenses related thereto, and the remainder of the proceeds may be used by Semtech for working capital and general corporate purposes.
Interest on the Term A loans accrues, at Semtechs option, at a rate per annum equal to the Base Rate (as defined below) plus a margin ranging from 1.50% to 1.75%, depending upon Semtechs consolidated leverage ratio, or LIBOR for an interest period to be selected by Semtech plus a margin ranging from 2.50% to 2.75%, depending upon Semtechs consolidated leverage ratio. Interest on the Term B loans accrues, at Semtechs option, at a rate per annum equal to the Base Rate (subject to a floor of 2.00%) plus a margin of 2.25% or LIBOR for an interest period to be selected by Semtech (subject to a floor of 1.00%) plus a margin of 3.25%. The Base Rate is equal to a fluctuating rate equal to the highest of (a) the prime rate, (b) 1/2 of 1% above the federal funds effective rate and (c) one-month LIBOR plus 1%.
The Term A loans have a term of 5 years and are repayable in equal quarterly installments of $5.0 million on the last business day of each quarter beginning July 31, 2012. The Term B loans have a term of 5 years and are repayable in quarterly installments of $0.6 million on the last business day of each quarter beginning July 31, 2012 and $238.1 million on the maturity date.
Note 2Pro Forma Adjustments
Unaudited Pro Forma Combined Condensed Statement of Income
(a) | To reclassify amounts recognized under Gennums intellectual property contracts to conform to Semtechs presentation as reductions of product development & engineering expense rather than as revenue. |
(b) | To reflect $0.1 million of amortization related to favorable leases based on a preliminary fair value of $0.7 million and incremental depreciation based on the preliminary fair values of the property, plant and equipment acquired as follows (in thousands): |
Property, Plant and Equipment |
Estimated Useful Lives (yrs) |
Pro Forma Depreciation |
||||||||
Property |
$ | 3,060 | N/A | $ | | |||||
Leasehold improvements |
1,068 | 5 | 198 | |||||||
Machinery and equipment |
14,517 | 6 | 2,422 | |||||||
Furniture and office equipment |
4,956 | 25 | 1,834 | |||||||
Construction in progress |
2,163 | N/A | | |||||||
|
|
|
|
|||||||
$ | 25,764 | 4,454 | ||||||||
|
|
|||||||||
Less: historical depreciation |
5,919 | |||||||||
|
|
|||||||||
Pro forma incremental depreciation |
$ | (1,464 | ) | |||||||
|
|
(c) | To reflect the incremental amortization based on the preliminary fair values of the intangible assets acquired as follows (in thousands): |
Intangible Assets |
Estimated Useful Lives (yrs) |
Pro Forma Amortization |
||||||||
Developed technology |
$ | 95,100 | 68 | $ | 13,499 | |||||
Customer relationships |
28,000 | 7 | 4,000 | |||||||
Backlog |
4,700 | 1 | | |||||||
Other intangible assets |
1,900 | 3 | 633 | |||||||
In-process research and development |
35,100 | N/A | | |||||||
|
|
|
|
|||||||
$ | 164,800 | 18,132 | ||||||||
|
|
|||||||||
Less: historical amortization |
3,676 | |||||||||
|
|
|||||||||
Pro forma incremental amortization |
$ | 14,456 | ||||||||
|
|
Amortization of backlog of $4.7 million is excluded from the unaudited pro forma condensed consolidated statement of income because it does not have a continuing impact on the combined results.
(d) | To remove the amortization of the deferred gain on sale-leaseback of a building that was eliminated in purchase accounting. |
(e) | To eliminate non-recurring acquisition-related costs that have been recorded in Semtechs historical results. |
(f) | To reflect interest expense associated with the term loans described in Note 1 of $16.6 million, which consists of contractual interest expense of $13.6 million, annual administrative fee of $0.1 million, amortization of original issue discount of $0.7 million and amortization of debt issuance costs of $2.2 million. A 1/8th% change in interest rates would change pro forma interest expense by $0.4 million. |
The amortization of the combined original issue discount and debt issuance costs to pro forma interest expense over the next five years would be $2.7 million, $2.4 million, $2.2 million, $2.0 million, and $0.2 million.
(g) | To reflect the estimated decrease in interest income due to the use of Semtechs cash and cash equivalents and temporary investments to pay the cash consideration based on Semtechs historical average investment yields of approximately 0.4%. |
(h) | To reflect the tax effects of adjustments b), c) and d) at an estimated Canadian statutory tax rate of 25.0% and adjustments f) and g) at an estimated U.S. statutory tax rate of 37.0%. |
Unaudited Pro Forma Combined Condensed Balance Sheet
(i) | To reflect the proceeds of the term loans described in Note 1 of $350.0 million, less original issue discount of $3.0 million and debt issuance costs of $9.0 million. |
(j) | To reflect the acquisition consideration for Gennum of $506.5 million, which consisted of $488.1 million to purchase outstanding shares, including restricted shares that vested upon the acquisition, and $18.4 million to purchase vested stock options. |
(k) | Certain employees were entitled to payments upon a change in control and their subsequent termination. These payments will be recognized as compensation expense in Semtechs financial statements post-acquisition. The impact to retained earnings is comprised of compensation expense of $10.0 million net of tax of $2.5 million. |
(l) | To reflect an adjustment of the historical Gennum inventories to estimated fair value. This inventory adjustment will be recognized in cost of sales in the first year following consummation of the transaction. |
(m) | To reflect the preliminary estimated property, plant and equipment, favorable leases and identifiable intangible assets. See Note 1 and Note 2(a) and (b) for a more detailed discussion. |
(n) | To reflect the preliminary goodwill resulting from the acquisition. See Note 1 for a more detailed discussion. |
(o) | To reflect the estimated transaction costs incurred by Gennum in connection with the acquisition. |
(p) | To reflect the estimated transaction costs incurred by Semtech subsequent to January 29, 2012 that will be recognized in Semtechs financial statements post-acquisition in the period they are incurred. The impact to retained earnings is comprised of expense of $5.1 million net of tax of $0.3 million. |
(q) | To reflect an adjustment of the liability for the deferred share units outstanding, which were settled in cash post-closing, to its estimated fair value, and to remove the liability for the total return swap under which Gennum previously hedged its exposure to the liability arising from the deferred share units. |
(r) | To recognize a liability related to litigation that was ongoing at the acquisition date and settled subsequent to the acquisition date. |
(s) | To record the fair value of the liability related to the previously recorded estimated obligation to accept inventory returns from distributors. This adjustment will be recognized in cost of sales and selling, general, and administrative expense in the first year following consummation of the transaction. |
(t) | To remove the deferred gain on sale-leaseback of a building of $3.5 million that was eliminated in purchase accounting and reduce historical deferred revenue of $0.8 million to its estimated fair value of $0.5 million. |
(u) | To reflect the elimination of the historical equity balances of Gennum. |
(v) | To reflect the tax effects of adjustments k), l), m), o, q), r), s) and t) at an estimated Canadian statutory tax rate of 25.0% and the tax-deductible portion of adjustment p) at an estimated Swiss statutory tax rate of 17%. |