10-Q 1 d220010d10q.htm 10-Q 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

 

  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

COMMISSION FILE NUMBER 000-26124

IXYS CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   77-0140882
(State or other jurisdiction   (I.R.S. Employer Identification No.)
of incorporation or organization)  

1590 BUCKEYE DRIVE

MILPITAS, CALIFORNIA 95035-7418

(Address of principal executive offices and Zip Code)

(408) 457-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

 

Accelerated filer

 

x

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

 

Smaller reporting company

  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of July 26, 2016 was 31,458,652.


Table of Contents

IXYS CORPORATION

FORM 10-Q

June 30, 2016

INDEX

 

     Page  
PART I — Financial Information      3   
Item 1. Financial Statements      3   

Unaudited Condensed Consolidated Balance Sheets

     3   

Unaudited Condensed Consolidated Statements of Operations

     4   

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

     5   

Unaudited Condensed Consolidated Statements of Cash Flows

     6   

Notes to Unaudited Condensed Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     28   

Item 4. Controls and Procedures

     28   

PART II — Other Information

     29   

Item 1. Legal Proceedings

     29   

Item 1A. Risk Factors

     29   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     42   

Item 3. Defaults Upon Senior Securities

     42   

Item 4. Mine Safety Disclosures

     42   

Item 5. Other Information

     42   

Item 6. Exhibits

     42   

 

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     June 30,     March 31,  
     2016     2016  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 151,393     $ 155,806  

Restricted cash

     272       277  

Accounts receivable, net

     41,063       38,440  

Inventories

     85,656       89,604  

Prepaid expenses and other current assets

     4,028       4,203  
  

 

 

   

 

 

 

Total current assets

     282,412       288,330  

Property, plant and equipment, net

     44,325       42,623  

Intangible assets, net

     6,590       7,607  

Goodwill

     42,313       42,355  

Deferred income taxes

     27,825       28,024  

Other assets

     14,171       13,762  
  

 

 

   

 

 

 

Total assets

   $ 417,636     $ 422,701  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Current portion of loans payable

     1,076       1,804  

Accounts payable

     12,272       11,416  

Accrued expenses and other current liabilities

     23,575       21,290  
  

 

 

   

 

 

 

Total current liabilities

     36,923       34,510  

Long term loans, net of current portion

     77,940       85,253  

Pension liabilities

     15,620       16,307  

Other long term liabilities

     7,197       7,336  
  

 

 

   

 

 

 

Total liabilities

     137,680       143,406  
  

 

 

   

 

 

 

Commitments and contingencies (Note 16)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value:

    

Authorized: 5,000,000 shares; none issued and outstanding

     —         —    

Common stock, $0.01 par value:

    

Authorized: 80,000,000 shares; 38,269,389 issued and 31,458,652 outstanding at June 30, 2016 and 38,214,158 issued and 31,375,524 outstanding at March 31, 2016

     383       382  

Additional paid-in capital

     215,354       214,045  

Treasury stock, at cost: 6,810,737 common shares at June 30, 2016 and 6,838,634 common shares at March 31, 2016

     (61,592     (61,845

Retained earnings

     148,727       146,979  

Accumulated other comprehensive loss

     (22,916     (20,266
  

 

 

   

 

 

 

Total stockholders’ equity

     279,956       279,295  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 417,636     $ 422,701  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

     Three Months Ended
June 30,
 
     2016     2015  

Net revenues

   $ 80,638     $ 82,047  

Cost of goods sold

     56,644       56,445  
  

 

 

   

 

 

 

Gross profit

     23,994       25,602  
  

 

 

   

 

 

 

Operating expenses:

    

Research, development and engineering

     7,910       7,683  

Selling, general and administrative

     10,038       10,636  

Amortization of acquisition-related intangible assets

     1,017       1,579  
  

 

 

   

 

 

 

Total operating expenses

     18,965       19,898  
  

 

 

   

 

 

 

Operating income

     5,029       5,704  

Other income (expense):

    

Interest income

     62       47  

Interest expense

     (635     (314

Other income (expense), net

     815       (790
  

 

 

   

 

 

 

Income before income tax provision

     5,271       4,647  

Provision for income tax

     (2,252     (1,662
  

 

 

   

 

 

 

Net income

   $ 3,019     $ 2,985  
  

 

 

   

 

 

 

Net income per share:

    

Basic

   $ 0.10     $ 0.09  
  

 

 

   

 

 

 

Diluted

   $ 0.09     $ 0.09  
  

 

 

   

 

 

 

Cash dividends per common share

   $ 0.040     $ 0.035  
  

 

 

   

 

 

 

Weighted average shares used in per share calculation:

    

Basic

     31,401       31,746  
  

 

 

   

 

 

 

Diluted

     32,001       32,733  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

     Three Months Ended
June 30,
 
     2016     2015  

Net income

   $ 3,019     $ 2,985  

Foreign currency translation adjustments

     (2,825     2,692  

Changes in market value of investments:

    

Changes in unrealized gains (losses), net of tax of $45 and $(78)

     85       (117

Reclassification adjustment for net losses (gains) realized in net income, net of tax of $61

     90       —    
  

 

 

   

 

 

 

Net change in market value of investments

     175       (117
  

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 369     $ 5,560  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Three Months Ended  
     June 30,  
     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 3,019     $ 2,985  

Adjustments to reconcile net income to net cash provided by operating activities, net of assets acquired and liabilities assumed:

    

Depreciation and amortization

     2,832       3,784  

Provision for receivable allowances

     1,610       1,407  

Net change in inventory provision

     425       300  

Stock-based compensation

     855       739  

Loss (gain) on investments

     (169     147  

Foreign currency adjustments on intercompany amounts and other non-cash items

     (111     248  

Changes in operating assets and liabilities, net of business acquired:

    

Accounts receivable

     (4,652     (630

Inventories

     2,083       611  

Prepaid expenses and other current assets

     130       (779

Accounts payable

     559       609  

Accrued expenses and other liabilities

     1,113       329  

Pension liabilities

     (198     (301
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,496       9,449  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Change in restricted cash

     5       (5

Purchase of businesses, net of cash and cash equivalents acquired and installment payments

     —         (14,571

Purchases of plant and equipment

     (3,477     (3,696
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,472     (18,272
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Principal payments on capital lease obligations

     —         (321

Repayments of loans and notes payable

     (7,970     (449

Proceeds from loans

     —         3,317  

Proceeds from employee equity plans

     694       2,468  
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (7,276     5,015  
  

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     (1,161     860  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (4,413     (2,948

Cash and cash equivalents at beginning of period

     155,806       121,164  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 151,393     $ 118,216  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Unaudited Condensed Consolidated Financial Statements

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of IXYS Corporation and its wholly-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most difficult judgments include, but are not limited to, revenue reserves, inventory valuation, accounting for income taxes, and allocation of purchase price in business combinations. All significant intercompany transactions have been eliminated in consolidation. All adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been made. The condensed consolidated balance sheet as of March 31, 2016 has been derived from our audited consolidated balance sheet as of that date. It is recommended that the interim financial statements be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2016, or fiscal 2016, contained in our Annual Report on Form 10-K. Interim results are not necessarily indicative of the operating results expected for later quarters or the full fiscal year. Our fiscal years end March 31. References to any numerically identified year preceded by the word “fiscal” are references to the year ending on March 31 of such numerically identified year.

2. Recent Accounting Pronouncements and Accounting Changes

In May 2014, Financial Accounting Standards Board, or FASB, issued a new standard on the recognition of revenue from contracts with customers, which includes a single set of rules and criteria for revenue recognition to be used across all industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when or as the entity satisfies a performance obligation. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods during the annual period. Early adoption is prohibited for annual periods commencing before December 15, 2016. Different transition methods are available — full retrospective method, retrospective with certain practical expedients, and a modified retrospective (cumulative effect) approach. We are currently evaluating the impact of the adoption of the standard on our consolidated financial statements including selection of the transition method.

In March 2016, FASB issued an amended guidance on the topic of revenue from contracts with customers relating to revenue recognition to clarify the implementation guidance on principal versus agent considerations and to address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of the new revenue recognition standard. We are currently evaluating the impact of these amendments on our financial statements.

In April 2016, FASB issued an amended guidance to clarify the following two aspects relating revenue recognition: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Before an entity can identify its performance obligation in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. The amendments include implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property or a right to access the entity’s intellectual property. The amendments are intended to improve the operability and understandability of the licensing implementation guidance. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements relating to the new revenue recognition standard. We are currently evaluating the impact of these amendments and the transition alternatives on our consolidated financial statements.

In May 2016, FASB issued an amended guidance on the topic of revenue from contracts with customers which would affect the narrow aspects of Topic 606, including assessing the collectibility criterion and accounting for contracts that do not meet the criteria for identifying the contracts with a customer, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and technical correction. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements relating to the new revenue recognition standard. We are currently evaluating the impact of these amendments and the transition alternatives on our consolidated financial statements.

 

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In July 2015, FASB issued an amendment to modify the inventory measurement guidance in Topic 330, Inventory, for inventory that is measured using the methods other than last-in, first-out, or LIFO, and the retail inventory method. It requires that an entity measure inventory within the scope of this update at the lower of cost and net realizable value. It eliminated the guidance in Topic 330 that required a reporting entity measuring inventory at the lower of cost or market to consider the replacement cost of inventory and the net realizable value of inventory less an approximately normal profit margin along with net realizable value in determining the market value. The guidance will be effective for annual reporting periods beginning after December 15, 2016, and interim periods during the annual period. The new standard is required to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We do not expect this change to have a significant impact on our consolidated financial statements.

In January 2016, the FASB issued authoritative guidance that modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under Accounting Standards Codification, or ASC 820, Fair Value Measurements, and as such these investments may be measured at cost. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the impact of this standard on our consolidated financial statements.

In February 2016, FASB issued amended guidance for lease arrangements, which requires lessees to recognize the followings for all leases with terms longer than 12 months: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The amendment is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.

In March 2016, FASB issued amended guidance to simplify the transition to the equity method of accounting. This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Additionally, any unrealized gain or loss in accumulated other comprehensive income (loss) will be recognized through earnings at the point an investment qualifies for the equity method. The amended guidance is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. It should be applied prospectively. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.

In March, 2016, FASB issued amended guidance which simplifies several aspects of the accounting for employee share-based payment awards, including forfeitures, employer tax withholding on share-based compensation and excess tax benefits or deficiencies. The amended guidance also clarifies the statement of cash flows presentation for share-based awards. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.

In June 2016, FASB issued amended guidance which replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect financial assets and net investment in leases that are not accounted for at fair value through net income. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is allowed as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.

3. Business Combinations

RadioPulse, Inc.

On May 1, 2015, we acquired RadioPulse, Inc., or RadioPulse, for a total consideration of $15.7 million. Based in South Korea, RadioPulse is a fabless semiconductor company that develops, manufactures and sells wireless network technology solutions based on the ZigBee® protocol, which combines microcontrollers and radio frequency devices. RadioPulse’s solutions are designed to enable a broad range of power-sensitive applications in the industrial, medical, consumer, smart grid and Internet of Things, or IoT, markets. RadioPulse offers a complementary product portfolio to our product lines. The consideration included cash consideration paid at closing of $14.7 million and $1.0 million related to an adjustment to eliminate debt owed to us for funds advanced prior to closing. The acquisition also included potential earnout payments aggregating up to $6.0 million payable over three years based on certain financial thresholds related to net revenues, gross profit and net income in calendar years 2015, 2016 and 2017. Based on our valuation, the fair value of the liability for the earnout payment was estimated to be nil as of June 30, 2016 and March 31, 2016. In connection with the acquisition, we incurred and expensed $248,000 in legal and consulting costs and $249,000 in acquisition-related compensation costs during fiscal 2016.

 

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The following table summarizes the values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

 

     Purchase Consideration
Allocation
 

Cash, restricted cash and cash equivalents

   $ 196  

Accounts receivable

     1,497  

Inventories

     534  

Property, plant and equipment

     24  

Prepaid expenses and other current assets

     547  

Identifiable intangible assets

     2,867  

Short-term borrowings

     (2,354

Accounts payable

     (614

Accruals and other liabilities

     (1,926
  

 

 

 

Total identifiable net liabilities

     771  

Goodwill

     14,887  
  

 

 

 

Total purchase consideration

   $ 15,658  
  

 

 

 

Identifiable intangible assets consisted of developed intellectual property, in-process research and development expenses, customer relationships, and contract backlog. The value reflected in the table represents the purchase price allocation. The valuation of the acquired intangibles was classified as a level 3 measurement under the fair value measurement guidance because the valuation was based on significant unobservable inputs and involved management judgment and assumptions about market participants and pricing. We did not recognize any liability with respect to the contingent consideration based upon our analysis.

Identified intangible assets resulting from the RadioPulse acquisition consisted of the following (in thousands):

 

                   Estimated  
     Fair Value      Amortization      Useful Life  
     (In thousands)      Method      (In months)  
            (unaudited)         

Developed intellectual property

   $ 1,005        Accelerated         60  

In-process research and development expenses (1)

     1,188        Straight-line         60  

Customer relationships

     500        Accelerated         36  

Contract backlog

     174        Straight-line         6  
  

 

 

       

Total

   $ 2,867        
  

 

 

       

 

(1) Amortization starts after the completion of the research and development activities of the related projects.

In determining the fair value of the acquired intangible assets, we determined the appropriate unit of measure, the exit market and the highest and best use for the assets. The income approach was used to estimate the fair value. The income approach indicates the fair value of an asset based on the value of the cash flows that the asset can be expected to generate in the future through a discounted cash flow method. The income approach was used to determine the fair values of developed intellectual property, in-process research and development expenses, contract backlog and customer relationships. The goodwill arising from the acquisition was largely attributable to the synergies expected to be realized after our acquisition and integration of RadioPulse and to the workforce acquired in the transaction. The goodwill is not deductible for tax purposes.

The results of operations and financial position of RadioPulse were immaterial compared to our financial statements and therefore pro-forma financial statements have not been separately presented.

4. Fair Value

We account for certain assets and liabilities at fair value. In determining fair value, we consider its principal or most advantageous market and the assumptions that market participants would use when pricing, such as inherent risk, restrictions on sale and risk of non-performance. The fair value hierarchy is based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:

Level 1 — Quoted prices for identical instruments in active markets.

 

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Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.

Fair Value Measurements on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following types of instruments as of June 30, 2016 and March 31, 2016 (in thousands):

 

     June 30, 2016 (1)      March 31, 2016 (1)  
            Fair Value Measured at             Fair Value Measured at  
            Reporting Date Using             Reporting Date Using  

Description

   Total      Level 1      Level 2      Total      Level 1      Level 2  
     (unaudited)      (unaudited)  

Assets

                 

Money market funds (2)

   $ 89,440      $ 89,440      $ —        $ 115,974      $ 115,974      $ —    

Marketable equity securities (3)

     1,879        1,879        —          1,749        1,749        —    

Auction rate preferred securities (3)

     350        —          350        350        —          350  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets Measured at Fair Value

   $ 91,669      $ 91,319      $ 350      $ 118,073      $ 117,723      $ 350  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We did not have any recurring fair value measurements of assets or liabilities whose fair value was measured using significant unobservable inputs.
(2) Included in “Cash and cash equivalents” on our unaudited condensed consolidated balance sheets.
(3) Included in “Other assets” on our unaudited condensed consolidated balance sheets.

We measure our marketable securities and derivative contracts at fair value. Marketable securities are valued using the quoted market prices and are therefore classified as Level 1 estimates. We review any impairment to determine whether it is other than temporarily impaired. This review is based on factors such as length of time of impairment, extent to which the fair value is below the cost basis, financial conditions of the issuer of the security, our expectations of future recoveries and our ability and intent to hold or sell the securities. Based on our review, we recognized an other than temporary impairment loss of $151,000 and $0 in marketable equity securities during the three months ended June 30, 2016 and June 30, 2015 respectively.

From time to time, we use derivative instruments to manage exposure to changes in interest rates and currency exchange rates. The fair values of these instruments are recorded on the balance sheets. The changes in the fair value of these instruments are recorded in the current period’s statement of operations and are included in other income (expense), net. All of our derivative instruments are traded on over-the-counter markets where quoted market prices are not readily available. For those derivatives, we measure fair value using prices obtained from the counterparties with whom we have traded. The counterparties price the derivatives based on models that use primarily market observable inputs, such as yield curves and option volatilities. Accordingly, we classify these derivatives as Level 2. We held no derivative instruments at June 30, 2016 and March 31, 2016.

Auction rate preferred securities, or ARPS, are stated at par value based upon observable inputs including historical redemptions received from the ARPS issuers. Our ARPS have credit ratings of A+, are 100% collateralized and continue to pay interest in accordance with their contractual terms. Additionally, the collateralized asset value ranges exceed the value of our ARPS by approximately 200 percent. Accordingly, the remaining ARPS balance was categorized as Level 2 for fair value measurement in accordance with the authoritative guidance provided by FASB and was recorded at full par value on the unaudited condensed consolidated balance sheets as of June 30, 2016 and March 31, 2016. We currently believe that the ARPS values are not impaired and as such, no impairment has been recognized against the investment. If future auctions fail to materialize and the credit rating of the issuers deteriorates, we may be required to record an impairment charge against the value of our ARPS.

Cash and cash equivalents are recognized and measured at amounts that approximate fair value in our unaudited condensed consolidated financial statements. Accounts receivable and prepaid expenses and other current assets are financial assets with carrying values that approximate fair value. Accounts payable and accrued expenses and other current liabilities are financial liabilities with carrying values that approximate fair value.

Our debt, which primarily consists of loans from banks, approximated fair value as the interest rates either adjusted according to the market rates or the interest rates approximated the market rates. The estimated fair value of our debt was approximately $79.0 million and $87.1 million as of June 30, 2016 and March 31, 2016, respectively. Our debt is categorized as Level 2 for fair value measurement. Our pension liabilities, net of plan assets approximated fair value. See Note 10, “Pension Plans” for a discussion of pension liabilities.

 

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The fair value of contingent consideration for a business acquisition is classified as Level 3 estimate. See Note 3, “Business Combinations” for a discussion of fair value of contingent consideration.

5. Accounts Receivable

Accounts receivable consist of the following (in thousands):

 

     June 30,
2016
    March 31,
2016
 
     (unaudited)  

Accounts receivable, gross

   $ 43,751     $ 41,219  

Allowances

     (2,688     (2,779
  

 

 

   

 

 

 

Accounts receivable, net

   $ 41,063     $ 38,440  
  

 

 

   

 

 

 

6. Other Assets

Other assets consist of the following (in thousands):

 

     June 30,
2016
     March 31,
2016
 
     (unaudited)  

Marketable equity securities

   $ 1,879      $ 1,749  

Auction rate preferred securities

     350        350  

Long-term equity method investments

     11,250        10,977  

Other items

     692        686  
  

 

 

    

 

 

 

Total

   $ 14,171      $ 13,762  
  

 

 

    

 

 

 

7. Inventories

Inventories consist of the following (in thousands):

 

     June 30,
2016
     March 31,
2016
 
     (unaudited)  

Raw materials

   $ 18,252      $ 18,269  

Work in process

     40,285        41,549  

Finished goods

     27,119        29,786  
  

 

 

    

 

 

 

Total

   $ 85,656      $ 89,604  
  

 

 

    

 

 

 

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 

     June 30,      March 31,  
     2016      2016  
     (unaudited)  

Uninvoiced goods and services

   $ 11,152      $ 8,824  

Compensation and benefits

     7,204        7,540  

Income taxes

     2,690        2,066  

Commissions, royalties and other

     2,529        2,860  
  

 

 

    

 

 

 

Total

   $ 23,575      $ 21,290  
  

 

 

    

 

 

 

 

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9. Borrowing Arrangements

Revolving Credit Agreement

On November 20, 2015, we entered into a Revolving Credit Agreement with a syndicate of banks for a line of credit of $125.0 million. The agent for the banks is Bank of the West, or BOTW. The obligations are guaranteed by four of our subsidiaries. The loan is collateralized pursuant to a Contingent Collateral Agreement, under which the assets of the parent company and the four subsidiaries could be subject to security interest for the benefit of the banks in the event of a loan default. The Revolving Credit Agreement expires on November 20, 2017.

The credit agreement provides different interest rate alternatives under which we may borrow funds. We may elect to borrow based on LIBOR plus a margin or an alternative base rate plus a margin. The margin can range from 0.75% to 2.5%, depending on interest rate alternatives and on our leverage of liabilities to effective tangible net worth. The applicable interest rate as of June 30, 2016 was 2.56%. An unused commitment fee is also payable. It ranges from 0.25% to 0.625%, depending on leverage. In relation to the execution of the credit agreement, we incurred loan costs that were deferred and reduced our “Long term loans, net of current portion” on our unaudited consolidated balance sheets. Those costs are being amortized over the two-year life of the credit agreement. The unamortized balance at June 30, 2016 and March 31, 2016 was $257,000 and $304,000, respectively.

The terms of the facility impose restrictions on the company’s ability to undertake certain transactions, to create liens on assets and to incur subsidiary indebtedness. In addition, the credit agreement is subject to a set of financial covenants, including minimum effective tangible net worth, the ratio of cash, cash equivalents and accounts receivable to current liabilities, profitability, a leverage ratio and a minimum amount of U.S. domestic cash on hand. At June 30, 2016, we complied with all of these financial covenants.

At June 30, 2016 and March 31, 2016, the outstanding principal balances under the credit agreement were $73.0 million and $80.0 million, respectively.

The credit agreement also includes a $10.0 million letter of credit subfacility. See Note 16, “Commitments and Contingencies” for further information regarding the terms of the subfacility.

IKB Deutsche Industriebank

In April 2015, we entered into a loan with IKB Deutsche Industriebank, or IKB. Under the agreement, we borrowed €6.5 million, or about $7.2 million at the time. The loan has a term ending March 31, 2022 and bears a fixed annual interest rate of 1.75%. Each fiscal quarter a principal payment of €232,000, or about $258,000, and a payment of accrued interest are required. Financial covenants for a ratio of indebtedness to cash flow, a ratio of equity to total assets and a minimum stockholders’ equity for the German subsidiary must be satisfied for the loan to remain in good standing. Compliance with these covenants is required annually at March 31. We complied with all of these financial covenants at March 31, 2016. The loan may be prepaid in whole or in part with a modest penalty. The loan is also collateralized by a security interest in the facility in Lampertheim, Germany. At June 30, 2016, the outstanding principal balance was €5.3 million, or about $5.9 million. At March 31, 2016, the outstanding principal balance was €5.6 million, or about $6.3 million.

Loans Assumed from Business Acquisitions

Our outstanding balances relating to loans assumed upon business acquisitions at June 30, 2016 and March 31, 2016 were $344,000 and $1.1 million, respectively. These loans consisted of certain short-term facilities from financial institutions and loans from government agencies to support research and development activities.

10. Pension Plans

We maintain three defined benefit pension plans: one for United Kingdom employees, one for German employees, and one for Philippine employees. We deposit funds for the United Kingdom and Philippine plans with financial institutions and make payments to former German employees directly. We accrue for the unfunded portion of the obligations. The measurement date for projected benefit obligations and plan assets is March 31. As of June 30, 2016, the German defined benefit plan was completely unfunded and we accrued for its obligations. The United Kingdom and German plans have been curtailed. As such, the plans are closed to new entrants and no credit is provided for additional periods of service. We expect to contribute approximately $1.1 million to the United Kingdom and the Philippines plans in the fiscal year ending March 31, 2017.

 

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The net periodic pension expense includes the following components (in thousands):

 

     Three Months Ended  
     June 30,  
     2016     2015  
     (unaudited)  

Service cost

   $ 28     $ 26  

Interest cost on projected benefit obligation

     352       368  

Expected return on plan assets

     (323     (438

Recognized actuarial loss

     48       45  
  

 

 

   

 

 

 

Net periodic pension expense

   $ 105     $ 1  
  

 

 

   

 

 

 

Information on Plan Assets

We report and measure the plan assets of our defined benefit pension plans at fair value. The table below sets forth the fair value of our plan assets as of June 30, 2016 and March 31, 2016, using the same three-level hierarchy of fair-value inputs described in Note 4, “Fair Value” (in thousands):

 

     June 30, 2016      March 31, 2016  

Description

   Level 1      Level 2      Total      Level 1      Level 2      Total  
     (unaudited)      (unaudited)  

Cash and cash funds

   $ 17      $      $ 17      $ 121      $      $ 121  

Equity

     398               398        351               351  

Fixed interest

     1,326        94        1,420        1,225        96        1,321  

Mutual funds

     13,156        13,203        26,359        13,527        13,394        26,921  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,897      $ 13,297      $ 28,194      $ 15,224      $ 13,490      $ 28,714  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

11. Employee Equity Incentive Plans

Stock Purchase and Stock Option Plans

The 2009 Equity Incentive Plan, the 2011 Equity Incentive Plan, and the 2013 Equity Incentive Plan

On September 10, 2009, our stockholders approved the 2009 Equity Incentive Plan, or the 2009 Plan, under which 900,000 shares of our common stock are reserved for the grant of stock options and other equity incentives. On September 16, 2011, our stockholders approved the 2011 Equity Incentive Plan, or the 2011 Plan, under which 600,000 shares of our common stock are reserved for the grant of stock options and other equity incentives. On August 30, 2013, our stockholders approved the 2013 Equity Incentive Plan, or the 2013 Plan, under which 2,000,000 shares of our common stock are reserved for the grant of stock options and other equity incentives. The 2009 Plan, the 2011 Plan and the 2013 Plan are referred to as the Plans.

Stock Options

Under the Plans, nonqualified and incentive stock options may be granted to employees, consultants and non-employee directors. Generally, the per share exercise price shall not be less than 100% of the fair market value of a share on the grant date. The Board of Directors has the full power to determine the provisions of each option issued under the Plans. While we may grant options that become exercisable at different times or within different periods, we have primarily granted options that vest over four years. The options, once granted, expire ten years from the date of grant.

Stock Awards

Stock awards, denominated restricted stock under the 2009 Plan and the 2011 Plan, may be granted to any employee, director or consultant under the Plans. Pursuant to a stock award, we will issue shares of common stock. Shares that are subject to the restriction will be released from restriction if certain requirements, including continued performance of services, are met.

 

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Stock Appreciation Rights

Awards of stock appreciation rights, or SARs, may be granted to employees, consultants and non-employee directors pursuant to the Plans. A SAR is payable on the difference between the market price at the time of exercise and the exercise price at the date of grant. In any event, the exercise price of a SAR shall not be less than 100% of the fair market value of a share on the grant date and shall expire no later than ten years from the grant date. Upon exercise, the holder of a SAR shall be entitled to receive payment either in cash or a number of shares by dividing such cash amount by the fair market value of a share on the exercise date.

Restricted Stock Units

Restricted stock units, denominated performance units in the 2009 Plan, may be granted to employees, consultants and non-employee directors under the Plan. Each restricted stock unit shall have a value equal to the fair market value of one share. After the applicable performance period has ended, the holder will be entitled to receive a payment, either in cash or in the form of shares, based on the number of restricted stock units earned over the performance period, to be determined as a function of the extent to which the corresponding performance goals or other vesting provisions have been achieved.

The 2016 Equity Incentive Plan

On June 9, 2016, the Board of Directors approved the adoption of the 2016 Equity Incentive Plan, or the 2016 Plan, under which 2,000,000 shares of the common stock will be reserved for the grant of stock options and other equity incentives. As of June 30, 2016, the 2016 Plan is subject to our stockholders’ approval.

Employee Stock Purchase Plan

The Board of Directors has approved the Amended and Restated 1999 Employee Stock Purchase Plan, or the Purchase Plan, and reserved a total of 1,550,000 shares of common stock for issuance under the Purchase Plan. Under the Purchase Plan, all eligible employees may purchase our common stock at a price equal to 85% of the lower of the fair market value at the beginning of the offer period or the semi-annual purchase date. Stock purchases are limited to 15% of an employee’s eligible compensation. During the three months ended June 30, 2016, there were 55,231 shares purchased under the Purchase Plan, leaving approximately 185,010 shares available for purchase under the Purchase Plan in the future.

Stock-Based Compensation

The following table summarizes the effects of stock-based compensation charges (in thousands):

 

     Three Months Ended
June 30,
 

Statement of Operations Classifications

   2016      2015  
     (unaudited)  

Cost of goods sold

   $ 100      $ 122  

Research, development and engineering (1)

     303        460  

Selling, general and administrative expenses

     452        406  
  

 

 

    

 

 

 

Stock-based compensation effect in income before taxes

     855        988  

Provision for income taxes (2)

     342        346  
  

 

 

    

 

 

 

Net stock-based compensation effects in net income

   $ 513      $ 642  
  

 

 

    

 

 

 

 

(1) Includes acquisition related compensation expenses of $249,000 during the quarter ended June 30, 2015.
(2) Calculated at the U.S. statutory income tax rate of 40% in fiscal 2017 and 35% in fiscal 2016.

During the three months ended June 30, 2016, the unaudited condensed consolidated statements of operations and cash flows do not reflect any tax benefit for the tax deduction from option exercises and other awards. As of June 30, 2016, approximately $6.8 million in stock-based compensation is to be recognized for unvested stock options granted under our equity incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.8 years.

 

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The Black-Scholes option pricing model is used to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our stock purchase plan. The weighted average estimated fair values of employee stock option grants and rights granted under the Purchase Plan, as well as the weighted average assumptions that were used in calculating such values during the three months ended June 30, 2016 and 2015, were based on estimates at the date of grant as follows:

 

     Stock Options     Purchase Plan  
     Three Months Ended
June  30,
    Three Months Ended
June  30,
 
     2016     2015     2016     2015  
     (unaudited)     (unaudited)  

Weighted average estimated fair value of grant per share

   $ 3.96     $ 6.32     $ 3.94     $ 3.15  

Risk-free interest rate

     1.4     2.0     0.26     0.1

Expected term in years

     6.41       6.75       1.00       1.00  

Volatility

     41.0     50.7     42.9     33.7

Dividend yield

     1.41     1.01     1.42     1.11

Activity with respect to outstanding stock options for the three months ended June 30, 2016 was as follows:

 

           Weighted Average         
     Number of     Exercise Price      Intrinsic Value
(000) (1)
 
     Shares     Per Share     
           (unaudited)         

Balance at March 31, 2016

     5,234,397     $ 10.40     

Options granted

     222,000     $ 10.97     

Options exercised

     (27,897   $ 6.53      $ 130  

Options expired

     (5,000   $ 9.73     
  

 

 

      

Balance at June 30, 2016

     5,423,500     $ 10.44     

Exercisable at June 30, 2016

     3,684,916     $ 10.03     

Exercisable at March 31, 2016

     3,619,563     $ 9.93     

 

(1) Represents the difference between the exercise price and the value of our common stock at the time of exercise.

12. Accumulated Other Comprehensive Income (Loss)

The components and the changes in accumulated other comprehensive income (loss), net of tax, for the three months ended June 30, 2016 and 2015 were as follows (in thousands):

 

     Foreign
Currency
    Unrealized
Gains (Losses)
on Securities
    Defined Benefit
Pension Plans
    Accumulated Other
Comprehensive
Income (Loss)
 
           (unaudited)        

Balance as of March 31, 2016

   $ (10,639   $ (82   $ (9,545   $ (20,266

Other comprehensive income (loss) before reclassifications

     (2,825     85             (2,740

Net loss reclassified from accumulated other comprehensive income (loss)

           90             90  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (2,825     175             (2,650
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2016

   $ (13,464   $ 93     $ (9,545   $ (22,916
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Foreign
Currency
    Unrealized
Gains (Losses)
on Securities
    Defined Benefit
Pension Plans
    Accumulated Other
Comprehensive
Income (Loss)
 
           (unaudited)        

Balance as of March 31, 2015

   $ (13,577   $ 7     $ (9,518   $ (23,088

Other comprehensive income (loss) before reclassifications

     2,692       (117           2,575  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     2,692       (117           2,575  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2015

   $ (10,885   $ (110   $ (9,518   $ (20,513
  

 

 

   

 

 

   

 

 

   

 

 

 

The amounts reclassified out of accumulated other comprehensive income (loss) for the three months ended June 30, 2016 and 2015 are as follows (in thousands):

 

Accumulated Other Comprehensive Income (Loss) Components

   Amount Reclassified from
Accumulated Other Comprehensive
Income (Loss)
    

Impacted Line Item on Unaudited

Condensed Consolidated Income

Statements

     Three Months Ended
June 30,
      
     2016     2015       
     (unaudited)       

Impairment of marketable securities

     (151          Other income (expense), net
  

 

 

   

 

 

    

Subtotal

     (151          Income before income tax provision

Tax impact

     61            Provision for income tax
  

 

 

   

 

 

    

Total reclassifications for the period

   $ (90   $       Net income
  

 

 

   

 

 

    

13. Computation of Earnings per Share

Basic and diluted earnings per share are calculated as follows (in thousands, except per share amounts):

 

     Three Months Ended  
     June 30,  
     2016      2015  
     (unaudited)  

Net income

   $ 3,019      $ 2,985  
  

 

 

    

 

 

 

Weighted average shares—basic

     31,401        31,746  
  

 

 

    

 

 

 

Weighted average shares—diluted

     32,001        32,733  
  

 

 

    

 

 

 

Net income per share—basic

   $ 0.10      $ 0.09  
  

 

 

    

 

 

 

Net income per share—diluted

   $ 0.09      $ 0.09  
  

 

 

    

 

 

 

Diluted weighted average shares included approximately 600,000 and 987,000 common equivalent shares from stock options for the three months ended June 30, 2016 and 2015.

Basic net income available per common share is computed using net income and the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed using net income and the weighted average number of common shares outstanding, assuming dilution, which includes potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of stock options using the treasury stock method. During the three months ended June 30, 2016 and 2015, there were outstanding options to purchase 2,889,670 and 868,702 shares, respectively, that were not included in the computation of diluted net income per share since the exercise prices of the options exceeded the market price of the common stock and thus their inclusion would be anti-dilutive. These options could dilute earnings per share in future periods if the market price of the common stock increases.

 

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14. Segment and Geographic Information

We have a single operating segment and reportable segment. We design develop, manufacture and market high performance semiconductor products. Our Chief Executive Officer and our President, together, have been identified as the chief operating decision makers. Our chief operating decision makers review financial information presented as one operating segment for the purpose of making decisions, allocating resources and assessing financial performance.

Our net revenues by major geographic area (based on destination) were as follows (in thousands):

 

     Three Months Ended
June 30,
 
     2016      2015  
     (unaudited)  

United States

   $ 19,501      $ 20,133  

Europe and the Middle East

     

France

     3,450        2,040  

Germany

     8,599        8,077  

Italy

     1,076        1,264  

Netherlands

     1,140        695  

United Kingdom

     3,627        3,220  

Other

     5,953        6,697  

Asia Pacific

     

China

     22,640        21,235  

Japan

     1,718        3,322  

Korea

     4,695        6,136  

Malaysia

     804        1,242  

Singapore

     3,007        3,117  

Thailand

     811        1,043  

Other

     1,747        1,484  

Rest of the World

     

India

     900        1,132  

Other

     970        1,210  
  

 

 

    

 

 

 

Total

   $ 80,638      $ 82,047  
  

 

 

    

 

 

 

The following table sets forth net revenues for each of our product groups for the three months ended June 30, 2016 and 2015 (in thousands):

 

     Three Months Ended
June 30,
 
     2016      2015  
     (unaudited)  

Power semiconductors

   $ 56,479      $ 54,978  

Integrated circuits

     20,382        22,484  

Systems and RF power semiconductors

     3,777        4,585  
  

 

 

    

 

 

 

Total

   $ 80,638      $ 82,047  
  

 

 

    

 

 

 

For the three months ended June 30, 2016 and 2015, one distributor accounted for 13.8% and 10.7% of our net revenues in each period, respectively. For the three months ended June 30, 2016, another distributor accounted for 10.6% of our net revenues.

15. Income Taxes

For the three months ended June 30, 2016 and 2015, we recorded income tax provisions of $2.3 million and $1.7 million, reflecting effective tax rates of 42.7% and 35.8%, respectively. Our effective tax rates for the quarters ended June 30, 2016 and 2015 were affected by non-benefitted losses incurred in certain tax jurisdictions. For both periods, the effective tax rates reflected estimates of annual income in domestic and foreign jurisdictions, as adjusted by certain tax items.

 

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16. Commitments and Contingencies

Revolving Credit Agreement

On November 20, 2015, we entered into Revolving Credit Agreement with a syndicate of banks whose agent is BOTW for a line of credit of $125.0 million. All amounts owed under the credit agreement are due and payable on November 20, 2017. Borrowings may be repaid and re-borrowed at any time during the term of the credit agreement. The obligations are guaranteed by four of our subsidiaries. The loan is collateralized pursuant to a Contingent Collateral Agreement under which the assets of the parent company and the four subsidiaries could be subject to security interests for the benefit of the banks in the event of a loan default. The credit agreement includes a letter of credit subfacility, under which BOTW agrees to issue letters of credit of up to $10.0 million. However, borrowing under this subfacility is limited to the extent of availability under the $125.0 million revolving line of credit. During the first quarter ended June 30, 2016, we made a principal repayment of $7.0 million. At June 30, 2016, the outstanding principal under the credit agreement was $73.0 million. See Note 9, “Borrowing Arrangements” for further information regarding the terms of the credit agreement.

Other Commitments and Contingencies

On occasion, we provide limited indemnification to customers against intellectual property infringement claims related to our products. To date, we have not experienced significant activity or claims related to such indemnifications. We also provide in the normal course of business indemnification to our officers, directors and selected parties. We are unable to estimate any potential future liability, if any. Therefore, no liability for these indemnification agreements has been recorded as of June 30, 2016 and March 31, 2016.

On July 1, 2016, in connection with an income tax audit of our subsidiary in the Philippines for fiscal year ended March 31, 2010, we received a notice from the Philippine Bureau of Internal Revenue, or BIR, that they upheld an initial assessment for a deficiency of income taxes, inclusive of interest and penalties, of approximately $2.5 million. In accordance with our rights, we have filed an appeal before the Philippine Court of Tax Appeals, or CTA. While there are no assurances that we will prevail, we believe that we have a valid legal reason to challenge the BIR’s decision and that our appeal before the CTA will merit a favorable resolution. Accordingly, we have not accrued any amount for this matter.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion contains forward-looking statements, which are subject to certain risks and uncertainties, including, without limitation, those described elsewhere in this Form 10-Q and, in particular, in Item 1A of Part I hereof. Actual results may differ materially from the results discussed in the forward-looking statements. For a discussion of risks that could affect future results, see “Item 1A. Risk Factors.” All forward-looking statements included in this document are made as of the date hereof, based on the information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement, except as may be required by law.

Overview

We are a multi-market integrated semiconductor company. Our three principal product groups are: power semiconductors; integrated circuits, or ICs; and systems and radio frequency, or RF, power semiconductors.

Our power semiconductors improve system efficiency and reliability by converting electricity at relatively high voltage and current levels into the finely regulated power required by electronic products. We focus on the market for power semiconductors that are capable of processing greater than 200 watts of power.

We also design, manufacture and sell integrated circuits for a variety of applications. Our microcontrollers provide application-specific, embedded system-on-chip, or SoC, solutions for the industrial and consumer markets. Our analog and mixed-signal ICs are principally used in telecommunications applications. Our mixed-signal application-specific ICs, or ASICs, address the requirements of the medical imaging equipment and display markets. Our power management and control ICs are used in conjunction with our power semiconductors.

Our systems include laser diode drivers, high voltage pulse generators and modulators, and high power subsystems, sometimes known as stacks, that are principally based on our high power semiconductor devices. Our RF power semiconductors enable circuitry that amplifies or receives radio frequencies in wireless and other microwave communication applications, medical imaging applications and defense and space applications.

In the quarter ended June 30, 2016, our net revenues increased as compared to the immediately preceding quarter. Our net revenues from sales of power semiconductors increased while our net revenues from sales of ICs and systems and RF power semiconductors decreased. Comparing the same periods, sales to major application markets increased, except the industrial and commercial market. Geographically, sales to the United States and Asia Pacific region increased while sales to the Europe and Middle East regions decreased. During the quarter ended June 30, 2016, our net revenues through distribution increased while our net revenues from original equipment manufacturers, or OEMs, decreased. Our selling, general and administrative, or SG&A, expenses increased because of higher bad debt expenses. Our research, development and engineering expenses, or R&D expenses, also increased slightly. In future periods, we expect our SG&A expenses to remain fairly consistent, except to the extent that selling expenses vary with changing revenues. We expect our R&D expenses to fluctuate modestly in the upcoming quarters.

Critical Accounting Policies and Significant Management Estimates

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the reasonableness of its estimates. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

We believe the following critical accounting policies require that we make significant judgments and estimates in preparing our consolidated financial statements.

Revenue recognition. Revenue is recognized when there is persuasive evidence that an arrangement exists, when delivery has occurred, when the price to the buyer is fixed or determinable and when collectability of the receivable is reasonably assured. These elements are typically met when title to the products is passed to the buyer, which is generally when product is shipped to the customer with sale terms ex-works, or EXW, or when product is delivered to the customer with sales terms delivered duty paid, or DDP.

 

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We sell to distributors and original equipment manufacturers, or OEMs. Approximately 59.5% of our net revenues in the three months ended June 30, 2016 and 55.2% of our net revenues in the three months ended June 30, 2015 were from distributors. We provide some of our distributors with the following programs: stock rotation and ship and debit.

Reserves for sales returns and allowances, including allowances for so called “ship and debit” transactions, are recorded at the time of shipment, and are based on historical levels of returns and current economic trends and changes in customer demand.

Accounts receivable from distributors are recognized and inventory is relieved when title to inventories transfer, typically upon shipment from us, at which point we have a legally enforceable right to collection under normal payment terms. Under certain circumstances, where we are not able to reasonably and reliably estimate the actual returns, revenues and costs relating to distributor sales are deferred until products are sold by the distributors to the distributors’ end customers. Deferred amounts are presented net and included under “Accrued expenses and other liabilities.”

We state our revenues net of any taxes collected from customers that are required to be remitted to various government agencies. The amount of taxes collected from customers and payable to governmental entities is included under “Accrued expenses and other liabilities.” Shipping and handling costs are included in cost of sales.

Allowance for sales returns. We maintain an allowance for sales returns based on estimated product returns by our customers. We estimate our allowance for sales returns based on our historical return experience, current economic trends, changes in customer demand, known returns we have not received and other assumptions. If we were to make different judgments or utilize different estimates, the amount and timing of our revenue could be materially different. Given that our revenues consist of a high volume of relatively similar products, to date our actual returns and allowances have not fluctuated significantly from period to period, and our returns provisions have historically been reasonably accurate. This allowance is included as part of “Accounts receivable, net” on the balance sheet and as a reduction of revenues in the statement of operations.

Allowance for stock rotation. We also provide “stock rotation” to select distributors. The rotation allows distributors to return a percentage of the previous six months’ sales in exchange for orders of an equal or greater amount. Under the program, approximately $321,000 and $349,000 of products were returned to us in the three months ended June 30, 2016 and 2015, respectively. We establish the allowance for sales to distributors except in cases where the revenue recognition is deferred and recognized upon sale by the distributor of products to the end-customer. The allowance, which is management’s best estimate of future returns, is based upon the historical experience of returns and inventory levels at the distributors. This allowance is included as part of “Accounts receivable, net” on the balance sheet and as a reduction of revenues in the statement of operations. Should distributors increase stock rotations beyond our estimates, these statements would be adversely affected.

Allowance for ship and debit. Ship and debit is a program designed to assist distributors in meeting competitive prices in the marketplace on sales to their end-customers. Ship and debit requires a request from the distributor for a pricing adjustment for a specific part for a customer sale to be shipped from the distributor’s stock. We have no obligation to accept this request. However, it is our historical practice to allow some companies to obtain pricing adjustments for inventory held. We receive periodic statements regarding our products held by our distributors. Ship and debit authorizations may cover current and future distributor activity for a specific part for sale to a distributor’s customer. At the time we record sales to distributors, we provide an allowance for the estimated future distributor activity related to such sales since it is probable that such sales to distributors will result in ship and debit activity. The sales allowance requirement is based on sales during the period, credits issued to distributors, distributor inventory levels, historical trends, market conditions, pricing trends we see in our direct sales activity with original equipment manufacturers and other customers and input from sales, marketing and other key management. We believe that the analysis of these inputs enables us to make reliable estimates of future credits under the ship and debit program. This analysis requires the exercise of significant judgments. Our actual results to date have approximated our estimates. At the time the distributor ships the part from stock, the distributor debits us for the authorized pricing adjustment. This allowance is included as part of “Accounts receivable, net” on the balance sheet and as a reduction of revenues in the statement of operations. If competitive pricing were to decrease sharply and unexpectedly, our estimates might be insufficient, which could significantly adversely affect our operating results.

Additions to the ship and debit allowance are estimates of the amount of expected future ship and debit activity related to sales during the period. Additions to the allowance reduce revenues and gross profit in the period. The following table sets forth the beginning and ending balances of, additions to, and deductions from, our allowance for ship and debit during the three months ended June 30, 2016 (in thousands):

 

     (unaudited)  

Balance at March 31, 2016

   $ 866  

Additions

     1,493  

Deductions

     (1,273
  

 

 

 

Balance at June 30, 2016

   $ 1,086  
  

 

 

 

 

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Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments. We evaluate our allowance for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. If we were to make different judgments of the financial condition of our customers or the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. This allowance is reported on the balance sheet as part of “Accounts receivable, net” and is included on the statement of operations as part of selling, general and administrative expenses. This allowance is based on historical losses and management’s estimates of future losses.

Inventories. Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. Our accounting for inventory costing is based on the applicable expenditure incurred, directly or indirectly, in bringing the inventory to its existing condition. Such expenditures include acquisition costs, production costs and other costs incurred to bring the inventory to its use. As it is impractical to track inventory from the time of purchase to the time of sale for the purpose of specifically identifying inventory cost, our inventory is, therefore, valued based on a standard cost, given that the materials purchased are identical and interchangeable at various production processes. We review our standard costs on an as-needed basis but in any event at least once a year, and update them as appropriate to approximate actual costs. The authoritative guidance provided by FASB requires certain abnormal expenditures to be recognized as expenses in the current period instead of capitalized in inventory. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities.

We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. The value of our inventories is dependent on our estimate of future demand as it relates to historical sales. If our projected demand is overestimated, we may be required to reduce the valuation of our inventories below cost. We regularly review inventory quantities on hand and record an estimated provision for excess inventory based primarily on our historical sales and expectations for future use. We also recognize a reserve based on known technological obsolescence, when appropriate. Actual demand and market conditions may be different from those projected by our management. This could have a material effect on our operating results and financial position. If we were to make different judgments or utilize different estimates, the amount and timing of our write-down of inventories could be materially different.

Excess inventory frequently remains saleable. When excess inventory is sold, it yields a gross profit margin of up to 100%. Sales of excess inventory have the effect of increasing the gross profit margin beyond that which would otherwise occur, because of previous write-downs. Once we have written down inventory below cost, we do not write it up when it is subsequently utilized, sold or scrapped. We do not physically segregate excess inventory nor do we assign unique tracking numbers to it in our accounting systems. Consequently, we cannot isolate the sales prices of excess inventory from the sales prices of non-excess inventory. Therefore, we are unable to report the amount of gross profit resulting from the sale of excess inventory or quantify the favorable impact of such gross profit on our gross profit margin.

The following table provides information on our excess and obsolete inventory reserve charged against inventory at cost (in thousands):

 

     (unaudited)  

Balance at March 31, 2016

   $ 21,380  

Utilization or sale

     (1,040

Scrap

     (867

Additional accrual

     1,363  

Foreign currency translation adjustments

     (173
  

 

 

 

Balance at June 30, 2016

   $ 20,663  
  

 

 

 

The practical efficiencies of wafer fabrication require the manufacture of semiconductor wafers in minimum lot sizes. Often, when manufactured, we do not know whether or when all the semiconductors resulting from a lot of wafers will sell. With more than 10,000 different part numbers for semiconductors, excess inventory resulting from the manufacture of some of those semiconductors will be continual and ordinary. Because the cost of storage is minimal when compared to the potential value and because our products do not quickly become obsolete, we expect to hold excess inventory for potential future sale for years. Consequently, we have no set time line for the utilization, sale or scrapping of excess inventory.

In addition, our inventory is also being written down to the lower of cost or market or net realizable value. We review our inventory listing on a quarterly basis for an indication of losses being sustained for costs that exceed selling prices less direct costs to sell. When it is evident that our selling price is lower than current cost, inventory is marked down accordingly. At June 30, 2016, our lower of cost or market reserve was $472,000.

 

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Furthermore, we perform an annual inventory count and at certain locations periodic cycle counts for specific parts that have a high turnover. We also periodically identify any inventory that is no longer usable and write it off.

Valuation of Goodwill and Intangible Assets. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired. The costs of acquired intangible assets are recorded at fair value at acquisition. Intangible assets with finite lives are amortized using the straight-line method or accelerated method over their estimated useful lives and evaluated for impairment in accordance with the authoritative guidance provided by FASB.

Goodwill and intangible assets with indefinite lives are reviewed at least annually for impairment charges during the quarter ending March 31, or more frequently if events and circumstances indicate that the asset might be impaired, in accordance with the authoritative guidance provided by FASB. We first assess qualitative factors to determine whether it is necessary to perform the two-step fair value-based impairment test described below. If we believe that, as a result of its qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.

Under the quantitative approach, there are two steps in the determination of the impairment of goodwill. The first step compares the carrying amount of the net assets to the fair value of the reporting unit. The second step, if necessary, recognizes an impairment loss to the extent the carrying value of the reporting unit’s net assets exceeds the implied fair value of goodwill. An impairment loss would be recognized to the extent that the carrying amount exceeds the fair value of the reporting unit. We operate our business as one reporting unit.

We assess the recoverability of the finite-lived intangible assets by examining the occurrences of certain events or changes of circumstances that indicate that the carrying amounts may not be recoverable. After our initial assessment, if it is necessary, we perform the impairment test by determining whether the estimated undiscounted cash flows attributable to the assets in question are less than their carrying values. Impairment losses, if any, are measured as the amount by which the carrying values of the assets exceed their fair value and are recognized in operating results. If a useful life is determined to be shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.

Income tax. In preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our unaudited condensed consolidated balance sheets. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. A valuation allowance reduces our deferred tax assets to the amount that management estimates is more likely than not to be realized. In determining the amount of the valuation allowance, we consider income over recent years, estimated future taxable income, feasible tax planning strategies and other factors in each taxing jurisdiction in which we operate. If we determine that it is more likely than not that we will not realize all or a portion of our remaining deferred tax assets, then we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that it is likely that we will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, then the related portion of the valuation allowance will reduce income tax expense. Significant management judgment is required in determining our provision for income taxes and potential tax exposures, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. Our ability to utilize our deferred tax assets and the need for a related valuation allowance are monitored on an ongoing basis.

Furthermore, computation of our tax liabilities involves examining uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process as prescribed by the authoritative guidance provided by FASB. The first step is to evaluate the tax position to determine whether there is sufficient available evidence to indicate if it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure and determine the approximate amount of the tax benefit at the largest amount that is more than 50% likely of being realized upon ultimate settlement with the tax authorities. It is inherently difficult and requires significant judgment to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reexamine these uncertain tax positions on a quarterly basis. This reassessment is based on various factors during the period including, but not limited to, changes in worldwide tax laws and treaties, changes in facts or circumstances, effectively settled issues under audit and any new audit activity. A change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our unaudited condensed consolidated financial statements, see Note 2, “Recent Accounting Pronouncements and Accounting Changes” in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

 

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Results of Operations — Three Months Ended June 30, 2016 and 2015

The following table sets forth selected consolidated statements of operations data for the fiscal periods indicated and the percentage change in such data from period to period. These historical operating results may not be indicative of the results for any future periods.

 

     Three Months Ended
June  30,
 
     2016      % change     2015  
     (unaudited)  
     (000)            (000)  

Net revenues

   $ 80,638        (1.7   $ 82,047  

Cost of goods sold

     56,644        0.4        56,445  
  

 

 

      

 

 

 

Gross profit

   $ 23,994        (6.3   $ 25,602  
  

 

 

      

 

 

 

Operating expenses:

       

Research, development and engineering

   $ 7,910        3.0      $ 7,683  

Selling, general and administrative

     10,038        (5.6     10,636  

Amortization of acquisition-related intangible assets

     1,017        (35.6     1,579  
  

 

 

      

 

 

 

Total operating expenses

   $ 18,965        (4.7   $ 19,898  
  

 

 

      

 

 

 

The following table sets forth selected statements of operations data as a percentage of net revenues for the fiscal periods indicated. These historical operating results may not be indicative of the results for any future periods.

 

     % of Net Revenues  
     Three Months Ended
June 30,
 
     2016     2015  
     (unaudited)  

Net revenues

     100.0        100.0  

Cost of goods sold

     70.2        68.8  
  

 

 

   

 

 

 

Gross profit

     29.8        31.2  
  

 

 

   

 

 

 

Operating expenses:

    

Research, development and engineering

     9.8        9.4  

Selling, general and administrative

     12.4        12.9  

Amortization of acquisition-related intangible assets

     1.4        1.9  
  

 

 

   

 

 

 

Total operating expenses

     23.6        24.2  
  

 

 

   

 

 

 

Operating income

     6.2        7.0  

Other income (expense), net

     0.3        (1.3
  

 

 

   

 

 

 

Income before income tax

     6.5        5.7  

Provision for income tax

     (2.8     (2.1
  

 

 

   

 

 

 

Net income

     3.7        3.6  
  

 

 

   

 

 

 

Revenues

The following table sets forth the net revenues for each of our product groups for the fiscal periods indicated:

 

Net Revenues (1)    Three Months Ended June 30,  
         2016          % change         2015  
     (unaudited)  
     (000)            (000)  

Power semiconductors

   $ 56,479        2.7      $ 54,978  

Integrated circuits

     20,382        (9.3     22,484  

Systems and RF power semiconductors

     3,777        (17.6     4,585  
  

 

 

      

 

 

 

Total

   $ 80,638        (1.7   $ 82,047  
  

 

 

      

 

 

 

 

(1) Revenue information includes intellectual property revenues that are not included in average selling prices.

 

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The following tables set forth the average selling prices, or ASPs, and units for the fiscal periods indicated:

 

Average Selling Prices    Three Months Ended June 30,  
         2016          % change         2015      
     (unaudited)  

Power semiconductors

   $ 1.68        (13.8   $ 1.95  

Integrated circuits

   $ 0.45        4.7      $ 0.43  

Systems and RF power semiconductors

   $ 21.71        (34.6   $ 33.22  
Units    Three Months Ended June 30,  
         2016          % change         2015      
     (unaudited)  
     (000)            (000)  

Power semiconductors

     33,554        19.3        28,134  

Integrated circuits

     44,694        (12.8     51,235  

Systems and RF power semiconductors

     174        26.1        138  
  

 

 

      

 

 

 

Total

     78,422        (1.4     79,507  
  

 

 

      

 

 

 

The following table sets forth the net revenue by geographic region for the fiscal periods indicated:

 

     Three Months Ended June 30,  
     2016      2015  
     Net
Revenue
     % of Net
Revenue
     Net
Revenue
     % of Net
Revenue
 
     (unaudited)  
     (000)             (000)         

Europe and Middle East

   $ 23,845        29.6      $ 21,993        26.8  

Asia Pacific

     35,422        43.9        37,579        45.8  

Rest of world

     1,870        2.3        2,342        2.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

International revenues

     61,137        75.8        61,914        75.5  

USA

     19,501        24.2        20,133        24.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 80,638        100.0      $ 82,047        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

The 1.7% decrease in net revenues in the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 reflected a decrease of $2.1 million, or 9.3%, in the sale of ICs and a decrease of $0.8 million, or 17.6%, in the sale of systems and RF power semiconductors, offset by an increase of $1.5 million, or 2.7%, in the sale of power semiconductors. The reduction in net revenues from ICs was primarily caused by decreased sales of microcontrollers to the consumer products market. The net revenues from the sale of systems and RF power semiconductors decreased primarily due to a decrease in net revenues from the sale of subassemblies, primarily to the industrial and commercial market. The increase in net revenues from power semiconductors was mainly due to a $1.7 million increase in the sale of metal-oxide-silicon, or MOS, products primarily to the industrial and commercial market.

For the three months ended June 30, 2016 as compared to the three months ended June 30, 2015, the increases in unit shipments of power semiconductors and systems and RF power semiconductors were broad-based, except for a reduction in the shipment of IGBTs and subassemblies. For both product groups, the decreases in ASPs were primarily due to shifts in product mix, rather than changes in product prices. In the case of ICs, the reduction in units was largely the result of lower shipments of flash microcontrollers and the increase in ASPs was due to changes in product mix.

For the three months ended June 30, 2016 as compared to the three months ended June 30, 2015, our sales decreased in the U.S. and Asia Pacific area and increased in the Europe and the Middle East. Comparing the same periods, our sales decreased to the industrial and commercial market and the consumer product market while our sales increased to our other major application markets.

For the three months ended June 30, 2016 and 2015, one distributor accounted for 13.8% and 10.7% of our net revenues, respectively. For the three months ended June 30, 2016, another distributor accounted for 10.6% of our net revenues.

 

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Our net revenues were reduced by allowances for sales returns, stock rotations and ship and debit. See “Critical Accounting Policies and Significant Management Estimates” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Gross Profit

Gross profit decreased to $24.0 million in the three months ended June 30, 2016 from $25.6 million in the three months ended June 30, 2015. Gross profit margin decreased to 29.8% in the quarter ended June 30, 2016 from 31.2% in the quarter ended June 30, 2015. The decrease in both gross profit dollars and margins were largely because of a shift in product mix to sales of lower margin products and, to a lesser extent, because of reduced revenues.

Our gross profit and gross profit margin were positively affected by the sale or utilization of excess inventories which had previously been written down. See “Critical Accounting Policies and Significant Management Estimates—Inventories” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Research, Development and Engineering

R&D expenses typically consist of internal engineering efforts for product design, process improvement and development. As a percentage of net revenues, our R&D expenses for the three months ended June 30, 2016 were 9.8% as compared to 9.4% for the three months ended June 30, 2015. The increase in the percentage primarily resulted from lower net revenues and higher R&D expenses, primarily due to an increase in the headcount. Expressed in dollars, for the three months ended June 30, 2016 as compared to the same period of the prior year, our R&D expenses increased by approximately $227,000, or 3.0%.

Selling, General and Administrative

As a percentage of net revenues, our SG&A expenses for the three months ended June 30, 2016 were 12.4% as compared to 12.9% for the three months ended June 30, 2015. Expressed in dollars, SG&A expenses decreased by approximately $598,000, or 5.6%, in the three months ended June 30, 2016 as compared to the same period in the prior fiscal year. The decreases, both in the percentage and in dollars, were primarily due to lower selling expenses.

Amortization of Acquisition-Related Intangible Assets

For the three months ended June 30, 2016, we recorded amortization expenses on acquired intangible assets of $1.0 million as compared to $1.6 million for the same period in fiscal 2016.

Interest Expense

During the three months ended June 30, 2016, our interest expenses were $635,000 as compared to $314,000 for the three months ended June 30, 2015. The increase was primarily due to additional borrowing under the revolving loan.

Other Income (Expense), net

In the quarter ended June 30, 2016, other income, net, was $815,000 as compared to other expense, net, of $790,000 in the quarter ended June 30, 2015. The shift from other expense, net, in the three month period ended June 30, 2015 to other income, net, in the same period of fiscal 2017 was primarily related to fluctuations in foreign currency exchange rates. Other income, net, in the three months ended June 30, 2016 principally consisted of $620,000 in gains associated with changes in exchange rates for foreign currency transactions. Other expense, net in the three months ended June 30, 2015 consisted principally of $668,000 in losses associated with changes in exchange rates for foreign currency transactions.

Provision for Income Tax

For the three months ended June 30, 2016 and 2015, we recorded income tax provisions of $2.3 million and $1.7 million, reflecting effective tax rates of 42.7% and 35.8%, respectively. Our effective tax rates for quarter ended June 30, 2016 and 2015 were affected by non-benefitted losses incurred in certain tax jurisdictions. For both periods, the effective tax rates reflected estimates of annual income in domestic and foreign jurisdictions, as adjusted by certain tax items.

 

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Liquidity and Capital Resources

At June 30, 2016, cash and cash equivalents were $151.4 million as compared to $155.8 million at March 31, 2016.

Our cash provided by operating activities for the three months ended June 30, 2016 was $7.5 million, a decrease of approximately $1.9 million as compared to the $9.4 million of cash provided by operating activities in the comparable period of the prior year. The change in our operating cash flow was primarily due to a decrease of $1.1 million in net income and total adjustments to reconcile net income, and a decrease of $804,000 in net changes in operating assets and liabilities.

The decrease in net income and total adjustments to reconcile net income was principally caused by the decrease in net revenues, depreciation and amortization expenses, foreign currency translation adjustments and net adjustments for investments. The changes in operating assets and liabilities for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 included the following: accounts receivable decreased due to lower net revenues and the timing of collection, inventory purchases decreased as a result of our efforts to reduce our inventory on hand, prepaid expenses and other current assets decreased due to the timing of payment from a subcontractor and a tax refund, while accrued expenses and other liabilities increased, primarily due to the timing of inventory receipts.

Our net cash used in investing activities for the three months ended June 30, 2016 was $3.5 million, as compared to net cash used in investing activities of $18.3 million during the three months ended June 30, 2015. During the three months ended June 30, 2016, we spent $3.5 million on the purchase of property and equipment. During the three months ended June 30, 2015, we spent $14.6 million, net of cash and cash equivalents acquired, on the acquisition of RadioPulse and $3.7 million on the purchase of property and equipment, including real estate in Germany.

For the three months ended June 30, 2016, net cash used in financing activities was $7.3 million, as compared to net cash provided by financing activities of $5.0 million in the three months ended June 30, 2015. During the three months ended June 30, 2016, we made a principal repayment of $8.0 million on loan obligations. During the three months ended June 30, 2015, we borrowed an additional €3.0 million, or about $3.3 million, and received $2.5 million from employee equity plans, offset by $770,000 used for principal repayment on capital lease and loan obligations.

At June 30, 2016, loans payable totalled $79.0 million. This represented 52.2% of our cash and cash equivalents and 28.2% of our stockholders’ equity.

In June 2005, IXYS Semiconductor GmbH, our German subsidiary, borrowed €10.0 million, or about $12.2 million at the time, from IKB. At March 31, 2015, the outstanding principal balance was €3.5 million, or about $3.8 million. In April 2015, we replaced the loan with a new loan from IKB Deutsche Industriebank, or IKB. Under the new agreement, we borrowed €6.5 million, or about $7.2 million at the time. The loan has a term ending March 31, 2022 and bears a fixed annual interest rate of 1.75%. Each fiscal quarter a principal payment of €232,000, or about $258,000, and a payment of accrued interest are required. Financial covenants for a ratio of indebtedness to cash flow, a ratio of equity to total assets and a minimum stockholders’ equity for the German subsidiary must be satisfied for the loan to remain in good standing. The loan may be prepaid in whole or in part with a modest penalty. The loan is also collateralized by a security interest in the facility in Lampertheim, Germany. These covenants are required to be complied with annually at March 31. We complied with all of these financial covenants at March 31, 2016. See Note 9, “Borrowing Arrangements” in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the new agreement.

On November 20, 2015, we entered into a Revolving Credit Agreement with a syndicate of banks for a line of credit of $125.0 million. The agent for the banks is Bank of the West, or BOTW. The obligations are guaranteed by four of our subsidiaries. The loan is collateralized pursuant to Contingent Collateral Agreement, under which the assets of the parent company and the four subsidiaries could be subject to security interests for the benefit of the banks in the event of a loan default. The Revolving Credit Agreement expires on November 20, 2017.

The credit agreement provides different interest rate alternatives under which we may borrow funds. We may elect to borrow based on LIBOR plus a margin or an alternative base rate plus a margin. The margin can range from 0.75% to 2.5%, depending on interest rate alternatives and on our leverage of liabilities to effective tangible net worth. The applicable interest rate as of June 30, 2016 was 2.56%. An unused commitment fee is also payable. It ranges from 0.25% to 0.625% annually, depending on leverage.

The terms of the facility impose restrictions on the Company’s ability to undertake certain transactions, to create liens on assets and to incur subsidiary indebtedness. In addition, the credit agreement is subject to a set of financial covenants, including minimum effective tangible net worth, the ratio of cash, cash equivalents and accounts receivable to current liabilities, profitability, a leverage ratio and a minimum amount of U.S. domestic cash on hand. At June 30, 2016 we complied with these financial covenants.

 

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At June 30, 2016, the outstanding principal balance under the credit agreement was $73.0 million. See Note 9, “Borrowing Arrangements” in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the credit agreement. The credit agreement also includes a $10.0 million letter of credit subfacility. See Note 16, “Commitments and Contingencies” and Note 9, “Borrowing Arrangements” in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the terms of our credit arrangements.

On May 1, 2015, we acquired RadioPulse. At closing, we paid a cash consideration of $14.7 million. The total consideration may also include earnout payments aggregating up to $6.0 million and payable over three years based on its operational results in calendar years 2015, 2016, and 2017.

We assumed loans of approximately $2.4 million related to the acquisition of RadioPulse. These loans were primarily short-term facilities from financial institutions and carried a weighted average interest rate of 4.9%. The loans were fully repaid in April 2016.

We assumed loans of approximately $723,000, related to an acquisition completed during the quarter ended June 30, 2014. The assumed borrowings were non-interest loans from government agencies to support the research and development activities with maturity dates varying from fiscal 2015 to fiscal 2021. As of June 30, 2016, the outstanding principal balance was approximately €310,000, or $344,000.

During the quarter ended June 30, 2016, we accrued $1.3 million for dividends to be paid in July 2016, consisting of a quarterly cash dividend of $0.04 per share. The quarterly dividend is at the discretion of the Board of Directors.

Additionally, we maintain three defined benefit pension plans: one in the United Kingdom, one in Germany and one in the Philippines. Benefits are based on years of service and the employees’ compensation. We either deposit funds for these plans with financial institutions, consistent with the requirements of local law, or accrue for the unfunded portion of the obligations. The United Kingdom and German plans have been curtailed. As such, the plans are closed to new entrants and no credit is provided for additional periods of service. The total pension liability accrued for the three plans at June 30, 2016 was $15.6 million.

We believe that our cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our anticipated cash requirements for the next 12 months. Our liquidity could be negatively affected by a decline in demand for our products, increases in the cost of materials or labor, investments in new product development, one or more acquisitions, or the inability to renew or replace our revolving line of credit in whole or in part. From time to time, we use derivative contracts in the normal course of business to manage our foreign currency exchange and interest rate risks. We did not have any open derivative contracts at June 30, 2016. There can be no assurance that additional debt or equity financing will be available when required or, if available, can be secured on terms satisfactory to us.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risk has not changed materially from the market risk disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2016.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Based on their evaluation as of June 30, 2016, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations. Furthermore, these controls and procedures were also effective to ensure that information required to be disclosed by us in this Quarterly Report on Form 10-Q was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our procedures or our internal controls will prevent or detect all errors and all fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of our controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, have been detected.

Changes in Internal Controls over Financial Reporting

During the quarter ended June 30, 2016, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We currently are involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition, results of operations and cash flows. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs.

Item 1A. Risk Factors

In addition to the other information in this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully in evaluating our business and us. Additional risks not presently known to us or that we currently believe are not serious may also impair our business and its financial condition.

Our operating results fluctuate significantly because of a number of factors, many of which are beyond our control.

Given the nature of the markets in which we participate, as well as macroeconomic uncertainties, we cannot reliably predict future revenues and profitability and unexpected changes may cause us to adjust our operations. Large portions of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, small declines in revenues could seriously negatively affect our operating results in any given quarter. Our operating results may fluctuate significantly from quarter-to-quarter and year-to-year. For example, from fiscal 2008 to fiscal 2009, net income in one year shifted to net loss in the next year. Some of the factors that may affect our quarterly and annual results are:

 

   

changes in business and economic conditions, including a downturn in demand or decrease in the rate of growth in demand, whether in the global economy, a regional economy or the semiconductor industry;

 

   

changes in market conditions, potentially including changes in the credit markets, currency exchange rates, expectations for inflation or energy prices;

 

   

the reduction, rescheduling or cancellation of orders by customers;

 

   

fluctuations in timing and amount of customer requests for product shipments;

 

   

changes in the mix of products that our customers purchase;

 

   

changes in the level of customers’ component inventories;

 

   

loss of key customers or employees;

 

   

the availability of production capacity, whether internally or from external suppliers;

 

   

the cyclical nature of the semiconductor industry;

 

   

competitive pressures on selling prices;

 

   

strategic actions taken by our competitors;

 

   

market acceptance of our products and the products of our customers;

 

   

fluctuations in our manufacturing yields and significant yield losses;

 

   

difficulties in forecasting demand for our products and the planning and managing of inventory levels;

 

   

the availability of raw materials, supplies and manufacturing services from third parties;

 

   

the amount and timing of investments in research and development;

 

   

damage awards or injunctions as the result of litigation;

 

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changes in our product distribution channels and the timeliness of receipt of distributor resale information;

 

   

the impact of vacation schedules and holidays, largely during the second and third quarters of our fiscal year; and

 

   

the amount and timing of costs associated with product returns.

As a result of these factors, many of which are difficult to control or predict, as well as the other risk factors discussed in this Quarterly Report on Form 10-Q, we may experience materially adverse fluctuations in our future operating results on a quarterly or annual basis. Changes in demand for our products and in our customers’ product needs could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our revenues, increase our costs, lower our gross margin percentage or require us to recognize impairments of our assets. If product demand declines, our manufacturing or assembly and test capacity could be underutilized and we may be required to record an impairment on our long-lived assets, including facilities and equipment as well as intangible assets and goodwill, which would increase our expenses. Factory planning decisions may also shorten the useful lives of long-lived assets, including facilities and equipment, and cause us to accelerate depreciation. In addition, if product demand declines or we fail to forecast demand accurately, we could be required to write off inventory or record underutilization charges, which would have a negative impact on our gross margin.

We may not be successful in our acquisitions.

We have in the past made, and may in the future make, acquisitions of other technologies and companies. These acquisitions involve numerous risks, including:

 

   

failure to retain key personnel of the acquired business;

 

   

diversion of management’s attention during the acquisition process;

 

   

disruption of our ongoing business;

 

   

the potential strain on our financial and managerial controls and reporting systems and procedures;

 

   

unanticipated expenses and potential delays related to integration of an acquired business;

 

   

the risk that we will be unable to develop or exploit acquired technologies;

 

   

the engineering risks inherent in transferring products from one wafer fabrication facility to another;

 

   

failure to successfully integrate the operations of an acquired business with our own;

 

   

the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;

 

   

the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets;

 

   

the risks of entering new markets in which we have limited experience;

 

   

difficulties in expanding our information technology systems or integrating disparate information technology systems to accommodate the acquired businesses;

 

   

the challenges inherent in managing an increased number of employees and facilities and the need to implement appropriate policies, benefits and compliance programs;

 

   

customer dissatisfaction or performance problems with an acquired company’s products or personnel, or with altered sales terms or a changed distribution channel;

 

   

adverse effects on our relationships with suppliers;

 

   

the reduction in financial stability associated with the incurrence of debt or the use of a substantial portion of our available cash;

 

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the costs associated with acquisitions, including amortization expenses related to intangible assets, and the integration of acquired operations;

 

   

assumption of known or unknown liabilities or other unanticipated events or circumstances; and

 

   

failure or fraud in pre-acquisition due diligence.

We cannot assure that we will be able to successfully acquire other businesses or product lines or integrate them into our operations without substantial expense, delay in implementation or other operational or financial problems.

As a result of an acquisition, our financial results may differ from the investment community’s expectations in a given quarter. Further, if one or more of the foregoing risks materialize or market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows or stock price could be negatively impacted.

Our backlog may not result in future revenues.

Customer orders typically can be cancelled or rescheduled by the customer without penalty to the customer. Cancellations or reschedulings are common in periods of decreasing demand. Further, in periods of increasing demand, particularly when production is allocated or delivery delayed, customers of semiconductor companies have on occasion placed orders without expectation of accepting delivery to increase their share of allocated product or in an effort to improve the timeliness of delivery. While we are attuned to the potential for such behavior and attempt to identify such orders, we could accept orders of this nature and subsequently experience order cancellation unexpectedly.

Our backlog at any particular date is not necessarily indicative of actual revenues for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenues, could harm our results of operations.

Fluctuations in the mix of products sold may adversely affect our financial results.

Changes in the mix and types of products sold may have a substantial impact on our revenues and gross profit margins. In addition, more recently introduced products tend to have higher associated costs because of initial overall development costs and higher start-up costs. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover our fixed costs and investments that are associated with a particular product or wafer foundry, and, as a result, can negatively impact our financial results.

Our international operations expose us to material risks.

For the fiscal year ended March 31, 2016, our net revenues by region were approximately 24.0% in the United States, approximately 29.1% in Europe and the Middle East, approximately 44.2% in the Asia Pacific region and approximately 2.7% in India and the rest of the world. We expect net revenues from foreign markets to continue to represent a majority of total net revenues. We maintain significant business operations in Germany, the United Kingdom, the Philippines and South Korea and work with subcontractors, suppliers and manufacturers in South Korea, Japan, the Philippines and elsewhere in Europe and the Asia Pacific region. Some of the risks inherent in doing business internationally are:

 

   

foreign currency fluctuations, particularly in the Euro and the British pound;

 

   

longer payment cycles;

 

   

challenges in collecting accounts receivable;

 

   

changes in the laws, regulations or policies of the countries in which we manufacture or sell our products, including the impact of the vote in the United Kingdom to leave the European Union;

 

   

trade restrictions;

 

   

cultural and language differences;

 

   

employment regulations;

 

   

limited infrastructure in emerging markets;

 

   

transportation delays;

 

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seasonal reduction in business activities;

 

   

work stoppages;

 

   

labor and union disputes;

 

   

electrical outages;

 

   

terrorist attack or war; and

 

   

economic or political instability.

Our sales of products manufactured in our Lampertheim, Germany facility and our costs at that facility are primarily denominated in Euros, and sales of products manufactured in our Chippenham, U.K. facility and our costs at that facility are primarily denominated in British pounds. Fluctuations in the value of the Euro and the British pound against the U.S. dollar could have a significant adverse impact on our balance sheet and results of operations. We generally do not enter into foreign currency hedging transactions to control or minimize these risks. Reductions in the value of the Euro or British pound would reduce our revenues recognized in U.S. dollars, all other things being equal. Changes in the value of the Euro or the British pound could cause or increase losses associated with changes in exchange rates for foreign currency transactions. Fluctuations in currency exchange rates could cause our products to become more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Alternatively, fluctuations in currency exchange rates in the face of competitive pricing pressures could lead to lower gross profit margins, as customer prices in one currency fall relative to costs of production experienced in a different currency. If we expand our international operations or change our pricing practices to denominate prices in other foreign currencies, we could be exposed to even greater risks of currency fluctuations.

Our financial performance is dependent on economic stability and credit availability in international markets. Actions by governments to address deficits or sovereign or bank debt issues, particularly in Europe, could adversely affect gross domestic product or currency exchange rates in countries where we operate, which in turn could adversely affect our financial results. If our customers or suppliers are unable to obtain the credit necessary to fund their operations, we could experience increased bad debts, reduced product orders and interruptions in supplier deliveries leading to delays or stoppages in our production. Alternatively, governmental actions in China or other emerging markets to address economic problems, such as inflation, asset or other “bubbles” or the transfer of capital out of the country, could also adversely affect gross domestic product or the growth thereof and result in reduced product orders or increased bad debt expense for us.

In addition, the laws and courts of certain foreign countries may not protect our products or intellectual property rights to the same extent as do U.S. laws and courts. Therefore, the risk of piracy of our technology and products may be greater when we manufacture or sell our products in certain foreign countries.

The semiconductor industry is cyclical, and an industry downturn could adversely affect our operating results.

Business conditions in the semiconductor industry may rapidly change from periods of strong demand and insufficient production to periods of weakened demand and overcapacity. The industry in general is characterized by:

 

   

changes in product mix in response to changes in demand;

 

   

alternating periods of overcapacity and production shortages, including shortages of raw materials supplies and manufacturing services;

 

   

cyclical demand for semiconductors;

 

   

significant price erosion;

 

   

variations in manufacturing costs and yields;

 

   

rapid technological change and the introduction of new products; and

 

   

significant expenditures for capital equipment and product development.

These factors could harm our business and cause our operating results to suffer.

 

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Our dependence on subcontractors to assemble and test our products subjects us to a number of risks, including an inadequate supply of products and higher materials costs.

We depend on subcontractors for the assembly and testing of our products. The substantial majority of our products are assembled by subcontractors located outside of the United States. Assembly subcontractors generally work on narrow margins and have limited capital. We have encountered assembly subcontractors who have ceased or reduced production because of financial problems. We engage assembly subcontractors who operate while in insolvency proceedings or whose financial stability is uncertain. The unexpected cessation of production or reduction in production by one or more of our assembly subcontractors could adversely affect our production, our customer relations, our revenues and our financial condition. Our reliance on these subcontractors also involves the following significant risks:

 

   

reduced control over delivery schedules and quality;

 

   

the potential lack of adequate capacity during periods of excess demand;

 

   

difficulties selecting and integrating new subcontractors;

 

   

limited or no warranties by subcontractors or other vendors on products supplied to us;

 

   

potential increases in prices due to capacity shortages and other factors;

 

   

potential misappropriation of our intellectual property; and

 

   

economic or political instability in foreign countries.

These risks may lead to delayed product delivery or increased costs, which would harm our profitability and customer relationships.

Further, we use only a limited number of subcontractors to assemble most of our products. If one or more of these key subcontractors experience financial, operational, production or quality assurance difficulties, we could experience a significant reduction or interruption in supply. Although we believe alternative subcontractors are available, our operating results could temporarily suffer until we engage one or more of those alternative subcontractors. Moreover, in engaging alternative subcontractors in exigent circumstances, our production costs could increase markedly.

We depend on external foundries to manufacture many of our products.

Of our net revenues for our fiscal year ended March 31, 2016, 47.4% came from wafers manufactured for us by a number of external foundries. In particular, the wafers for all of our microcontrollers are fabricated at external foundries. Our dependence on external foundries may grow.

Our relationships with our external foundries do not guarantee prices, delivery or lead times or wafer or product quantities sufficient to satisfy current or expected demand. Generally, these foundries manufacture our products on a purchase order basis. We provide these foundries with rolling forecasts of our production requirements. However, the ability of each foundry to provide wafers to us is limited by the foundry’s available capacity. At any given time, these foundries could choose to prioritize capacity for their own use or other customers or reduce or eliminate deliveries to us. If growth in demand for our products occurs, our external foundries may be unable or unwilling to allocate additional capacity to our needs, thereby limiting our revenue growth. Accordingly, we cannot be certain that these foundries will allocate sufficient capacity to satisfy our requirements. In addition, we cannot be certain that we will continue to do business with these or other foundries on terms as favorable as our current terms. If we are not able to obtain foundry capacity as required, our relationships with our customers could be harmed, we could be unable to fulfill contractual requirements and our revenues could be reduced or our growth limited. Moreover, even if we are able to secure foundry capacity, we may be required, either contractually or as a practical business matter, to utilize all of that capacity or incur penalties or an adverse effect to the business relationship. The costs related to maintaining foundry capacity could be expensive and could harm our operating results. Other risks associated with our reliance on external foundries include:

 

   

the lack of control over delivery schedules;

 

   

the unavailability of, or delays in obtaining access to, key process technologies;

 

   

limited control over quality assurance, manufacturing yields and production costs; and

 

   

potential misappropriation of our intellectual property.

 

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Our requirements typically represent a small portion of the total production of the external foundries that manufacture our wafers and products. One or more of these external foundries may not continue to produce wafers for us or continue to advance the process design technologies on which the manufacturing of our products is based. If we are required to transition production from one foundry to another, we may make large last-time buys of product at the foundry that we are exiting, which could eventually result in substantial inventory write-offs if semiconductors are not sold or utilized. These circumstances could harm our ability to deliver our products or increase our costs.

Our gross margin is dependent on a number of factors, including our level of capacity utilization.

Semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense. We are limited in our ability to reduce fixed costs quickly in response to any shortfall in revenues. If we are unable to utilize our manufacturing, assembly and testing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in lower gross margins. Increased competition and other factors may lead to price erosion, lower revenues and lower gross margins for us in the future.

Our success depends on our ability to manufacture our products efficiently.

We manufacture our products in facilities that are owned and operated by us, as well as in external wafer foundries and subcontract assembly facilities. The fabrication of semiconductors is a highly complex and precise process, and a substantial percentage of wafers could be rejected or numerous dies on each wafer could be nonfunctional as a result of, among other factors:

 

   

contaminants in the manufacturing environment;

 

   

defects in the masks used to print circuits on a wafer;

 

   

manufacturing equipment failure; or

 

   

wafer breakage.

For these and other reasons, we could experience a decrease in manufacturing yields. Additionally, if we increase our manufacturing output, the additional demands placed on existing equipment and personnel or the addition of new equipment or personnel may lead to a decrease in manufacturing yields. As a result, we may not be able to cost-effectively expand our production capacity in a timely manner.

We order materials and commence production in advance of anticipated customer demand. Therefore, revenue shortfalls may also result in inventory write-downs.

We typically plan our production and inventory levels based on our own expectations for customer demand. Actual customer demand, however, can be highly unpredictable and can fluctuate significantly. In response to anticipated long lead times to obtain inventory and materials, we order materials and production in advance of customer demand. This advance ordering and production may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize.

If our goodwill, acquired intangible assets or long-lived assets become impaired, we may be required to record a significant charge to earnings.

Under generally accepted accounting principles, goodwill is required to be tested for impairment at least annually and we review our acquired intangible assets and long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill, acquired intangible assets or long-lived assets may not be recoverable include a decline in stock price and market capitalization, reduced future cash flows and slower growth rates in our industry. From time to time, we have recorded impairment charges and written down the value of goodwill.

Costs related to product defects and errata may harm our results of operations and business.

Costs associated with unexpected product defects and errata (deviations from published specifications) due to, for example, unanticipated problems in our manufacturing processes, include the costs of:

 

   

writing off the value of inventory of defective products;

 

   

disposing of defective products;

 

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recalling defective products that have been shipped to customers;

 

   

providing product replacements for, or modifications to, defective products; and/or

 

   

defending against litigation related to defective products.

These costs could be substantial and may, therefore, increase our expenses and lower our gross margin. In addition, our reputation with our customers or users of our products could be damaged as a result of such product defects and errata, and the demand for our products could be reduced. These factors could harm our financial results and the prospects for our business.

Semiconductors for inclusion in consumer products have shorter product life cycles.

We believe that consumer products are subject to shorter product life cycles, because of technological change, consumer preferences, trendiness and other factors, than other types of products sold by our customers. Shorter product life cycles result in more frequent design competitions for the inclusion of semiconductors in next generation consumer products, which may not result in design wins for us. Shorter product life cycles may lead to more frequent circumstances where sales of existing products are reduced or ended.

Uncertain global macroeconomic conditions could adversely affect our results of operations and financial condition.

Uncertain global macroeconomic conditions that affect the economy and the economic outlook of the United States, Europe, China and other parts of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition. These uncertainties, including, among other things, sovereign and foreign bank debt levels, the inability of national or international political institutions to effectively resolve economic or budgetary crises or issues, consumer confidence, unemployment levels, interest rates, availability of capital, fuel and energy costs, tax rates and the threat or outbreak of terrorism or public unrest, could adversely impact our customers and vendors, which could adversely affect us. Recessionary conditions and depressed levels of consumer and commercial spending may cause customers to reduce, modify, delay or cancel plans to purchase our products and may cause vendors to reduce their output or change their terms of sales. We generally sell products to customers with credit payment terms. If customers’ cash flow or operating or financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, they may not be able to pay, or may delay payment to us. Likewise, for similar reasons vendors may restrict credit or impose different payment terms. Any inability of current or potential customers to pay us for our products or any demands by vendors for different payment terms may adversely affect our results of operations and financial condition.

Economic conditions and regulatory changes leading up to and following the United Kingdom’s likely exit from the European Union could have a material adverse effect on our business and results of operations.

Following a referendum in which voters in the United Kingdom, or U.K., approved an exit from the European Union, it is expected that the U.K. government will initiate a process to leave the European Union and begin negotiating the terms of the U.K.’s future relationship with the European Union. We face uncertainty regarding the impact of the likely exit of the U.K. from the European Union. Adverse consequences such as deterioration in global economic conditions, stability in global financial markets, volatility in currency exchange rates, new or increased tariffs or adverse changes in regulation of the cross-border agreements could have a negative impact on our operations, financial condition and results of operations.

Our debt agreements contain certain restrictions that may limit our ability to operate our business.

The agreements governing our debt contain, and any other future debt agreement we enter into may contain, restrictive covenants that limit our ability to operate our business, including, in each case subject to certain exceptions, restrictions on our ability to:

 

   

incur additional indebtedness;

 

   

grant liens;

 

   

consolidate, merge or sell our assets, unless specified conditions are met;

 

   

acquire other business organizations;

 

   

make investments;

 

   

redeem or repurchase our stock; and

 

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change the nature of our business.

In addition, our debt agreements contain financial covenants and additional affirmative and negative covenants. Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. If we are not able to comply with all of these covenants for any reason, some or all of our outstanding debt could become immediately due and payable and the incurrence of additional debt under the credit facilities provided by the debt agreements would not be allowed. If our cash is utilized to repay any outstanding debt, depending on the amount of debt outstanding, we could experience an immediate and significant reduction in working capital available to operate our business. Related to these risks, our lenders waived a default under our existing Revolving Credit Agreement caused by the leverage ratio, which compared total funded indebtedness as of March 31, 2016 to EBITDA for the four fiscal quarters ended March 31, 2016. The leverage ratio minimally exceeded the contractually agreed ratio of 2:1. As of June 30, 2016, we complied with all of the financial covenants.

As a result of these covenants, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us, such as strategic acquisitions or joint ventures.

If we default on our Revolving Credit Agreement, most of our assets may become subject to security interests, which could lead to our lenders taking possession, selling or otherwise disposing of such assets, or to bankruptcy to forestall such actions.

We estimate tax liabilities, the final determination of which is subject to review by domestic and international taxation authorities.

We are subject to income taxes and other taxes in both the United States and foreign jurisdictions in which we currently operate or have historically operated. We are also subject to review and audit by both domestic and foreign taxation authorities. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires significant judgment and estimation. The provision for income taxes can be adversely affected by a variety of factors, including but not limited to changes in tax laws, regulations and accounting principles, including accounting for uncertain tax positions, or interpretation of those changes. Significant judgment is required to determine the recognition and measurement attributes prescribed in the authoritative guidance issued by Financial Accounting Standards Board, or FASB, in connection with accounting for income taxes. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our consolidated financial statements and may materially affect our income tax provision, net income, goodwill or cash flows in the period or periods for which such determination is made.

Our intellectual property revenues are uncertain and unpredictable in timing and amount.

We are unable to discern a pattern in or otherwise predict the amount of any payments for the sale or licensing of intellectual property that we may receive. Consequently, we are unable to plan on the timing of intellectual property revenues and our results of operations may be adversely affected by a reduction in the amount of intellectual property revenues.

Our markets are subject to technological change and our success depends on our ability to develop and introduce new products.

The markets for our products are characterized by:

 

   

changing technologies;

 

   

changing customer needs;

 

   

frequent new product introductions and enhancements;

 

   

increased integration with other functions; and

 

   

product obsolescence.

To develop new products for our target markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise. Failure to do so could cause us to lose our competitive position and seriously impact our future revenues.

Products or technologies developed by others may render our products or technologies obsolete or non-competitive. A fundamental shift in technologies in our product markets would have a material adverse effect on our competitive position within the industry.

 

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Our revenues are dependent upon our products being designed into our customers’ products.

Many of our products are incorporated into customers’ products or systems at the design stage. The value of any design win largely depends upon the customer’s decision to manufacture the designed product in production quantities, the commercial success of the customer’s product and the extent to which the design of the customer’s electronic system also accommodates incorporation of components manufactured by our competitors. In addition, our customers could subsequently redesign their products or systems so that they no longer require our products. The development of the next generation of products by our customers generally results in new design competitions for semiconductors, which may not result in design wins for us, potentially leading to reduced revenues and profitability. We may not achieve design wins or our design wins may not result in future revenues.

We could be harmed by intellectual property litigation.

As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. We have been sued for purported patent infringement and have been accused of infringing the intellectual property rights of third parties. We also have certain indemnification obligations to customers and suppliers with respect to the infringement of third party intellectual property rights by our products. We could incur substantial costs defending ourselves and our customers and suppliers from any such claim. Infringement claims or claims for indemnification, whether or not proven to be true, may divert the efforts and attention of our management and technical personnel from our core business operations and could otherwise harm our business. For example, in June 2000, we were sued for patent infringement by International Rectifier Corporation. The case was ultimately resolved in our favor, but not until October 2008. In the interim, the U.S. District Court entered multimillion dollar judgments against us on two different occasions, each of which was subsequently vacated.

In the event of an adverse outcome in any intellectual property litigation, we could be required to pay substantial damages, cease the development, manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third party claiming infringement with royalty payment obligations upon us. An adverse outcome in an infringement action could materially and adversely affect our financial condition, results of operations and cash flows.

We may not be able to protect our intellectual property rights adequately.

Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technology that is substantially similar or superior to our technology. More specifically, we cannot assure that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties. Nor can we assure that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. We may also become subject to or initiate patentability or interference proceedings in the U.S. Patent and Trademark Office, which can demand significant financial and management resources and could harm our financial results. Also, others may independently develop similar products or processes, duplicate our products or processes or design their products around any patents that may be issued to us.

Because our products typically have lengthy sales cycles, we may experience substantial delays between incurring expenses related to research and development and the generation of revenues.

The time from initiation of design to volume production of new semiconductors often takes 18 months or longer. We first work with customers to achieve a design win, which may take nine months or longer. Our customers then complete the design, testing and evaluation process and begin to ramp up production, a period that may last an additional nine months or longer. As a result, a significant period of time may elapse between our research and development efforts and our realization of revenues, if any, from volume purchasing of our products by our customers.

The markets in which we participate are intensely competitive.

Many of our target markets are intensely competitive. Our ability to compete successfully in our target markets depends on the following factors:

 

   

proper new product definition;

 

   

product quality, reliability and performance;

 

   

product features;

 

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price;

 

   

timely delivery of products;

 

   

technical support and service;

 

   

design and introduction of new products;

 

   

market acceptance of our products and those of our customers; and

 

   

breadth of product line.

In addition, our competitors or customers may offer new products based on new technologies, industry standards or end-user or customer requirements, including products that have the potential to replace our products or provide lower cost or higher performance alternatives to our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable.

Our primary power semiconductor competitors include Fairchild Semiconductor, Fuji, Hitachi, Infineon, Microsemi, Mitsubishi, On Semiconductor, Powerex, Renesas Electronics, Semikron International, STMicroelectronics, Toshiba and Vishay Intertechnology. Our IC products compete principally with those of Atmel, Cypress Semiconductor, NXP Semiconductors, Microchip, NEC, Renesas Electronics and Silicon Labs. Our RF power semiconductor competitors include Microsemi and Qorvo. Many of our competitors have greater financial, technical, marketing and management resources than we have. Some of these competitors may be able to sell their products at prices at which it would be unprofitable for us to sell our products or benefit from established customer relationships that provide them with a competitive advantage. We cannot assure that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased price competition.

We rely on our distributors and sales representatives to sell many of our products.

Most of our products are sold to distributors or through sales representatives. Our distributors and sales representatives could reduce or discontinue sales of our products. They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we depend upon the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. These distributors and sales representatives, in turn, depend substantially on general economic conditions and conditions within the semiconductor industry. We believe that our success will continue to depend upon these distributors and sales representatives. Foreign distributors are typically granted longer payment terms, resulting in higher accounts receivable balances for a given level of sales than domestic distributors. Our risk of loss from the financial insolvency of distributors is, therefore, disproportionally weighted to foreign distributors. If any significant distributor or sales representative experiences financial difficulties, or otherwise becomes unable or unwilling to promote and sell our products, our business could be harmed. For example, All American Semiconductor, Inc., one of our former distributors, filed for bankruptcy in April 2007.

Our future success depends on the continued service of management and key engineering personnel and our ability to identify, hire and retain additional personnel.

Our success depends upon our ability to attract and retain highly skilled technical, managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of Nathan Zommer, Ph.D., our Chief Executive Officer, and other members of senior management. The loss of the services of one or more of our senior management or other key employees could adversely affect our business. We do not maintain key person life insurance on any of our officers, employees or consultants. There is intense competition for qualified employees in the semiconductor industry, particularly for highly skilled design, application and test engineers. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified individuals who could leave us at any time in the future. If we grow, we expect increased demands on our resources, and growth would likely require the addition of new management and engineering staff as well as the development of additional expertise by existing management. If we lose the services of or fail to recruit key engineers or other technical and management personnel, our business could be harmed.

Acquisitions, expansion, technological and administrative changes and software conversions and updates place a significant strain on our information systems.

Presently, because of our acquisitions, we are operating a number of different information systems that are not integrated, some of which are no longer supported by software vendors. As a consequence, we use spreadsheets, which are prepared by individuals rather than automated systems, in our accounting. In our accounting, we perform many manual reconciliations and other manual steps, which result in a high risk of errors. Manual steps also increase the possibility of control deficiencies and material weaknesses.

 

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If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage or grow our business may be harmed. Our ability to successfully implement our goals and comply with regulations, requires an effective planning and management system and process. We will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future.

In improving, consolidating, changing or updating our operational and financial systems, procedures and controls, we would expect to periodically implement new or different software and other systems that will affect our internal operations regionally or globally. The conversion process from one system to another is complex and could require, among other things, that data from the existing system be made compatible with the upgraded or different system.

In connection with any of the foregoing, we could experience errors, interruptions, delays, cessations of service and other inefficiencies, which could adversely affect our business. Any error, delay, disruption, interruption or cessation, including with respect to any new or different systems, software programs, procedures or controls, could harm our ability to forecast sales demand, manage our supply chain, achieve accuracy in the conversion of electronic data and record and report financial and management information on a timely and accurate basis. In addition, as we add or change functionality, transition or convert to different systems or programs or integrate additional data in connection with an acquisition, problems could arise that we have not foreseen. Such problems could adversely impact our ability to do the following in a timely manner: provide quotes; take customer orders; ship products; provide services and support to our customers; bill and track our customers; fulfill contractual obligations; and otherwise run our business. Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources, adversely affect our ability to manage our business, increase expenses, or adversely affect our results of operations, cash flows, stock price or reputation.

System security risks, data protection breaches and cyber-attacks could disrupt our operations and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation or adversely affect our stock price.

Computer programmers and hackers may be able to penetrate our security controls and misappropriate or compromise our intellectual property or other confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.

We manage and store proprietary information and sensitive or confidential data relating to our business and the businesses of third parties. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our partners or customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our partners and customers to a risk of loss or misuse of this information; result in regulatory investigations, fines, litigation and potential liability for us; damage our brand and reputation; or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant. Delayed sales, lower margins or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.

Regulations related to conflict minerals create additional compliance risks and force us to incur additional expenses.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of minerals originating from the conflict zones of the Democratic Republic of Congo, or DRC, and adjoining countries. As a result, the SEC established annual disclosure and reporting requirements for those companies who use “conflict” minerals mined from the DRC and adjoining countries in their products. These requirements could affect the sourcing and availability of minerals used in the manufacture of our products. As a result, we cannot ensure that we will be able to obtain minerals at competitive prices. Moreover, there are additional costs associated with complying with the extensive due diligence and audit procedures required by the SEC. In addition, we may face reputational challenges with our customers and other stakeholders as we have in the past and may in the future be unable to sufficiently verify the origins of all minerals used in our products. Finally, these rules bring implementation challenges. We may not successfully implement effective procedures to timely or adequately comply with these rules.

We depend on a limited number of suppliers for our substrates, most of whom we do not have long term agreements with.

We purchase the bulk of our silicon substrates from a limited number of vendors, most of whom we do not have long term supply agreements with. Any of these suppliers could reduce or terminate our supply of silicon substrates at any time. Our reliance on a limited number of suppliers involves several risks, including potential inability to obtain an adequate supply of silicon substrates and reduced control over the price, timely delivery, reliability and quality of the silicon substrates. We cannot assure that problems will not occur in the future with suppliers.

 

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Increasing raw material prices could impact our profitability.

Our products use large amounts of silicon, metals and other materials. From time to time, we have experienced price increases for many of these items. If we are unable to pass price increases for raw materials onto our customers, our gross margins and profitability could be adversely affected.

We may not be able to increase production capacity to meet the present and future demand for our products.

The semiconductor industry has been characterized by periodic limitations on production capacity. These limitations may result in longer lead times for product delivery than desired by many of our customers. If we are unable to increase our production capacity to meet future demand, some of our customers may seek other sources of supply, our future growth may be limited or our results of operations may be adversely affected.

We face the risk of financial exposure to product liability claims alleging that the use of products that incorporate our semiconductors resulted in adverse effects.

Approximately 9.7% of our net revenues for the fiscal year ended March 31, 2016 were derived from sales of products used in medical devices, such as defibrillators. Product liability risks may exist even for those medical devices that have received regulatory approval for commercial sale. We cannot be sure that the insurance that we maintain against product liability will be adequate to cover our losses. Any defects in our semiconductors used in these devices, or in any other product, could result in significant product liability costs to us.

Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies.

The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Significant Management Estimates” in Part I, Item 2 of this Form 10-Q). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations.

We are exposed to various risks related to the regulatory environment.

We are subject to various risks related to new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by legislative bodies and/or regulatory agencies in the countries in which we operate; disagreements or disputes between national or regional regulatory agencies; and the interpretation and application of laws, rules and regulations. If we are found by a court or regulatory agency not to be in compliance with applicable laws, rules or regulations, our business, financial condition and results of operations could be materially and adversely affected.

In addition, approximately 9.7% of our net revenues for the fiscal year ended March 31, 2016 were derived from the sale of products included in medical devices that are subject to extensive regulation by numerous governmental authorities in the United States and internationally, including the U.S. Food and Drug Administration, or FDA. The FDA and certain foreign regulatory authorities impose numerous requirements for medical device manufacturers to meet, including adherence to Good Manufacturing Practices, or GMP, regulations and similar regulations in other countries, which include testing, control and documentation requirements. Ongoing compliance with GMP and other applicable regulatory requirements is monitored through periodic inspections by federal and state agencies, including the FDA, and by comparable agencies in other countries. Our failure to comply with applicable regulatory requirements could prevent our products from being included in approved medical devices or result in damages or other compensation payable to medical device manufacturers.

Our business could also be harmed by delays in receiving or the failure to receive required approvals or clearances, the loss of obtained approvals or clearances or the failure to comply with existing or future regulatory requirements.

We invest in companies for strategic reasons and may not realize a return on our investments.

We make investments in companies to further our strategic objectives and support our key business initiatives. Such investments include investments in equity securities of public companies and investments in non-marketable equity securities of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies whose products or technologies may directly support a product or initiative. The success of these companies is dependent on product development, market acceptance, operational efficiency and other key business success factors. The private companies in which we

 

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invest may fail for operational reasons or because they may not be able to secure additional funding, obtain favorable investment terms for future financings or take advantage of liquidity events such as initial public offerings, mergers and private sales. If any of these private companies fail, we could lose all or part of our investment in that company. If we determine that an other-than-temporary decline in the fair value exists for the equity securities of the public and private companies in which we invest, we write down the investment to its fair value and recognize the related write-down as an investment loss. Furthermore, when the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may decide to dispose of the investment, even at a loss. Our investments in non-marketable equity securities of private companies are not liquid, and we may not be able to dispose of these investments on favorable terms or at all. The occurrence of any of these events could negatively affect our results of operations.

Our ability to access capital markets could be limited.

From time to time, we may need to access the capital markets to obtain long-term financing. Although we believe that we can continue to access the capital markets on acceptable terms and conditions, our flexibility with regard to long-term financing activity could be limited by our existing capital structure, our credit ratings and the health of the semiconductor industry. In addition, many of the factors that affect our ability to access the capital markets, such as the liquidity of the overall capital markets and the current state of the economy, are outside of our control. There can be no assurance that we will continue to have access to the capital markets on favorable terms.

Geopolitical instability, war, terrorist attacks and terrorist threats, and government responses thereto, may negatively affect all aspects of our operations, revenues, costs and stock price.

Any such event may disrupt our operations or those of our customers or suppliers. Our markets currently include South Korea, Taiwan, Russia and Israel, which are currently experiencing political instability. Additionally, we have accounting and administrative operations in the Philippines, an external foundry and some of our design and sales operations are located in South Korea and assembly subcontractors are located in Indonesia, the Philippines and South Korea.

Business interruptions may damage our facilities or those of our suppliers.

Our operations and those of our suppliers are vulnerable to interruption by fire, earthquake, flood and other natural disasters, as well as power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan and do not have backup generators. Our facilities in California are located near major earthquake faults and have experienced earthquakes in the past. For example, the March 2011 earthquake in Japan adversely affected the operations of some of our Japanese suppliers, which limited the availability of certain production inputs to us for a period of time. If a natural disaster occurs, our ability to conduct our operations could be seriously impaired, which could harm our business, financial condition and results of operations and cash flows. We cannot be sure that the insurance we maintain against general business interruptions will be adequate to cover all our losses.

We may be affected by environmental laws and regulations.

We are subject to a variety of laws, rules and regulations related to the use, storage, handling, discharge and disposal of certain chemicals and gases used in our manufacturing process. Any of those regulations could require us to acquire expensive equipment or to incur substantial other expenses to comply with them. If we incur substantial additional expenses, product costs could significantly increase. Failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations.

Nathan Zommer, Ph.D. owns a significant interest in our common stock.

Nathan Zommer, Ph.D., our Chief Executive Officer, beneficially owned, as of July 26, 2016, approximately 21.3% of the outstanding shares of our common stock. As a result, Dr. Zommer can exercise significant control over all matters requiring stockholder approval, including the election of the Board of Directors. His holdings could result in a delay of, or serve as a deterrent to, any change in control of our company, which may reduce the market price of our common stock.

Our stock price is volatile.

The market price of our common stock has fluctuated significantly to date. The future market price of our common stock may also fluctuate significantly in the event of:

 

   

variations in our actual or expected quarterly operating results;

 

   

announcements or introductions of new products;

 

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technological innovations by our competitors or development setbacks by us;

 

   

conditions in semiconductor markets;

 

   

the commencement or adverse outcome of litigation;

 

   

changes in analysts’ estimates of our performance or changes in analysts’ forecasts regarding our industry, competitors or customers;

 

   

announcements of merger or acquisition transactions or a failure to achieve the expected benefits of an acquisition as rapidly or to the extent anticipated by participants in the stock market;

 

   

terrorist attack or war;

 

   

sales of our common stock by one or more members of management, including Nathan Zommer, Ph.D., our Chief Executive Officer; or

 

   

general economic and market conditions.

In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, including semiconductor companies. These fluctuations have often been unrelated or disproportionate to the operating performance of companies in our industry, and could harm the market price of our common stock.

The anti-takeover provisions of our certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control.

Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control because the terms of any issued preferred stock could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction, without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders.

Our stockholders must give substantial advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action. The Delaware anti-takeover law restricts business combinations with some stockholders once the stockholder acquires 15% or more of our common stock. The Delaware statute makes it more difficult for us to be acquired without the consent of our Board of Directors and management.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

See the Index to Exhibits, which is incorporated by reference herein.

 

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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.

 

IXYS CORPORATION
By:    /s/ Uzi Sasson                                                          
 

Uzi Sasson, President and Chief Financial Officer

(Principal Financial Officer)

Date: August 2, 2016

 

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EXHIBIT INDEX

 

Exhibit
No.
  

Description

10.1

 

31.1

  

IXYS Corporation 2016 Equity Incentive Plan. (1)

 

Certificate of Chief Executive Officer required under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2    Certificate of Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification required under Section 906 of the Sarbanes-Oxley Act of 2002. (2)
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

(1) Management contract or compensatory plan or arrangement.
(2) This exhibit is furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1933, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities and Exchange Act of 1993, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

 

 

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