10-K 1 d737432d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

 

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

For the fiscal year ended March 31, 2014

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 of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

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)

Securities registered pursuant to Section 12(b) of the Act:

 

Common stock, par value $0.01 per share   The NASDAQ Global Select Market
(Title of each class)   (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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  þ    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  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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  þ    Non-accelerated Filer  ¨   Smaller reporting company  ¨
  (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ

The aggregate market value of the common stock held by non-affiliates of the registrant, computed by reference to the last sale price on the NASDAQ Global Select Market on September 30, 2013, was approximately $236,990,635. For purpose of this calculation, shares held or controlled by directors and executive officers have been excluded because they may be deemed to be “affiliates.” This determination is used for convenience and is not conclusive for any purpose. The number of shares of the registrant’s Common Stock outstanding as of May 23, 2014 was 31,356,319.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement relating to its Annual Meeting of Stockholders to follow its fiscal year ended March 31, 2014, to be filed subsequently — Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

IXYS CORPORATION

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED MARCH 31, 2014

TABLE OF CONTENTS

 

          Page  
   PART I   
Item 1.    Business      3   
Item 1A.    Risk Factors      12   
Item 1B.    Unresolved Staff Comments      27   
Item 2.    Properties      27   
Item 3.    Legal Proceedings      27   
Item 4.    Mine Safety Disclosures      28   
   Executive Officers of the Registrant      28   
   PART II   
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      28   
Item 6.    Selected Financial Data      30   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk      44   
Item 8.    Financial Statements and Supplementary Data      46   
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      88   
Item 9A.    Controls and Procedures      88   
Item 9B.    Other Information      90   
   PART III   
Item 10.    Directors, Executive Officers and Corporate Governance      90   
Item 11.    Executive Compensation      90   
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      90   
Item 13.    Certain Relationships and Related Transactions, and Director Independence      90   
Item 14.    Principal Accounting Fees and Services      90   
   PART IV   
Item 15.   

Exhibits and Financial Statement Schedules

     91   

 

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that include, but are not limited to, statements concerning projected revenues, expenses, gross profit and income and the need for additional capital. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by us. In some cases, these statements may be identified by terminology, such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of such terms and other comparable expressions. These statements involve known and unknown risks and uncertainties that may cause our results, levels of activity, performance or achievements or our industry to be materially different than those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, our ability to compete successfully in our industry, to continue to develop new products on a timely basis, cancellation of customer orders and other factors discussed below and under the caption “Risk Factors” in Item 1A. We disclaim any obligation to update any of the forward-looking statements contained in this report to reflect any future events or developments, except as may be required by law.

PART I

Item 1.    Business

We are a multi-market integrated semiconductor company. We specialize in the development, manufacture and marketing of high performance power semiconductors, advanced mixed-signal integrated circuits, or ICs, application specific integrated circuits, or ASICs, microcontrollers, 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.

Our power semiconductor products have historically been divided into two primary categories, power MOS, or metal-oxide-silicon, and power bipolar products. Our power semiconductors are sold as individual units and are also packaged in high power modules that frequently consist of multiple semiconductor die. In our fiscal year ended March 31, 2014, or fiscal 2014, power semiconductors constituted approximately 66.3% of our revenues, which included 25.5% of revenues from power MOS transistors and 39.1% of revenues from bipolar products. References to revenues in this Annual Report on Form 10-K constitute references to net revenues, except where the context otherwise requires.

Our power semiconductor products are used primarily to control electricity in:

 

   

power conversion systems, including uninterruptible power supplies, or UPS, and switch-mode power supplies, or SMPS, for applications, such as communications infrastructure, including wireless base stations, network servers and telecommunication switching stations;

 

   

motor drives for industrial applications, such as industrial transportation, robotics, automation and process control equipment;

 

   

medical electronics for sophisticated applications, such as defibrillators and MRI equipment; and

 

   

renewable energy sources, such as wind turbines and solar systems.

We design and sell ICs that have applications in telecommunications, display, power management, security systems and appliances. In fiscal 2014, ICs constituted approximately 27.1% of our revenues.

Our mixed-signal ICs are used in telecommunications products, central office switching equipment, customer premises equipment, set top boxes, remote meter reading equipment, security systems, advanced flat displays, medical electronics and defense aerospace systems. Our microcontroller semiconductor products are designed for a variety of applications, including consumer electronics, home appliances and security systems.

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.

 

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We also design and sell RF power semiconductors that switch electricity at the high rates required by circuitry that generates radio frequencies. Our RF power devices are used in wireless infrastructure, industrial RF applications, medical systems and defense and space electronics. In fiscal 2014, system and RF semiconductors constituted approximately 6.6% of our revenues.

We design our power semiconductor, IC and systems and RF semiconductor products primarily for industrial and business applications, rather than for use in consumer electronics.

In fiscal 2014, our products were used by over 2,500 end customers worldwide. Our major end customers include ABB, Boston Scientific, Emerson, Medtronic, Schneider Electric and Siemens.

We were founded in 1983 and are incorporated in the state of Delaware.

Background and Industry

The worldwide demand for electrical energy is currently increasing due to:

 

   

proliferation of technology-driven products that require electricity, including computers, telecommunications equipment and the infrastructure to support portable electronics;

 

   

increased use of electronic content in traditional products such as airplanes, automobiles and home appliances;

 

   

increased use of automation and electrical processes in industry and mass transit systems;

 

   

growth of the Internet and mobile telecommunications demand; and

 

   

penetration of technology into developing countries.

Not only is demand increasing, but the requirements for electricity are also changing. Electronic products in all markets are becoming increasingly sophisticated, offering more “intelligence” through the use of microprocessors and additional solid-state components. The increasing complexity of such products requires more precisely regulated power and greater power reliability. In addition, the increasing costs of electricity, coupled with governmental regulations and environmental concerns, have caused an increased demand for energy efficiency.

Power semiconductors are used to provide the precisely regulated power required by sophisticated electronic products and equipment and address the growing demand for energy efficiency. In most cases, power semiconductors:

 

   

convert, or “rectify,” alternating current, or AC, power delivered by electrical utilities to the direct current, or DC, power that is required by most electronic equipment;

 

   

convert DC power at a certain voltage level to DC power at a different voltage level to meet the specific voltage requirement for an application;

 

   

invert DC power to high frequency AC power to permit the processing of power through the use of substantially smaller electronic components; or

 

   

rectify high frequency AC power from switch-mode power supplies to meet the specific DC voltage and frequency required by an application.

Power semiconductors improve system efficiency and reliability by processing and converting electrical energy into more usable, higher quality power. Specifically, our power semiconductors are used primarily in controlling energy in power conversion systems, including switch-mode power supplies and uninterruptible power supplies, and in motor drive controls. Switch-mode power supplies efficiently convert power to meet the specific voltage requirements of an application, such as communications equipment. Uninterruptible power supplies provide a short-term backup of electricity in the event of power failure. Motor drive controls regulate the voltage, current and frequency of power to a motor.

With the growth in telecommunications, data communications and wireless communications, the demand for analog and mixed-signal ICs and RF power semiconductors has grown. Our mixed-signal ICs address the interface between telecommunication and data communication components, both in the central office and in

 

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gateway applications, especially with the increased use of the Internet protocol, or IP. Our microcontrollers are used to control electronic devices such as motors and user interfaces on appliances. Our RF power semiconductors are used in wireless infrastructure and in other microwave communication applications. Technical advancement in the communication industries is expected, in part, to drive the demand for higher performance semiconductors.

Power Semiconductors

Our power semiconductor products have historically been divided into two primary categories: power MOS transistors and bipolar products. Our power semiconductors are sold separately and are also packaged in high power modules that frequently consist of multiple semiconductor dies. In fiscal 2014, power semiconductors constituted approximately 66.3% of our revenues, which included about 25.5% of revenues from power MOS transistors and about 39.1% of revenues from bipolar products. In fiscal year ended March 31, 2013, or fiscal 2013, power semiconductors constituted approximately 71.8% of our revenues, which included about 25.4% of revenues from power MOS transistors and about 44.8% of revenues from bipolar products. In fiscal year ended March 31, 2012, or fiscal 2012, power semiconductors constituted approximately 75.5% of our revenues, which included about 26.1% of revenues from power MOS transistors and about 47.2% of revenues from bipolar products.

Power MOS Transistors.

Power MOS transistors operate at much greater switching speeds than bipolar transistors, allowing the design of smaller and less costly end products. Power MOS transistors are activated by voltage rather than current, so they require less external circuitry to operate, making them more compatible with IC controls. Power MOS transistors also offer more reliable long term performance and are more rugged than traditional bipolar transistors, permitting them to better withstand adverse operating conditions. Our power MOS transistors consist of power MOSFETs and IGBTs.

 

   

Power MOSFETs. A power MOSFET, or metal-oxide-silicon field-effect transistor, is a switch controlled by voltage at the gate. Power MOSFETs are used in combination with passive components to vary the amperage and frequency of electricity by switching on and off at high frequency. Our power MOSFETs are used primarily in power conversion systems and are focused on higher voltage applications ranging from 40 to 1,700 volts.

 

   

IGBTs. IGBTs, or insulated-gate bipolar transistors, also are used as switches. IGBTs have achieved many of the advantages of power MOSFETs and of traditional bipolar technology by combining the voltage-controlled switching features of power MOSFETs with the superior conductivity and energy efficiency of bipolar transistors. For a given semiconductor die size, IGBTs can operate at higher currents and voltages, making them more cost-effective devices for high energy applications than power MOSFETs. Since our inception, we have developed IGBTs for high voltage applications. Our current products are focused on voltage applications ranging from 300 volts to 4,500 volts. Our IGBTs are used principally in AC motor drives, power systems and defibrillators.

Bipolar Products.

Bipolar products are also used to process electricity, but are activated by current rather than voltage. Bipolar products are capable of switching electricity at substantially higher power levels than power MOS transistors. However, switching speeds of bipolar products are slower than those of power MOS transistors and, as a result, bipolar products are preferred where very high power is required. Our bipolar products consist of rectifiers and thyristors.

 

   

Rectifiers.    Rectifiers convert AC power to DC power and are used primarily in input and output rectification and inverters. Our rectifiers are used in DC and AC motor drives, power supplies, lighting and heating controls and welding equipment. A subset of our rectifier product group is a very fast switching device known as a FRED, or fast recovery epitaxial diode. FREDs limit spikes in voltage across the power switch to reduce power dissipation and electromagnetic interference. Our FREDs are used principally in AC motor drives and power supplies.

 

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Thyristors.    Thyristors are switches that can be turned on by a controlled signal and turned off only when the output current is reduced to zero, which occurs in the flow of AC power. Thyristors are preferred over power MOSFETs and IGBTs in high voltage, low frequency AC applications because their on-state resistance is lower than the on-state resistance of power MOSFETs and IGBTs. Our thyristors are used in motor drives, defibrillators, power supplies, lighting and heating controls.

Integrated Circuits

Our integrated circuits address the demand for analog, mixed-signal and digital interface solutions in communication and other industries and include mixed-signal application specific ICs, as designed for specific customers and as standard products, power management and control ICs and microcontrollers. ICs accounted for 27.1% of our revenues in fiscal 2014, 20.7% of our revenues in fiscal 2013 and 17.3% of our revenues in fiscal 2012.

Solid-State Relays.

We manufacture solid-state relays, or SSRs, that isolate the low current communication signal from the higher power circuit, while also switching to control the flow of current. Our SSRs, which include high voltage analog components, optocouplers and integrated packages, are utilized principally in telecommunication and video and data communication applications, as well as instrumentation, industrial control and aerospace and automotive applications.

LCAS and DAA integrated products.

A line card access switch, or LCAS, is a solid-state solution for a switching function traditionally performed by electromagnetic devices. Our LCAS products are used in central office switching applications to enable data and voice telephony. Data access arrangements, or DAAs, integrate a number of discrete components and are principally used in analog data communications that interface with telephone network applications. Our Litelink® products are DAAs for applications such as voice-over IP, wired communication lines and set top boxes.

Application Specific Integrated Circuits.

We design high voltage, analog and mixed-signal ASICs for a variety of applications. Applying our technological expertise in ASICs, we also design and sell application specific standard products. In this regard, we have developed a line of source and gate drivers.

Power Management and Control ICs.

We also make and sell power management and control ICs, such as current regulators, motion controllers, digital power modulators and drivers for power MOSFETs and IGBTs. These ICs typically manage, control or regulate power semiconductors and the circuits and subassemblies that incorporate them.

Microcontrollers.

A microcontroller is a computer-on-a-chip that is optimized to control electronic devices, such as motors and user interfaces on appliances. A microcontroller typically includes a central processing unit, non-volatile program memory, random access memory for data storage and various peripheral capabilities. The microcontroller includes application-specific software provided by the customer and may include specialized peripheral device controllers and internal or external non-volatile memory components to enable the storage and access of additional program software.

Microcontroller devices have been incorporated into a wide variety of products in markets including consumer electronics, home appliances and security systems. Microcontrollers are generally segmented by word length, which is measured in bits ranging from 4-bit through 32-bit architectures. Although 4-bit microcontrollers are relatively inexpensive, they generally lack the minimum performance and features required for product differentiation and are typically used only to produce basic functionality in products. While traditional 16-bit and 32-bit architectures are typically higher performance, they can be too expensive for many high volume embedded

 

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control applications. Our microcontroller product lines are focused on 8-bit microcontrollers. Manufacturers will choose the appropriate microcontrollers based on cost, performance and functionality requirements.

RF Power Semiconductors

Our RF power devices switch electricity at the high rates necessary to enable the amplification or reception of radio frequencies. Our products include field-effect transistors, or FETs, pseudomorphic-high-electron-mobility transistors, or PHEMTs, and Gunn diodes. These products are principally gallium arsenide devices, which remain efficient at the high heat and energy levels inherent in RF applications.

Systems and Other Products

We manufacture and sell laser diode drivers, high voltage pulse generators and modulators, and high power subsystems, sometimes known as modules or stacks, that are principally based on our high power semiconductor devices. Additionally, we sell our proprietary direct copper bond, or DCB, substrates for use in our own semiconductor products as well as for sale to a variety of customers, including those in the power semiconductor industry. DCB technology cost-effectively provides excellent thermal transfer while maintaining high electrical isolation.

Products and Applications

Our power semiconductors are used primarily to control electricity in power conversion systems, motor drives and medical electronics. Our ICs are used to interface with telecommunication lines, control power semiconductors and drive medical equipment and displays, as well as offer our customers the ability to integrate peripheral functions such as network connectivity, timers, serial communication, analog-to-digital conversion and display drivers on our micrologic devices. Our RF power semiconductors enable the amplification and reception of radio frequencies in telecommunication, industrial, defense and space applications. The following table summarizes the primary categories of uses for our products, some products used within the categories and some of the applications served within the categories:

 

Category

  

Our Products

  

End User Applications

Power Conversion Systems

   FRED    SMPS and UPS for:
   IGBT        Wireless base stations
   Module        Internet facilities
   MOSFET        Storage area networks
   Thyristor        RF generators
   Rectifier    Renewable energy systems
   IC Driver    Low-power controllers
   Embedded flash microcontroller    Industrial controllers
   8-bit microcontroller    Battery chargers

Motor Drives

   FRED    Automation
   IGBT    Robotics
   Module    Process control equipment
   MOSFET    Machine tools
   Thyristor    Electric trains
   IC driver   
   Solid state relay   

Medical Electronics

   IGBT    Defibrillators
   MOSFET    Medical imaging devices
   Thyristor    Laser power supplies
   IC    Ultrasound
   GaAs FET   

 

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Category

  

Our Products

  

End User Applications

Telecommunications

   SSR    Point-of-sale terminals
   MOSFET    Modems
   LCAS    Set top boxes
   GaAs FET    Wireless base stations
   DAA    Central office
   8-bit microcontroller    Security systems
   Serial communication controller    Telephone switches/PBX

Consumer Products

   Display driver IC    Cell phones
   8-bit microcontroller    Appliances
   Embedded flash microcontroller    Displays

We also sell our power semiconductor chips and DCB substrates to other power semiconductor companies for use in their modules.

Sales and Marketing

We sell our products through a worldwide selling organization that includes direct sales personnel, independent representatives and distributors. As of March 31, 2014, we employed 72 people in sales, marketing and customer support and used 30 sales representative organizations and 12 distributors in the Americas and 137 sales representative organizations and distributors in the rest of the world. Sales to distributors accounted for approximately 56.8% of net revenues in fiscal 2014, 57.4% of net revenues in fiscal 2013 and 56.3% of net revenues in fiscal 2012. One distributor, Allied Group (Hong Kong), accounted for 10.8%, 10.3% and 11.3% of net revenues in fiscal 2014, 2013 and 2012, respectively. Another distributor, Future Electronics, accounted for 13.2% and 11.1% of net revenues in fiscal 2013 and 2012, respectively.

In fiscal 2014, United States sales represented approximately 26.7%, and international sales represented approximately 73.3%, of our net revenues. Of our international sales in fiscal 2014, approximately 40.2% were derived from sales in Europe and the Middle East, approximately 55.0% were derived from sales in Asia and approximately 4.8% were derived from sales in Canada and the rest of the world. For financial information about geographic areas for each of our last three fiscal years, see Note 15, “Segment and Geographic Information” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, which information is incorporated by reference into this Item 1. For a discussion of the risks attendant to our foreign operations, see Item 1A, “Risk Factors-Our international operations expose us to material risks,” which information is incorporated by reference into this Item 1.

We market our products through advertisements, technical articles and press releases that appear regularly in a variety of trade publications, as well as through the dissemination of brochures, data sheets and technical manuals. We also have a presence on the Internet through a worldwide web page that enables engineers to access and download technical information and data sheets.

Research and Development

We believe that we successfully compete in our markets, in part because of our ability to design, develop and introduce new products offering technological improvements to the market on a timely basis. While the time from initiation of design to volume production of new semiconductors often takes 18 months or longer, our power semiconductors typically have a product life of several years. Our research and development expenses were approximately $30.9 million in fiscal 2014, $28.0 million in fiscal 2013 and $28.8 million in fiscal 2012. As of March 31, 2014, we employed 143 people in engineering and research and development activities.

We are engaged in ongoing research and development efforts focused on enhancements to existing products and the development of new products. Currently, we are pursuing research and development projects with respect to:

 

   

developing new power semiconductors and ICs for medical applications;

 

   

increasing the operating range of our MOS and bipolar products;

 

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increasing the operating range of our power diodes and rectifier products;

 

   

developing new gallium arsenide and gallium nitride amplifiers and MMICs;

 

   

developing new high voltage LED drivers;

 

   

developing higher power IGBT, thyristor and rectifier modules;

 

   

developing hybrids and modules with silicon carbide devices;

 

   

developing power solid-state relays;

 

   

developing high voltage integrated circuits, or HVICs, and optically isolated drivers for power management;

 

   

developing high current MOSFETs and IGBTs for power supplies, UPS, generators, automotive and portable equipment markets;

 

   

developing module products for automotive markets;

 

   

developing module products for electric trains, solar inverters and wind power generators;

 

   

developing stacks and subsystems for renewable energy markets;

 

   

developing ICs for telecommunications and flexible displays;

 

   

developing solar-powered battery charging devices, products and circuits; and

 

   

developing 8-bit and 16-bit embedded flash-based microcontrollers.

Research and development activities are conducted in collaboration with manufacturing activities to help expedite new products from the development phase to manufacturing and to more quickly implement new process technologies. From time to time, our research and development efforts have included participation in technology collaborations with universities and research institutions.

Patents and Other Intellectual Property Rights

As of March 31, 2014, we held 383 issued patents, of which 287 were issued in the U.S. and 96 were issued in international jurisdictions. We rely on a combination of patent rights, copyrights and trade secrets to protect the proprietary elements of our products. Our policy is to file patent applications to protect technology, inventions and improvements that are important to our business. We also seek to protect our trade secrets and proprietary technology, in part through confidentiality agreements with employees, consultants and other parties. While we believe that our intellectual property rights are valuable, we also believe that other factors, such as innovative skills, technical expertise, the ability to adapt quickly to evolving customer requirements and new technologies, product support and customer relations, are of greater competitive significance.

Manufacturing and Facilities

The production of our products is a highly complex and precise process. We manufacture our products in our own manufacturing facilities, utilize external wafer foundries and subcontract assembly facilities. We divide our manufacturing operations into three key areas: wafer fabrication, assembly and test.

Wafer Fabrication.

The first step in our manufacturing process for our power semiconductors is the deposition of a layer of epitaxy on the substrates we purchase from third parties. This deposition occurs at external facilities and at our facility in Santa Clara, California. The substrates are then sent for fabrication.

We have four facilities which perform fabrication. We own an approximately 170,000 square-foot facility in Lampertheim, Germany, where we fabricate bipolar products, and an approximately 83,000 square-foot facility in Beverly, Massachusetts, capable of manufacturing HVICs. We also lease an approximately 30,000 square-foot facility in Fremont, California, where we manufacture gallium arsenide RF power semiconductors, and an approximately 100,000 square-foot facility in Chippenham, England, where we fabricate very high power bipolar

 

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devices. We believe that our internal fabrication capabilities enable us to more quickly bring products to the market, retain certain proprietary aspects of our process technology and develop new innovations.

In addition to maintaining our own fabrication facilities, we have established alliances with selected foundries for wafer fabrication. This approach allows us to reduce substantial capital spending and manufacturing overhead expenses, obtain competitive pricing and technologies and expand manufacturing capacity more rapidly than could be achieved with internal foundries alone. In some cases, we retain the flexibility to shift the production of our products to different or additional foundries for cost or performance reasons. Our product designs enable the production of our devices at multiple foundries using well-established and cost-effective processes.

Measured in dollars, we relied on external foundries for approximately 43.6% of our wafer fabrication requirements in fiscal 2014. We have arrangements with a number of external wafer foundries, both for power semiconductors and ICs. We provide our foundries forecasts for wafer fabrication six months in advance and make firm purchase commitments one to two months in advance of delivery.

Wafer fabrication of power semiconductors generally employs process technology and equipment already proven in IC manufacturing. Power semiconductors are manufactured using fabrication equipment that is one or more generations behind the equipment used to fabricate leading-edge ICs. Used fabrication equipment can be obtained at prices substantially less than the original cost of such equipment or the cost of current equipment applying the latest technology. Consequently, the fabrication of power semiconductors is less capital intensive than the fabrication of leading-edge ICs.

For a discussion of risks attendant to our use of external foundries, see “Risk Factors-We depend on external foundries to manufacture many of our products,” provided in Item 1A of this Annual Report on Form 10-K, which information is incorporated by reference into this Item 1. For a discussion of risks attendant to our acquisition of substrates prior to wafer fabrication, see “Risk Factors-We depend upon a limited number of suppliers for our substrates, most of whom we do not have long term agreements with,” provided in Item 1A of this Annual Report on Form 10-K, which information is incorporated by reference into this Item 1. For a discussion of environmental risks attendant to our business, see “Risk Factors-We may be affected by environmental laws and regulations,” provided in Item 1A of this Annual Report on Form 10-K, which information is incorporated by reference into this Item 1.

Assembly.

Packaging, or assembly, refers to the sequence of production steps that divide the wafer into individual chips and enclose the chips in external structures, called packages, which make them useable in a circuit. Manufacturing typically involves the assembly and packaging of single semiconductor, or die, devices. Module manufacturing involves the assembly of multiple devices within a single package. SSR products involve multiple chip assembly on a specialized lead frame. The resulting packages vary in configuration, but all have leads that are used to mount the package through holes in the customer’s printed circuit boards.

Most of our wafers are sent to subcontract assembly facilities. We use assembly subcontractors located in Asia and Europe in order to take advantage of low assembly costs. Measured in dollars, approximately 69.0% of our products were, during fiscal 2014, assembled at external assembly facilities, and the rest were assembled in our Lampertheim, Chippenham and Fremont facilities.

Test.

Generally, each die on our wafers is electrically tested for performance after wafer fabrication. Following assembly, our products undergo testing and final inspection, either internally or externally, prior to shipment to customers. Our test operations are performed by subcontractors located throughout Asia and at our facilities in the United States and Europe.

 

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Competition

The semiconductor industry is intensely competitive and is characterized by price competition, technological change, limited fabrication capacity, international competition and manufacturing yield problems. The competitive factors in the market for our products include:

 

   

price;

 

   

proper new product definition;

 

   

product quality, reliability and performance;

 

   

product features;

 

   

timely delivery of products;

 

   

breadth of product line;

 

   

design and introduction of new products;

 

   

market acceptance of our products and those of our customers;

 

   

support tools;

 

   

familiarity with micrologic architecture;

 

   

existing customer investment in system software based on a particular architecture; and

 

   

technical support and service.

Regarding these factors, we view our competitive advantage as an ability to respond quickly to customer requests for new product development. On the other hand, we rarely consider our company to be among the most aggressive in pricing. We believe that we are one of a limited group of companies focused on the development and marketing of high power, high performance semiconductors capable of performing all of the basic functions of power semiconductor design and manufacture. Our primary power semiconductor competitors include Fairchild Semiconductor, Fuji, Hitachi, Infineon, International Rectifier, 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, Freescale Semiconductor, Microchip, NEC, Renesas Electronics, Silicon Labs and Supertex. Our RF power semiconductor competitors include Microsemi and RF Micro Devices.

Backlog

Backlog is influenced by several factors including market demand, pricing and customer order patterns in reaction to product lead times. In the semiconductor industry, backlog quantities and shipment schedules under outstanding purchase orders are frequently revised to reflect changes in customer needs. Purchase orders or agreements calling for the sale of specific quantities are either contractually subject to quantity revisions or, as a matter of industry practice, often not enforced. Therefore, a significant portion of our order backlog may be cancelable. For these reasons, the amount of backlog as of any particular date may not be an accurate indicator of future results. At March 31, 2014, our backlog of orders was approximately $101.7 million, as compared to $81.7 million at March 31, 2013. Backlog represents existing customer orders that, by their terms, are expected to be shipped within the 12 months following March 31, 2014.

Our trade sales are made primarily pursuant to standard purchase orders that are booked months in advance of delivery. Generally, prices and quantities are fixed at the time of booking.

We sell products to key customers pursuant to contracts that allow us to schedule production capacity in advance and allow the customers to manage their inventory levels consistent with just-in-time principles while shortening the cycle times required to produce ordered product. However, these contracts are typically amended to reflect changes in customer demand and periodic price renegotiations.

 

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Employees

At March 31, 2014, we employed 1,016 employees, of whom 143 were primarily engaged in engineering and research and development activities, 72 in marketing, sales and customer support, 724 in manufacturing and 77 in administration and finance. Of these employees, 209 hold engineering or science degrees, including 28 Ph.D.s. Certain employees at our Lampertheim and Chippenham facilities are subject to collective bargaining agreements. There have been no work stoppages at any of our facilities to date. We believe that our employee relations are good.

Seasonality

Over the years, we have experienced a pattern, although not consistently, in our September and December quarters of reduced revenues or reduced growth in revenues from quarter to sequential quarter because of summer vacation and year-end holiday schedules in our and our customers’ facilities, particularly in our European operations.

Available Information

We currently make available, through our website at http://www.ixys.com, free of charge, copies of our Annual Report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after submitting the information to the Securities and Exchange Commission, or SEC. None of the information posted on or accessible through our website is incorporated by reference into this Annual Report on Form 10-K by virtue thereof. You can also request free copies of such documents by contacting us at 408-457-9000 or by sending an e-mail to investorrelations@ixys.net.

 

Item 1A.    Risk Factors

In addition to the other information in this Annual Report on Form 10-K, 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 2005 to fiscal 2006 and 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 consumer and business confidence caused by changes in market conditions, potentially including changes in the credit markets, or changes in 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;

 

   

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

 

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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;

 

   

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 fiscal 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 Annual Report on Form 10-K, 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.

In fiscal 2014, we completed the acquisition of a 4-bit and 8-bit microcontroller product line. Further, 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;

 

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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;

 

   

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

 

   

assumption of known or unknown liabilities or other unanticipated events or circumstances.

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, 2014, our net revenues by region were approximately 26.7% in the United States, approximately 29.4% in Europe and the Middle East, approximately 40.3% in the Asia Pacific region and approximately 3.6% in Canada and the rest of the world. We expect revenues from foreign markets to continue to represent a majority of total net revenues. We maintain significant business operations in Germany, the United Kingdom and the Philippines 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;

 

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changes in the laws, regulations or policies of the countries in which we manufacture or sell our products;

 

   

trade restrictions;

 

   

cultural and language differences;

 

   

employment regulations;

 

   

limited infrastructure in emerging markets;

 

   

transportation delays;

 

   

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. Increases 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. 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. Conversely, actions in emerging markets, such as China, to limit inflation or to address asset or other “bubbles” 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 of certain foreign countries may not protect our products or intellectual property rights to the same extent as do U.S. laws regarding the manufacture and sale of our products in the U.S. Therefore, the risk of piracy of our technology and products may be greater when we manufacture or sell our products in these 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;

 

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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.

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 experienced 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, 2014, 43.6% came from wafers manufactured for us by external foundries. Our dependence on external foundries may grow. We currently have arrangements with a number of wafer foundries. The wafers for many of our semiconductors are fabricated at external foundries. In particular, the wafers for all of our microcontrollers are fabricated at external foundries.

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. 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

 

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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.

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. For example, additional inventory write-downs occurred in the quarter ended March 31, 2009.

 

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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. The proportion of our revenue that comes from the sale of semiconductors intended for use in consumer products has increased substantially in recent periods.

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 the 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.

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 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.

Approximately 28.9% of our total consolidated net sales for the fiscal year ended March 31, 2014 were derived from Europe. There have been continuing concerns and uncertainties about the state of the European economies and Europe’s political institutions. Continued difficult or declining economic conditions in Europe may adversely affect our operations in Europe by adversely affecting our European customers and vendors in the ways described above. Additionally, the inability of Europe’s political institutions to deal effectively with actual or perceived currency or budget crises could increase economic uncertainty in Europe, and globally, and may have an adverse effect on our customers’ cash flow or operating performance. Further, debt or budget crises in European countries may lead to reductions in government spending in certain countries or higher income or corporate taxes, which could depress spending overall. Our results of operations and financial condition could be adversely affected by any of these events.

 

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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

 

   

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.

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.

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 noncompetitive. 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 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.

 

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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;

 

   

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, International Rectifier, 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, Freescale Semiconductor, Microchip, NEC, Renesas Electronics, Silicon Labs and Supertex. Our RF power semiconductor competitors include Microsemi and RF Micro Devices. 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. In connection with the acquisition of a 4-bit and 8-bit microcontroller business during fiscal 2014, we acquired a new set of distributor and sales representative relationships, some of which may be challenging to maintain at the same level of productivity. 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.

 

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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 employees. 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. In part because of this, 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.

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 internal 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 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

 

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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 or the individuals affected to a risk of loss or misuse of this information, result in 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.

New regulations related to conflict minerals will 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 new annual disclosure and reporting requirements for those companies who use “conflict” minerals mined from the DRC and adjoining countries in their products. These new 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 will be 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 been in the past and may in the future be unable to sufficiently verify the origins of all minerals used in our products. Finally, new 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.

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.

 

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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;

 

   

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.

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 9.9% of our net revenues for the fiscal year ended March 31, 2014 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.

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, future cash flows and slower growth rates in our industry. In fiscal 2012, we recorded a goodwill impairment charge of $6.4 million, based on our estimates of the future operating results and discounted cash flows of the Zilog reporting unit.

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 II, Item 7 of this Form 10-K). 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 9.9% of our net revenues for the fiscal year ended March 31, 2014 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

 

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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 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 and Israel, which are currently experiencing political instability. Additionally, we have accounting operations in the Philippines, an external foundry is 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

 

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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 in the United States, England and Germany 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 May 23, 2014, approximately 21.4% 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;

 

   

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

 

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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 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Our principal facilities are described below:

 

Principal Facilities

   Approximate
Square
Footage
     Lease Expiration  

Use

Aliso Viejo, California

     27,000       (1)   Research and development, sales and distribution

Beverly, Massachusetts

     83,000       (1)   Research and development, manufacturing, sales and distribution

Chippenham, England

     100,000      December 2022   Research and development, manufacturing, sales and distribution

Fremont, California

     30,000      November 2014   Research and development, manufacturing, sales and distribution

Lampertheim, Germany

     170,000       (1)   Research and development, manufacturing, sales and distribution

Manila, Philippines

     43,000      August 2016   Product testing and global support

Milpitas, California

     51,000       (1)   Corporate headquarters, research and development, sales and distribution

Santa Clara, California

     21,000       (1)   Manufacturing

 

(1) Owned, not leased.

We believe that our current facilities are suitable to our needs and will be adequate through at least fiscal year 2015 and that suitable additional or replacement space will be available in the future as needed on commercially reasonable terms. The Lampertheim property serves as collateral for a loan, and is subject to a security interest.

Item 3.    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.

 

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Item 4.    Mine Safety Disclosures

Not Applicable.

Executive Officers of the Registrant

The executive officers, their ages and positions at our company, as well as certain biographical information of these individuals, are set forth below. The ages of the individuals are provided as of March 31, 2014.

 

Name

   Age   

Position(s)

Nathan Zommer

   66    Chairman of the Board and Chief Executive Officer

Uzi Sasson

   51    President, Chief Financial Officer and Secretary

There are no family relationships among our directors and executive officers.

Nathan Zommer.    Dr. Zommer, our founder, has served as a Director since our inception in 1983, and has served as Chairman of the Board and Chief Executive Officer since 1993. From 1993 to 2009, Dr. Zommer served as our President and, from 1984 to 1993, Dr. Zommer served as our Executive Vice President. Prior to founding our company, Dr. Zommer served in a variety of positions with Intersil, Hewlett-Packard and General Electric, including as a scientist in the Hewlett-Packard Laboratories and Director of the Power MOS Division for Intersil/General Electric. Dr. Zommer received his B.S. and M.S. degrees in Physical Chemistry from Tel Aviv University and a Ph.D. in Electrical Engineering from Carnegie Mellon University.

Uzi Sasson.    Mr. Sasson has served as our President since December 2009 and our Chief Financial Officer and Secretary since November 2004. From November 2004 to December 2009, Mr. Sasson was our Vice President and, from June 2007 to August 2010, Mr. Sasson held the title of Chief Operating Officer. Although he no longer formally holds that title, he continues to function in that role. From August to November 2004, Mr. Sasson served as a Director of our company. Prior to joining our company, Mr. Sasson worked in tax, accounting and finance for technology and accounting firms. Mr. Sasson has a Master of Science in Taxation and a Bachelor of Science in Accounting from Golden Gate University and is a Certified Public Accountant in California.

PART II

 

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Select Market under the symbol “IXYS.” The following table presents, for the periods indicated, the intraday high and low sale prices per share of our common stock as reported by the NASDAQ Global Select Market:

 

     First Quarter      Second Quarter      Third Quarter      Fourth Quarter  

Fiscal Year Ended March 31, 2014

           

High

   $ 12.04      $ 12.45      $ 13.14      $ 14.95  

Low

   $ 8.75      $ 9.09      $ 9.55      $ 10.76  

Fiscal Year Ended March 31, 2013

           

High

   $ 13.44      $ 11.25      $ 10.19      $ 10.67  

Low

   $ 9.91      $ 8.48      $ 7.91      $ 9.24  

The number of record holders of our common stock as of May 23, 2014 was 292. During fiscal 2014 and for the last two quarters of fiscal 2013, we paid a quarterly cash dividend of $0.03 per share. The quarterly dividend is at the discretion of the Board of Directors.

 

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Stock Performance Graph

The line graph below shows the total stockholder return of an investment of $100 in cash for the period from March 31, 2009 through March 31, 2014 for (i) our common stock, (ii) the NASDAQ Composite Index and (iii) the Standard & Poor’s Semiconductors Index. All values assume reinvestment of the full amount of all dividends and are calculated as of March 31 of each year. Historical stock price performance should not be relied upon as indicative of future stock price performance.

 

LOGO

Issuer Purchases of Equity Securities

 

Period

  (a) Total
Number of
Shares
Purchased
    (b) Average
Price Paid
per Share
    (c) Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
    (d) Maximum Number (or
Approximate Dollar
Value) of Shares that May
Yet Be Purchased Under
the Plans or Programs(1)
 

January 1, 2014 – January 31, 2014

                         614,390   

February 1, 2014 – February 28, 2014

                         614,390   

March 1, 2014 – March 31, 2014

    10,000      $ 10.89        10,000        604,390   
 

 

 

   

 

 

   

 

 

   

Total

    10,000      $ 10.89        10,000     
 

 

 

   

 

 

   

 

 

   

 

(1) On August 24, 2012, our Board of Directors authorized a program to repurchase up to 1,000,000 shares of our common stock.

 

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Item 6.    Selected Financial Data

The following selected consolidated financial information should be read in conjunction with our consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended March 31, 2014, 2013 and 2012, and the balance sheet data as of March 31, 2014 and 2013 are derived from our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The statements of operations data for the years ended March 31, 2011 and 2010 and the balance sheet data as of March 31, 2012, 2011 and 2010 are derived from our consolidated financial statements that are not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of results to be expected in any future period.

 

    Years Ended March 31,  
    2014(1)     2013     2012     2011     2010(2)  
    (In thousands, except per share amounts)  

Statement of Operations Data:

         

Net revenues

  $ 336,330     $ 280,014     $ 368,004     $ 363,273     $ 243,224  

Cost of goods sold

    236,120       195,134       248,760       241,526       180,082  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    100,210       84,880       119,244       121,747       63,142  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Research, development and engineering

    30,884       28,022       28,847       28,177       20,776  

Selling, general and administrative

    41,983       39,287       42,063       41,880       35,208  

Amortization of acquisition-related intangible assets

    10,521       2,244       2,524       6,937       1,839  

Restructuring charges

                      759       1,614  

Impairment charges

                6,448       702        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    83,388       69,553       79,882       78,455       59,437  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    16,822       15,327       39,362       43,292       3,705  

Other expense:

       

Interest expense, net

    (1,422     (604     (762     (1,228     (1,230

Other income (expense)

    (1,941     (41     1,941       836       (141
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

    13,459       14,682       40,541       42,900       2,334  

Provision for income tax

    (7,413     (7,034     (10,235     (6,253     (3,011
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 6,046     $ 7,648     $ 30,306     $ 36,647     $ (677
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share — basic

  $ 0.19     $ 0.25     $ 0.97     $ 1.17     $ (0.02 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share — diluted

  $ 0.19     $ 0.24     $ 0.93     $ 1.14     $ (0.02 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends per share

  $ 0.12     $ 0.06     $     $     $  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in per share calculations

       

Basic

    31,146       31,025       31,344       31,235       31,005  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    31,916       31,695       32,496       32,008       31,005  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During fiscal 2014, we acquired a microcontroller product line from Samsung Electronics Co., Ltd.

 

(2) During fiscal 2010, we acquired Zilog, Inc. and a display driver product line from Leadis Technology, Inc.

 

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     As of March 31,  
     2014(1)     2013     2012     2011     2010(2)  
     (In thousands)  

Selected operating data:

          

Gross profit margin

     29.8     30.3     32.4     33.5     26.0

Depreciation and amortization

   $ 21,274     $ 12,492     $ 13,467     $ 18,059     $ 13,386  

Balance sheet data:

          

Cash and cash equivalents

   $ 98,438     $ 107,116     $ 98,604     $ 75,406     $ 60,524  

Working capital

     185,659       195,278       208,138       181,963       135,280  

Total assets

     383,182       333,476       343,910       325,189       285,939  

Total long term obligations

     43,204       31,640       48,784       51,918       48,122  

Total stockholders’ equity

     270,632       253,608       254,107       229,229       183,135  

Cash flow data:

          

Cash provided by operating activities

   $ 19,329     $ 31,637     $ 44,446     $ 33,867     $ 29,166  

Cash (used in) investing activities

     (27,134     (11,082     (12,375     (8,941     (36,256

Cash (used in) provided by financing activities

     (3,344     (10,856     (7,707     (11,401     11,775  

 

(1) During fiscal 2014, we acquired a microcontroller product line from Samsung Electronics Co., Ltd.

 

(2) During fiscal 2010, we acquired Zilog, Inc. and a display driver product line from Leadis Technology, Inc.

Item 7.    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-K and, in particular, in Item 1A 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; and systems and 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 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 microcontrollers provide application specific, embedded system-on-chip, or SoC, solutions for the industrial and consumer markets.

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.

During fiscal 2014, our revenues increased by 20.1% from fiscal 2013. While the acquisition of a 4-bit and 8-bit microcontroller product line, or the Acquired MCU Business, from the Samsung Electronics Co., Ltd. boosted our IC sales to the consumer products market in the Asia Pacific area, we experienced growth in sales to our major country markets, except the United Kingdom, and major application markets from year to year. Gross profit margin decreased during fiscal 2014 primarily due to changes in product mix towards the lower-margin consumer products market. From fiscal 2013 to fiscal 2014, both distribution revenues and our sales to original equipment manufacturers, or OEMs, increased. From year to year, our selling expenses increased with higher

 

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revenues and our general and administration expenses increased principally due to acquisition-related costs. Our research, development and engineering expenses, or R&D expenses, grew due to increased research activities as well as added expenses related to the Acquired MCU Business. Over the next year, we expect our selling, general and administrative, or SG&A, expenses to remain fairly consistent, except to the extent that selling expenses vary with changing revenues. Similarly, we expect our R&D expenses to remain fairly consistent over the next year.

Critical Accounting Policies and Significant Management Estimates

The discussion and analysis of our financial condition and results of operations are based upon our 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 met when title to the products is passed to the buyers, 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 sale terms Delivered Duty Paid, or DDP.

We sell to distributors and original equipment manufacturers. Approximately 56.8% of our revenues in fiscal 2014 were from distributors. We provide certain 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, based on historical levels of returns and discounts, 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 distributor’s 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 the various government agencies. The amount of taxes collected from customers and payable to government 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 for 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 the accounts receivable allowance 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. In the fiscal years ended March 31, 2014, 2013 and 2012, approximately $1.5 million, $2.4 million and

 

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$2.1 million, respectively, of products were returned to us under the program. We establish the allowance for all 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 the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations. Should distributors increase stock rotations beyond our estimates, our 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 enable 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 the accounts receivable allowance 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 and 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 years ended March 31, 2014 (in thousands):

 

Balance March 31, 2011

   $ 1,400  

Additions

     5,858  

Deductions

     (6,157
  

 

 

 

Balance March 31, 2012

     1,101  

Additions

     5,842  

Deductions

     (5,547
  

 

 

 

Balance March 31, 2013

     1,396  

Additions

     4,757  

Deductions

     (5,082
  

 

 

 

Balance March 31, 2014

   $ 1,071  
  

 

 

 

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 the accounts receivable allowance 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.

 

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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. For example, during the fourth quarter of fiscal 2009, we examined our inventory and as a consequence of the dramatic retrenchment in some of our markets, certain of our inventory that normally would not be considered excess was considered as such. Therefore, we booked additional charges of about $14.9 million to recognize this exposure.

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):

 

Balance at March 31, 2011

   $ 29,436  

Utilization or sale

     (2,543

Scrap

     (2,313

Additional accrual

     3,921  

Foreign currency translation adjustments

     (363
  

 

 

 

Balance at March 31, 2012

     28,138  

Utilization or sale

     (2,242

Scrap

     (3,662

Additional accrual

     3,385  

Foreign currency translation adjustments

     (330
  

 

 

 

Balance at March 31, 2013

     25,289  

Utilization or sale

     (1,579

Scrap

     (3,422

Additional accrual

     3,503  

Foreign currency translation adjustments

     513  
  

 

 

 

Balance at March 31, 2014

   $ 24,304  
  

 

 

 

 

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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 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 March 31, 2014 and 2013, our lower of cost or market reserves were $474,000 and $670,000, respectively.

Furthermore, we perform an annual inventory count and 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 carried at fair value and reviewed at least annually for impairment charge 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 exceed 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 have one reporting unit that has goodwill allocated to it.

We use the income approach, based on estimated future cash flows, to perform the quantitative goodwill impairment test when and if required. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates and future economic and market conditions. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. By their nature, these assumptions would not reflect unanticipated events and circumstances that may occur. Due to the significant unobservable inputs inherent in discounted cash flow methodologies, this method is classified as Level 3 in the fair value hierarchy.

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.

See Note 7, “Goodwill and Intangible Assets” for a further discussion of the impairment analysis of goodwill and the related charges recorded.

Income tax.    As part of the process of 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

 

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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 consolidated balance sheet. 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 for recognition by determining if 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 and Accounting Changes

For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

 

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Results of Operations

The following table sets forth selected consolidated statements of operations data for the fiscal years indicated and the percentage change in such data from year to year:

 

     Years Ended March 31,  
     2014      % change      2013      % change     2012  
     (000)             (000)            (000)  

Net revenues

   $ 336,330        20.1      $ 280,014        (23.9   $ 368,004  

Cost of goods sold

     236,120        21.0        195,134        (21.6     248,760  
  

 

 

       

 

 

      

 

 

 

Gross profit

   $ 100,210        18.1      $ 84,880        (28.8   $ 119,244  
  

 

 

       

 

 

      

 

 

 

Operating expenses:

             

Research, development and engineering

   $ 30,884        10.2      $ 28,022        (2.9   $ 28,847  

Selling, general and administrative

     41,983        6.9        39,287        (6.6     42,063  

Amortization of acquisition-related intangible assets

     10,521        368.9        2,244        (11.1     2,524  

Impairment charges

            nm                (100.0     6,448  
  

 

 

       

 

 

      

 

 

 

Total operating expenses

   $ 83,388        19.9      $ 69,553        (12.9   $ 79,882  
  

 

 

       

 

 

      

 

 

 

 

nm — not meaningful

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

 

     Years Ending March 31,  
     2014
% of Net
Revenues
    2013
% of Net
Revenues
    2012
% of Net
Revenues
 

Net revenues

     100.0       100.0       100.0  

Cost of goods sold

     70.2       69.7       67.6  
  

 

 

   

 

 

   

 

 

 

Gross profit

     29.8       30.3       32.4  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research, development and engineering

     9.2       10.0       7.8  

Selling, general and administrative

     12.5       14.0       11.4  

Amortization of acquisition-related intangible assets

     3.1       0.8       0.7  

Impairment charges

                 1.8  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     24.8       24.8       21.7  
  

 

 

   

 

 

   

 

 

 

Operating income

     5.0       5.5       10.7  

Other income (expense), net

     (1.0     (0.3     0.3  
  

 

 

   

 

 

   

 

 

 

Income before income tax provision

     4.0       5.2       11.0  

Provision for income tax

     (2.2     (2.5     (2.8
  

 

 

   

 

 

   

 

 

 

Net income

     1.8       2.7       8.2  
  

 

 

   

 

 

   

 

 

 

 

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The following table sets forth the revenues for each of our product groups for fiscal 2014, 2013 and 2012:

Net Revenues(1)

 

      Year Ended March 31,  
     2014      % change      2013      % change     2012  
     (000)             (000)            (000)  

Power semiconductors

   $ 222,813        10.9      $ 200,907        (27.7   $ 277,718  

ICs

     91,189        57.2        57,993        (8.8     63,597  

Systems and RF power semiconductors

     22,328        5.7        21,114        (20.9     26,689  
  

 

 

       

 

 

      

 

 

 

Total

   $ 336,330        20.1      $ 280,014        (23.9   $ 368,004  
  

 

 

       

 

 

      

 

 

 

 

(1) Includes $3.0 million, $2.1 million and $3.6 million of intellectual property revenues in integrated circuits for fiscal 2014, 2013 and 2012, respectively. Includes $2.0 million of nonrecurring intellectual property revenues in power semiconductors for fiscal 2012.

The following tables set forth the average selling prices, or ASPs, and units for fiscal 2014, 2013 and 2012:

Average Selling Prices

 

      Year Ended March 31,  
     2014      % change     2013      % change     2012  

Power semiconductors

   $ 1.93        (12.3   $ 2.20        1.9     $ 2.16  

ICs

   $ 0.48        (44.8   $ 0.87        (1.1   $ 0.88  

Systems and RF power semiconductors

   $ 22.49        1.3     $ 22.20        (17.5   $ 26.90  

Units

 

      Year Ended March 31,  
     2014      % change      2013      % change     2012  
     (000)             (000)            (000)  

Power semiconductors

     115,596        26.6        91,276        (28.6     127,858  

ICs

     177,749        177.7        64,015        (5.9     68,050  

Systems and RF power semiconductors

     993        4.4        951        (4.1     992  
  

 

 

       

 

 

      

 

 

 

Total

     294,338        88.4        156,242        (20.6     196,900  
  

 

 

       

 

 

      

 

 

 

The following tables set forth the net revenues by geographic region for fiscal 2014, 2013 and 2012:

 

     Year Ended March 31,  
     2014      2013      2012  
     Net
Revenues
     % of Net
Revenues
     Net
Revenues
     % of Net
Revenues
     Net
Revenues
     % of Net
Revenues
 
     (000)             (000)             (000)         

Europe and Middle East

   $ 99,049        29.4      $ 98,568        35.2      $ 138,561        37.7  

Asia Pacific

     135,641        40.3        83,404        29.8        111,137        30.2  

Rest of world

     11,906        3.6        13,253        4.7        15,184        4.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International revenues

     246,596        73.3        195,225        69.7        264,882        72.0  

USA

     89,734        26.7        84,789        30.3        103,122        28.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 336,330        100.0      $ 280,014        100.0      $ 368,004        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Comparison of Fiscal 2013 Revenues to Fiscal 2014 Revenues.

The 20.1% increase in net revenues from fiscal 2013 to fiscal 2014 reflected a $21.9 million, or 10.9%, increase in the sale of power semiconductors, a $33.2 million, or 57.2%, increase in the sale of ICs and a $1.2 million, or 5.7%, increase in the sale of systems and RF power semiconductors.

The increase in power semiconductors was mainly due to a $14.6 million increase in the sale of MOS products, principally to the medical market and the industrial and commercial market, and a $6.1 million increase in the sale of bipolar products, primarily to the industrial and commercial market. The increase in revenues from ICs was driven by the Acquired MCU Business and the increased revenues from the sales of systems and RF power semiconductors were broad-based.

From fiscal 2013 to fiscal 2014, the changes in the ASPs of each product group were primarily due to shifts in our product mix rather than changes in product prices. In the case of ICs, the changes in product mix were driven by the addition of the Acquired MCU Business, as was the unit volume. For power semiconductors and systems and RF power semiconductors, the increases in unit shipments were broad-based.

Intellectual property revenues, consisting of sales, licensing fees and royalties, were $3.0 million for fiscal 2014 as compared to $2.1 million for fiscal 2013.

From fiscal 2013 to fiscal 2014, our sales increased in all major geographic areas, including the U.S., Europe and the Middle East, and the Asia Pacific area, and to all of our major application markets.

In fiscal 2014 and 2013, one distributor accounted for 10.8% and 10.3% of our net revenues, respectively. In fiscal 2013, another distributor accounted for 13.2% of our net revenues.

Comparison of Fiscal 2012 Revenues to Fiscal 2013 Revenues.

From fiscal 2012 to fiscal 2013, net revenues declined by $88.0 million, or 23.9%. The decline was across all product groups and reflected a decrease of $76.8 million, or 27.7%, in the sale of power semiconductors, a decrease of $5.6 million, or 8.8%, in the sale of ICs and a decrease of $5.6 million, or 20.9%, in the sales of systems and RF power semiconductors.

The decline in power semiconductors included a $48.3 million decrease in the sale of bipolar products, primarily to the industrial and commercial market, and a $24.9 million decrease in sale of MOS products, principally to the medical market and the industrial and commercial market. The decline in revenues from ICs was principally caused by reduced sales of microcontrollers. The revenues from the sale of systems and RF power semiconductors decreased primarily due to reduced sales of subassemblies to the industrial and commercial market.

In fiscal 2013 as compared to fiscal 2012, the changes in the ASPs of our product groups were due to shifts in our product mix, rather than changes in product prices. The reductions in unit shipments were broad-based.

Intellectual property revenues, consisting of sales, licensing fees and royalties, were $2.1 million for fiscal 2013 as compared to $5.6 million for fiscal 2012.

From fiscal 2012 to fiscal 2013, we experienced reduced sales in all major geographic areas, including the U.S., Europe and the Middle East, and the Asia Pacific area, and to all of our major application markets. The reduction in sales from year-to-year was principally the result of difficult economic conditions in Europe leading to reduced orders for industrial and infrastructure applications, reduced infrastructure construction in China and a decline in the manufacture of defibrillators by the medical device industry, in both the United States and Asia.

In fiscal 2013 and 2012, one distributor accounted for 10.3% and 11.3% of our net revenues, respectively, and another distributor accounted for 13.2% and 11.1% of our net revenues, respectively.

In each of the last three fiscal years, our 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.

 

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Gross Profit.

From fiscal 2013 to fiscal 2014, gross profit increased by $15.3 million, whereas the gross profit margin decreased from 30.3% to 29.8%. The increase in gross profit dollars was largely because of revenue growth. The lower gross profit margin was primarily due to changes in product mix towards the lower-margin consumer products market and an increase in the accrual for excess inventories.

From fiscal 2012 to fiscal 2013, gross profit decreased by $34.4 million and the gross profit margin decreased from 32.4% to 30.3%. The decrease in gross profit dollars was primarily because of reduced revenues. The lower gross profit margin was primarily due to underutilized capacity, which increased our unabsorbed manufacturing costs as a percentage of net revenues, and a shift in product mix to sales of lower margin products. In fiscal 2012, the gross profit margin was positively affected by $2.0 million of nonrecurring intellectual property revenues, which carry a gross profit margin approaching 100%. During the same fiscal year, due to the completion of insolvency proceedings and a liquidation of a former foreign vendor, we wrote off $700,000 in accounts payable, which positively affected our gross profit margin.

In each of the last three years, our gross profit and gross profit margin were positively affected by the utilization and sale of excess inventory, which had previously been written down. See “Critical Accounting Policies and Significant Management Estimates — Inventories” elsewhere in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Research, Development and Engineering.

Research, development and engineering, or R&D, expenses typically consist of internal engineering efforts for product design, process improvement and development. As a percentage of net revenues, from fiscal 2013 to fiscal 2014, R&D expenses decreased from 10.0% to 9.2% as a result of the increase in net revenues. Expressed in dollars, our R&D expenses increased by $2.9 million mainly due to an increased product development effort and a license fee. From fiscal 2012 to fiscal 2013, R&D expenses decreased by $825,000 and increased from 7.8% to 10.0% as a percentage of net revenues. The decrease in R&D expenses was primarily due to reduced outside testing and service activities and the increase in percentage primarily resulted from reduced net revenues.

Selling, General and Administrative.

In fiscal 2014 as compared to fiscal 2013, SG&A expenses increased by $2.7 million and decreased from 14.0% to 12.5% as a percentage of net revenues. The increase in SG&A expenses was principally due to higher commission expenses consistent with increased revenues and additional professional and consulting expenses relating to the Acquired MCU Business, offset by reduced share-based compensation; whereas the decrease in the percentage primarily resulted from increased revenues. In fiscal 2013, as compared to fiscal 2012, SG&A expenses decreased by $2.8 million and increased from 11.4% to 14.0% as a percentage of net revenues. The decrease in SG&A expenses was principally due to lower commission expenses and reduced stock compensation expenses, while the percentage increased due to the reduction in revenues.

Amortization of Acquisition-Related Intangible Assets.

During the quarter ended June 30, 2013, we completed the acquisition of the Acquired MCU Business. As a result, we recorded $24.0 million of intangible assets. We also recorded certain intangible assets during fiscal 2010 in connection with the acquisition of Zilog. The intangible assets from these acquisitions are amortized based upon their estimated useful lives of up to 72 months. For fiscal 2014, 2013 and 2012, amortization expenses on acquisition-related intangible assets were $10.5 million, $2.2 million and $2.5 million, respectively. See Note 7, “Goodwill and Intangible Assets” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion regarding acquisition-related intangible assets.

Impairment Charges.

In fiscal 2012, we performed an assessment of the impairment of goodwill at the reporting unit level that considered current economic conditions and trends, estimated future operating results and anticipated future economic conditions. We concluded that the goodwill was completely impaired. Consequently, we wrote off all of the outstanding goodwill and recorded an impairment charge of $6.4 million.

 

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See Note 7, “Goodwill and Intangible Assets” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion regarding impairment testing.

Other Income (Expense).

In fiscal 2014, interest expense, net was $1.4 million as compared to $604,000 in fiscal 2013 and $762,000 in fiscal 2012. The increase in interest expense, net from fiscal 2013 to fiscal 2014 was due to the accrual of interest on the installment payments for the Acquired MCU Business. The decrease in interest expense, net from fiscal 2012 to fiscal 2013 primarily resulted from reduced capital lease and note payable expense. See Note 8, “Borrowing and Deferred Payment Arrangements” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information regarding the arrangement.

In fiscal 2014, other expense, net was $1.9 million as compared to other expense, net of $41,000 in fiscal 2013 and other income, net of $1.9 million in fiscal 2012, respectively. The other expense, net in fiscal 2014 mainly consisted of losses associated with changes in exchange rates for foreign currency transactions of $2.4 million, offset by income from investments. The other expense, net in fiscal 2013 included primarily a $1.3 million other than temporary write-down of our investments in marketable equity securities, offset by smaller gains associated with changes in exchange rates for foreign currency transactions and income from investments. The other income, net in fiscal 2012 was primarily due to gains associated with changes in exchange rates for foreign currency transactions.

Provision for Income Taxes.

In fiscal 2014, the provision for income taxes reflected an effective tax rate of 55% as compared to 48% in fiscal 2013 and 25% in fiscal 2012. The fiscal 2014 tax rate was affected by a loss recognized in a lower tax rate jurisdiction and certain discrete items. The loss recognized in the lower tax jurisdiction was primarily due to amortization expenses resulting from the acquisition of the Acquired MCU Business. The fiscal 2013 tax rate reflected increases in valuation allowances applied against foreign deferred tax assets due to non-benefitted losses in certain tax jurisdictions where statutory tax rates are lower than in the countries where our principal operations occur. The fiscal 2012 tax rate reflected the release of valuation allowances that had been applied against foreign deferred tax assets, principally consisting of certain foreign net operating loss carryforwards, as well as the release of other tax reserves. See Note 17, “Income Taxes” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion regarding provision for income taxes.

Liquidity and Capital Resources

At March 31, 2014, cash and cash equivalents were $98.4 million as compared to $107.1 million at March 31, 2013 and $98.6 million at March 31, 2012. Over the past three fiscal years, the cash generated by our operations has provided sufficient liquidity for our needs.

Our cash provided by operating activities in fiscal 2014 was $19.3 million as compared to $31.6 million in fiscal 2013 and $44.4 million in fiscal 2012. For fiscal 2014 as compared to fiscal 2013, the decrease in cash provided by operating activities of $12.3 million was primarily due to a decrease of $13.6 million in net changes in operating assets and liabilities, offset by an increase of $1.3 million in net income and total adjustments to reconcile net income.

Changes in assets and liabilities for fiscal 2014 compared to fiscal 2013 included the following: Accounts receivables increased due to the timing of revenues, inventory purchases increased to meet our production plans and prepaid and other current assets increased because of the timing of tax refunds. These were offset by accrued expenses and other liabilities, which increased in large part as a result of changes in income tax accruals.

For fiscal 2013 as compared to fiscal 2012, the decrease in cash provided by operating activities of $12.8 million was primarily due to a decrease of $24.8 million in net income and total adjustments to reconcile net income, offset by an increase of $12.0 million in net changes in operating assets and liabilities.

Changes in assets and liabilities for fiscal 2013 compared to fiscal 2012 included the following: Prepaid and other current assets increased because of an increase in estimated tax payments and accounts payable and inventories decreased due to a reduction in the purchase of inventories.

 

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We used $27.1 million in net cash for investing activities during fiscal 2014, as compared to $11.1 million in fiscal 2013 and $12.4 million in fiscal 2012. In fiscal 2014, we made a payment of $20.0 million for the Acquired MCU Business. In fiscal 2014, 2013 and 2012, we spent $7.6 million, $7.2 million and $11.8 million on capital expenditures, respectively. Over the past three fiscal years, the capital expenditures were principally for equipment required to maintain or increase our production capacity. In addition, in fiscal 2013, we spent $4.5 million on the purchase of investments.

For fiscal 2014, net cash used in financing activities was $3.3 million, as compared to net cash used in financing activities of $10.9 million in fiscal 2013 and net cash used in financing activities of $7.7 million in fiscal 2012. In fiscal 2014, we used $3.7 million for payments of cash dividends to stockholders, $2.6 million for principal repayments on capital lease obligations, $1.0 million for repayments of loans and $602,000 to purchase treasury stock, offset by proceeds from employee equity plans of $4.4 million.

In fiscal 2013, we used $6.5 million for the purchase of treasury stock, $2.8 million for principal repayments on capital lease obligations, $1.9 million for payments of cash dividends to stockholders and $1.7 million for repayments of loans, offset by proceeds from employee equity plans of $2.0 million. In fiscal 2012, we used $7.6 million for the purchase of treasury stock, $3.2 million for principal repayments on capital lease obligations and $1.4 million for repayments of loans, offset by proceeds from employee equity plans of $3.4 million.

At March 31, 2014, capital lease obligations, loans payable and remaining installment payments totaled $54.8 million. This represented 55.7% of our cash and cash equivalents and 20.3% of our stockholders’ equity. Over the past three fiscal years, satisfying our payment obligations for capital leases and loans payable did not materially affect our ability to fund our operating needs.

We are obligated on a €4.2 million, or $5.7 million, loan. The loan has a term ending in June 2020, and bears a variable interest rate, which is dependent upon the current Euribor rate and the ratio of indebtedness to cash flow for the German subsidiary. Each fiscal quarter a principal payment of €167,000, or about $230,000, 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 at the end of a fiscal quarter without penalty. At March 31, 2014, we had complied with the financial covenants. The loan is collateralized by a security interest in the facility in Lampertheim, Germany.

On December 6, 2013, we entered into an Amended and Restated Credit Agreement with BOTW for a revolving line of credit of $50.0 million. All amounts owed under the credit agreement are due and payable on November 30, 2015. Borrowings may be repaid and re-borrowed during the term of the credit agreement. The obligations are guaranteed by two of our subsidiaries. At March 31, 2014, the outstanding principal balance under the credit agreement was $15.0 million. The credit agreement is subject to a set of financial covenants, including minimum total 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. As of March 31, 2014, we complied with all of these financial covenants. See Note 8, “Borrowing and Deferred Payment Arrangements” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information regarding the credit agreement. The credit agreement also includes a $3.0 million letter of credit subfacility. See Note 18, “Commitment and Contingencies” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information regarding the terms of our credit arrangements.

In fiscal 2014 and 2013, we paid $3.7 million and $1.9 million in dividends, respectively, through a quarterly cash dividend of $0.03 per share. The quarterly dividend is at the discretion of the Board of Directors.

On June 27, 2013, we purchased the Acquired MCU Business. The aggregate purchase price for the transferred assets is $50.0 million. The closing payment was $20.0 million and we are obligated to pay $30.0 million in two installment payments of $15.0 million each. The first installment is due on June 27, 2014 and the second installment is due on December 31, 2014. The installments bear simple interest at a variable annual rate equal to six-month LIBOR plus a 3 percentage point margin. We expect to fund the deferred payments of the acquisition through cash on hand, future cash flow generated from operations and, to the extent advisable, a bank line of credit facility. See Note 8, “Borrowing and Deferred Payment Arrangements” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information regarding the terms of the installment payments.

 

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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 March 31, 2014 was $15.5 million. See Note 9, “Pension Plans” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for a discussion of the investment return assumptions, the underlying estimates and the expected future cash flows associated with the pension plans.

As of March 31, 2014, we had $98.4 million in cash and cash equivalents. 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 or one or more acquisitions. We occasionally use forward and option contracts in the normal course of business to manage our foreign currency exchange risks. We did not have any open foreign exchange forward and option contracts at March 31, 2014. 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.

Off-Balance Sheet Arrangements

As of March 31, 2014 and 2013, we did not have any relationships with unconsolidated entities or financial partners, including entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Disclosures about Contractual Obligations and Commercial Commitments

Details of our contractual obligations and commitments as of March 31, 2014 to make future payments under contracts are set forth below (in thousands):

 

Contractual Obligations(1)(2)

   Payments Due by Period  
   Total      Less Than
1 Year
     1-3 Years      3-5 Years      More than
5 Years
 

Long term debt(3)

   $ 51,640      $ 31,809      $ 16,852      $ 1,834      $ 1,145  

Capital lease obligations(4)

     3,278        2,547        731                

Operating lease obligations

     5,964        1,268        1,560        1,294        1,842  

Other purchase obligations(5)

     31,480        29,455        2,025                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 92,362      $ 65,079      $ 21,168      $ 3,128      $ 2,987  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Contractual obligations shown in the table above exclude benefit payments to participants of our defined benefit pension plans. We summarize the estimated benefit payments to be made by the plans over the next ten years in Note 9, “Pension Plans” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. The table also excludes contributions we made to defined benefit pension plans and our defined contribution plan. Our future contributions to these plans depend on many uncertain factors including future returns on the defined benefit plan assets and the amount and timing of employee and discretionary employer contributions to the defined contribution plan. We provide additional information about our defined benefit pension plans and our defined contribution plan, in Note 14, “Employee Savings and Retirement Plans” and Note 9, “Pension Plans” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

 

(2) We are unable to reliably determine the timing of future payments related to some of our uncertain tax positions. Therefore, $7.0 million of income taxes payable has been excluded from the table above. However, long term income taxes payable, included on our consolidated balance sheet, includes these uncertain tax payments.

 

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(3) Includes principal only since the interest rates are variable. See Note 8 “Borrowing and Deferred Payment Arrangements” for more details.

 

(4) Includes anticipated interest payments. The capital lease obligations of $3.3 million include interest payments totaling $87,000.

 

(5) Represents commitments for purchase of inventory and property and equipment. These were not recorded as liabilities on our consolidated balance sheet as of March 31, 2014, as we had not yet received the related goods or taken title to the property.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various risks, including fluctuations in interest and foreign currency rates. In the normal course of business, we also face risks that are either non-financial or non-quantifiable. Such risks principally include country risks, credit risks and legal risks that are not discussed or quantified in the following analyses.

Other than some immaterial investments, we currently keep our funds in accounts and instruments that, for accounting purposes, are cash and cash equivalents and do not carry interest rate risk to the fair market value of principal. We may, in the future, choose to place our funds in investments in high quality debt securities, potentially consisting of debt instruments of the United States or state or local governments or investment grade corporate issuers. Investments in both fixed and floating rate securities have some degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted by increases in interest rates. Floating rate securities may produce less income than anticipated if interest rates fall. As a result, changes in interest rates could cause us to incur losses in principal if we are forced to sell securities that have declined in market value or may result in lower than anticipated investment income.

We intend to manage our exposure to interest rate, market and credit risk in any investment portfolio with investment policies and procedures that limit such things as term, credit rating and the amount of credit exposure to any one issue, issuer and type of instrument. We have not used derivative financial instruments in any investment portfolio.

The impact on the fair market value of our cash equivalents and our earnings from a hypothetical 100 basis point adverse change in interest rates as of the end of fiscal 2014 would have had the effect of reducing our net income by an amount less than $1.0 million. As our cash and cash equivalents have historically been held in accounts and instruments where the principal was not subject to interest rate risk and our cash and cash equivalents exceeded our variable rate borrowings, this sensitivity analysis was accomplished by offsetting our variable rate borrowings against our cash and cash equivalents and then estimating the impact of a 100 basis point reduction in interest rates on such adjusted cash balances.

We have interest rate risk from a €4.2 million, or approximately $5.7 million, loan taken by IXYS Semiconductor GmbH, a German subsidiary of IXYS, from IKB Deutsche Industriebank, which has a remaining term of about 6 years.

The interest rate on the loan is determined by adding the then effective three month Euribor rate and a margin. The margin can range from 0.7% to 1.25%, depending on the calculation of a ratio of indebtedness to cash flow for our German subsidiary. In June 2010, we entered into an interest rate swap agreement commencing June 30, 2010. The swap agreement has a fixed interest rate of 1.99% and expires on June 30, 2015. The effective interest rate as of March 31, 2014 was 2.69%.

In addition, we have interest rate risk from a $50.0 million revolving line of credit with BOTW. Borrowings may be repaid and re-borrowed during the term of the credit agreement. The obligations are guaranteed by two of our subsidiaries. All amounts owed under the credit agreement are due and payable on November 30, 2015. At March 31, 2014, the outstanding principal balance under the credit agreement was $15.0 million.

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, an alternative base rate plus a margin or a floating 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 effective interest rate as of March 31, 2014 was 1.95%.

 

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Revenues from our foreign subsidiaries were approximately 49.8% of total revenues in fiscal 2014. To the extent not U.S. dollar denominated, these revenues are primarily denominated in Euros and British pounds. Our risk to foreign currencies is partially offset by the natural hedge of manufacturing and selling goods in the local currency. Most of our principal foreign subsidiaries use their respective local currencies as their functional currency.

Although from time to time we enter into a limited number of foreign exchange forward or option contracts to help manage foreign currency exchange risk associated with certain of our operations, we do not generally hedge foreign currency exchange rates. The foreign exchange forward or option contracts we have entered into generally have original maturities ranging from one to six months. We do not enter into these contracts for trading purposes and do not expect gains or losses on these contracts to have a material impact on our financial results.

A hypothetical 10% adverse fluctuation in the exchange rate between the Euro and the U.S. dollar and the exchange rate between the British pound and the U.S. dollar would have had the effect of reducing our net income as of the end of fiscal 2014 by less than $2.5 million. Because of the operation of our principal foreign units in their own functional currencies, this sensitivity analysis was undertaken by examining the net income or loss of the foreign units incorporated into our statement of operations and testing the impact of the hypothetical change in exchange rates on such income or loss. The hypothetically derived net income or loss of the foreign units was then calculated with our statement of operations data to derive the hypothetical impact on our net income. Additionally, the impact of the hypothetical change in exchange rates on the balance sheets of our principal foreign units was examined and the hypothetical transaction effects, using normal accounting practices, were incorporated into the analysis.

It is likely that our future financial results could be directly affected by changes in foreign currency exchange rates. We will continue to face foreign currency exchange risks in the future. Therefore, our financial results could be directly affected by weak economic conditions in foreign markets. In addition, a strengthening of the U.S. dollar, the Euro or the British pound could make our products less competitive in foreign markets.

 

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Item 8.    Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

IXYS Corporation

Milpitas, California

We have audited the accompanying consolidated balance sheets of IXYS Corporation (the “Company”) as of March 31, 2014 and 2013 and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IXYS Corporation at March 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), IXYS Corporation’s internal control over financial reporting as of March 31, 2014, based on criteria established in Internal Control — Integrated Framework (1992) — issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated June 13, 2014 expressed an unqualified opinion thereon.

/s/    BDO USA, LLP

San Francisco, California

June 13, 2014

 

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IXYS CORPORATION

CONSOLIDATED BALANCE SHEETS

 

     March 31,  
     2014     2013  
     (In thousands, except
share data)
 
ASSETS   

Current assets:

  

Cash and cash equivalents

   $ 98,438     $ 107,116  

Restricted cash

     337       314  

Accounts receivable, net of allowances of $3,013 at March 31, 2014 and $2,656 at March 31, 2013

     45,707       37,752  

Inventories

     93,028       83,829  

Prepaid expenses and other current assets

     9,520       7,328  

Deferred income taxes

     7,975       7,167  
  

 

 

   

 

 

 

Total current assets

     255,005       243,506  

Property, plant and equipment, net

     50,569       51,995  

Intangible assets, net

     16,347       2,893  

Goodwill

     25,164        

Deferred income taxes

     24,316       24,847  

Other assets

     11,781       10,235  
  

 

 

   

 

 

 

Total assets

   $ 383,182     $ 333,476  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

  

Current portion of capitalized lease obligations

   $ 2,468     $ 2,458  

Current portion of loans payable

     1,028       15,956  

Accounts payable

     15,684       12,822  

Accrued expenses and other current liabilities

     50,166       16,992  
  

 

 

   

 

 

 

Total current liabilities

     69,346       48,228  

Other long term liabilities

     7,105       6,877  

Capitalized lease obligations, net of current portion

     723       2,974  

Long term loans, net of current portion

     19,831       5,459  

Pension liabilities

     15,545       16,330  
  

 

 

   

 

 

 

Total liabilities

     112,550       79,868  
  

 

 

   

 

 

 

Commitments and contingencies (Note 18)

    

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; 38,016,909 issued and 31,353,819 outstanding at March 31, 2014 and 37,921,213 issued and 30,885,354 outstanding at March 31, 2013

     380       379  

Additional paid-in capital

     206,290       202,598  

Treasury stock, at cost: 6,663,090 common shares at March 31, 2014 and 7,035,859 common shares at March 31, 2013

     (58,782     (61,994

Retained earnings

     117,715       115,718  

Accumulated other comprehensive income (loss)

     5,029       (3,093
  

 

 

   

 

 

 

Total stockholders’ equity

     270,632       253,608  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 383,182     $ 333,476  
  

 

 

   

 

 

 

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

 

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IXYS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Year Ended March 31,  
     2014     2013     2012  
     (In thousands, except per share data)  

Net revenues

   $ 336,330     $ 280,014     $ 368,004  

Cost of goods sold

     236,120       195,134       248,760  
  

 

 

   

 

 

   

 

 

 

Gross profit

     100,210       84,880       119,244  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

  

Research, development and engineering

     30,884       28,022       28,847  

Selling, general and administrative

     41,983       39,287       42,063  

Amortization of acquisition-related intangible assets

     10,521       2,244       2,524  

Impairment charges

                 6,448  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     83,388       69,553       79,882  
  

 

 

   

 

 

   

 

 

 

Operating income

     16,822       15,327       39,362  

Other income (expense):

  

Interest income

     157       334       367  

Interest expense

     (1,579     (938     (1,129

Other income (expense), net

     (1,941     (41     1,941  
  

 

 

   

 

 

   

 

 

 

Income before income tax provision

     13,459       14,682       40,541  

Provision for income tax

     (7,413     (7,034     (10,235
  

 

 

   

 

 

   

 

 

 

Net income

   $ 6,046     $ 7,648     $ 30,306  
  

 

 

   

 

 

   

 

 

 

Net income per share

  

Basic

   $ 0.19     $ 0.25     $ 0.97  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.19     $ 0.24     $ 0.93  
  

 

 

   

 

 

   

 

 

 

Cash dividends per common share

   $ 0.12     $ 0.06     $  
  

 

 

   

 

 

   

 

 

 

Weighted average shares used in per share calculation

  

Basic

     31,146       31,025       31,344  
  

 

 

   

 

 

   

 

 

 

Diluted

     31,916       31,695       32,496  
  

 

 

   

 

 

   

 

 

 

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

 

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IXYS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Year Ended March 31,  
     2014     2013     2012  
     (in thousands)  

Net income

   $ 6,046     $ 7,648     $ 30,306  

Foreign currency translation adjustments

     7,553       (3,490     (4,249

Changes in market value of investments:

      

Changes in unrealized gains (losses), net of tax expenses (benefits) of $196 in 2014, $(363) in 2013 and $(13) in 2012

     361       (672     (23

Reclassification adjustment for net losses (gains) realized in net income, net of tax benefits (expenses) of $(52) in 2014, $431 in 2013 and $(17) in 2012

     (96     800       (32
  

 

 

   

 

 

   

 

 

 

Net changes in market value of investments

     265       128       (55
  

 

 

   

 

 

   

 

 

 

Changes in accumulated net actuarial income (loss):

      

Changes in accumulated net actuarial income (loss), net of tax expenses (benefits) of $8 in 2014, $(449) in 2013 and $(431) in 2012

     89       (1,957     (1,423

Reclassification adjustment for net losses realized in net income, net of tax benefits of $21 in 2014, $31 in 2013 and $16 in 2012

     215       136       54  
  

 

 

   

 

 

   

 

 

 

Net changes in defined benefit plan accumulated net actuarial income (loss)

     304       (1,821     (1,369
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 14,168     $ 2,465     $ 24,633  
  

 

 

   

 

 

   

 

 

 

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

 

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IXYS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

    Common Stock and
Additional Paid-In
Capital
    Treasury Shares     Treasury Amount     Retained Earnings     Accumulated
Other
Comprehensive
Income (loss)
    Total
Stockholders’
Equity
 
    Shares     Amount            

Balances, March 31, 2011

    37,353     $ 191,179       5,900     $ (49,667   $ 79,954     $ 7,763     $ 229,229  

Net income

            30,306         30,306  

Other comprehensive loss

              (5,673     (5,673

Stock-based compensation

      3,779               3,779  

Proceeds from sale of shares through employee equity incentive plans, related excess tax benefits and others

    453       3,703               3,703  

Purchase of treasury stock

        628       (7,576         (7,576

Re-issuance of treasury stock under stock compensation plans

        (46     405       (66       339  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, March 31, 2012

    37,806       198,661       6,482       (56,838     110,194       2,090       254,107  

Net income

            7,648         7,648  

Other comprehensive loss

              (5,183     (5,183

Stock-based compensation

      3,451               3,451  

Proceeds from sale of shares through employee equity incentive plans, related excess tax benefits and others

    115       865               865  

Purchase of treasury stock

        707       (6,505         (6,505

Re-issuance of treasury stock under stock compensation plans

        (153     1,349       (270       1,079  

Payment of dividend to stockholders

            (1,854       (1,854
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, March 31, 2013

    37,921       202,977       7,036       (61,994     115,718       (3,093     253,608  

Net income

            6,046         6,046  

Other comprehensive income

              8,122       8,122  

Stock-based compensation

      2,785               2,785  

Proceeds from sale of shares through employee equity incentive plans, related excess tax benefits and others

    96       908               908  

Purchase of treasury stock

        60       (602         (602

Re-issuance of treasury stock under stock compensation plans

        (433     3,814       (305       3,509  

Payment of dividend to stockholders

            (3,744       (3,744
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, March 31, 2014

    38,017     $ 206,670       6,663     $ (58,782   $ 117,715     $ 5,029     $ 270,632  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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IXYS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended March 31,  
     2014     2013     2012  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 6,046     $ 7,648     $ 30,306  

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

    

Depreciation and amortization

     21,274       12,492       13,467  

Provision for receivable allowances

     8,563       10,064       8,524  

Write-down of goodwill and other intangibles

                 6,448  

Write-down of marketable equity securities

     7       1,342        

Net change in inventory provision

     1,724       1,295       1,322  

Stock-based compensation

     2,785       3,451       3,779  

Deferred income taxes

     (551     2,495       1,696  

Tax impacts due to employee equity incentive plans

     (152     38       (663

Loss on disposal of plant and equipment

                 71  

Gain on investments

     (542     (362     (217

Other non-cash items, net

     854       220       (1,212

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

    

Accounts receivable

     (14,755     (487     (2,795

Inventories

     (6,296     (839     (13,420

Prepaid expenses and other current assets

     (5,518     (3,878     2,842  

Other assets

     (968     832       540  

Accounts payable

     2,067       (1,304     (2,006

Accrued expenses and other liabilities

     5,698       (744     (3,634

Pension liabilities

     (907     (626     (602
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     19,329       31,637       44,446  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

    

Change in restricted cash

     (23     195       84  

Purchase of businesses, net of deferred payments

     (20,000            

Purchases of investments

           (4,538     (1,048

Purchases of plant and equipment

     (7,623     (7,192     (11,842

Proceeds from sale of investments

     512       453       431  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (27,134     (11,082     (12,375
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

    

Principal payments on capital lease obligations

     (2,570     (2,774     (3,222

Repayments of loans and notes payable

     (1,000     (1,667     (1,374

Proceeds from loans

                 423  

Tax impacts due to employee equity incentive plans

     152       (38     663  

Purchases of treasury stock

     (602     (6,505     (7,576

Payments of cash dividends to stockholders

     (3,744     (1,854      

Proceeds from employee equity plans

     4,420       1,982       3,379  
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (3,344     (10,856     (7,707
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash and cash equivalents

     2,471       (1,187     (1,166
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (8,678     8,512       23,198  

Cash and cash equivalents at beginning of the year

     107,116       98,604       75,406  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the year

   $ 98,438     $ 107,116     $ 98,604  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid during the period for interest

   $ 801     $ 897     $ 1,129  

Cash paid during the period for income taxes

   $ 4,760     $ 126     $ 11,329  

Supplemental disclosure of noncash investing and financing activities

    

Fixed assets acquired under capital leases and loans

   $     $     $ 5,764  

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

 

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IXYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Description of Business

We design, develop, manufacture and market power semiconductors, digital and analog integrated circuits, or ICs, and systems and radio frequency, or RF, power semiconductors.

Power semiconductors are used primarily in controlling energy in motor drives, power conversion including uninterruptible power supplies, or UPS, and switch mode power supplies, or SMPS, and medical electronics. Our power semiconductors convert electricity at relatively high voltage and current levels to create efficient power as required by a specific application. Our target market includes segments of the power semiconductor market that require medium to high power semiconductors, with a particular emphasis on high power semiconductors. Our power semiconductors include power metal-oxide-silicon field-effect transistors, or Power MOSFETs, insulated-gate bipolar transistors, or IGBTs, thyristors and rectifiers, including fast-recovery epitaxial diodes, or FREDs. Our ICs include solid state relays, or SSRs, for telecommunications applications and power management and control ICs, such as current regulators, motion controllers, digital power modulators and drivers, and microcontrollers such as embedded flash microcontrollers and 8-bit microcontrollers. Our systems include laser diode drivers, high voltage pulse generators and modulators, and high power subsystems, sometimes know as stacks, that are principally based on our high power semiconductor devices.

We sell products in North America, Europe and Asia through an organization that includes direct sales personnel, independent representatives and distributors. We are headquartered in Northern California with principal operations in California, Massachusetts, Germany, the Philippines and the United Kingdom. Each site has manufacturing, research and development and sales and distribution activities. We also make use of subcontract manufacturers for fabrication of wafers and for assembly and test operations.

2.    Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of IXYS and our wholly-owned subsidiaries after elimination of all intercompany balances and transactions.

Foreign Currency Translation and Transaction

The local currency is considered to be the functional currency of some of our wholly-owned international subsidiaries. IXYS Semiconductor GmbH, or IXYS GmbH, and IXYS Semiconductor BV, or IXYS BV, utilize the Euro as their functional currency, while IXYS UK Westcode Limited, or IXYS UK, utilizes the British pound sterling as its functional currency. For such subsidiaries, the assets and liabilities are translated at the exchange rate in effect at year-end and the revenues and expenses are translated at average rates during the year. Adjustments resulting from the translation of these accounts of these subsidiaries into U.S. dollars are included in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Foreign currency transaction gains and losses are included as a component of other income or expense.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from our estimates. Areas where management uses subjective judgments include, but are not limited to, revenue reserves, inventory valuation, deferred income taxes and related valuation allowances, allocation of purchase price in business combinations and asset impairment analysis.

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

 

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IXYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

reasonably assured. These elements are met when title to the products is passed to the buyers, 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 sale terms Delivered Duty Paid, or DDP.

We sell to distributors and original equipment manufacturers. Approximately 56.8% of our revenues in fiscal 2014 were from distributors. We provide certain 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, based on historical levels of returns and discounts, 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 distributor’s end customers. Deferred amounts are presented net and included under “Accrued expenses and other liabilities.”

Allowance for sales returns.    We maintain an allowance for sales returns for 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 the accounts receivable allowance 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 the fiscal years ended March 31, 2014, 2013 and 2012, approximately $1.5 million, $2.4 million and $2.1 million, respectively, of products were returned to us under the program. We establish the stock rotation allowance immediately upon sales except where the revenue recognition is deferred and recognized on the 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 the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations.

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 enable 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 the accounts receivable allowance 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.

 

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IXYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 and reduce revenues and gross profit in the period. The following table sets forth the beginning and ending balances of, additions to, and deductions from, the allowance for ship and debit during the three years ended March 31, 2014 (in thousands):

 

Balance March 31, 2011

   $ 1,400  

Additions

     5,858  

Deductions

     (6,157
  

 

 

 

Balance March 31, 2012

     1,101  

Additions

     5,842  

Deductions

     (5,547
  

 

 

 

Balance March 31, 2013

     1,396  

Additions

     4,757  

Deductions

     (5,082
  

 

 

 

Balance March 31, 2014

   $ 1,071  
  

 

 

 

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

Trade accounts receivable and allowance for doubtful accounts.    Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in the existing accounts receivable. We determine the allowance 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. The allowance for doubtful accounts is reviewed quarterly. Past due balances and other specified accounts as necessary are reviewed individually. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Actual write-offs may be in excess of the recorded allowance. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a “selling, general and administrative expense” in the statement of operations.

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents include investments in commercial paper and money market accounts at banks.

Restricted Cash

Restricted cash balances at March 31, 2014 and March 31, 2013 were $337,000 and $314,000, respectively. The restricted cash balances constitute funds segregated for pension payments in Germany.

Inventories

Inventories are recorded at the lower of a currently adjusted 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

 

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IXYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

impractical to track inventory from the time of purchase to the time of sale for the purpose of specifically identifying inventory cost, inventory is, therefore, valued based on a standard cost, given that the materials purchased are identical and interchangeable at various production processes. The authoritative guidance provided by Financial Accounting Standards Board, or FASB, requires certain abnormal expenditures to be recognized as expenses in the current period versus being 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 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.

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. 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 the 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 inventory is written down below cost, it is not written back up when it is subsequently sold or scrapped. We do not physically segregate excess inventory and 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):

 

Balance at March 31, 2011

   $ 29,436  

Utilization or sale

     (2,543

Scrap

     (2,313

Additional accrual

     3,921  

Foreign currency translation adjustments

     (363
  

 

 

 

Balance at March 31, 2012

     28,138  

Utilization or sale

     (2,242

Scrap

     (3,662

Additional accrual

     3,385  

Foreign currency translation adjustments

     (330
  

 

 

 

Balance at March 31, 2013

     25,289  

Utilization or sale

     (1,579

Scrap

     (3,422

Additional accrual

     3,503  

Foreign currency translation adjustments

     513  
  

 

 

 

Balance at March 31, 2014

   $ 24,304  
  

 

 

 

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

 

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IXYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 potential value and because the products of our company 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 sale or scrapping of excess inventory.

In addition, our inventory is also being written down to 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 the selling price is lower than current cost, the inventory is marked down accordingly. At March 31, 2014 and 2013, our lower of cost or market reserves were $474,000 and $670,000, respectively.

We periodically identify any inventory that is no longer usable and write it off against recorded reserves.

Property, Plant and Equipment

Property, plant and equipment, including equipment under capital leases, are stated at cost less accumulated depreciation. Equipment under capital lease is stated at the lower of the present value of the minimum lease payments at the beginning of the lease term or the fair value of the leased assets at the inception of the lease. Depreciation is computed using the straight-line method over estimated useful lives of 1 to 14 years for equipment and 24 years to 50 years for property and plant. Upon disposal, the assets and related accumulated depreciation are removed from our accounts and the resulting gains or losses are reflected in the statements of operations. Repairs and maintenance costs are charged to expense. Depreciation of leasehold improvements is provided on the straight-line method over the shorter of the estimated useful life or the term of the lease.

The authoritative guidance provided by FASB requires evaluating the recoverability of the carrying amount of our property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Impairment is assessed when the forecasted undiscounted cash flows derived for the operation to which the assets relate are less than the carrying amount including associated intangible assets of the operation. If the operation is determined to be unable to recover the carrying amount of its assets, then impairment loss is recognized by reducing the carrying amount of the long-lived asset group on a pro-rata basis using the relative carrying amounts of those assets. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted expected cash flows used to assess impairments and the fair value of an impaired asset. The dynamic economic environment in which we operate and the resulting assumptions used to estimate future cash flows affect the outcome of these impairment tests.

On June 10, 2005, IXYS Semiconductor GmbH, or IXYS GmbH, our German subsidiary, borrowed €10.0 million, or about $12.2 million at the time, from IKB Deutsche Industriebank. This loan is partially collateralized by a security interest in our facility in Lampertheim, Germany and expected to be paid in full by June 30, 2020. See Note 8, “Borrowing and Deferred Payment Arrangements” for more details.

Treasury Stock

We account for treasury stock using the cost method. Cost includes fees charged in connection with acquiring treasury stock.

Other Assets

Other assets include marketable equity securities classified as available-for-sale and long term equity investments accounted under the equity method. Investments designated as available-for-sale are reported at fair value with the unrealized gains and losses, net of tax, recorded in other comprehensive income (loss). Realized gains and losses (calculated as proceeds less specifically identified costs) and declines in value of these investments judged by management to be other than temporary, if any, are included in other income (expense).

 

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We have a 45% equity interest in Powersem GmbH, or Powersem, a semiconductor manufacturer based in Germany, and 20% equity interest in EB Tech Ltd., or EB Tech, a radiation services provider based in South Korea. These investments are accounted for using the equity method. In fiscal 2014, we recognized income of $115,000 on our investment in Powersem and $188,000 on our investment in EB Tech Ltd. In fiscal 2013, we recognized income of $107,000 and $124,000 on each of these investments, respectively. In fiscal 2012, we recognized income of $461,000 and $190,000 on each of these investments, respectively.

Refer to Note 5, “Other Assets” and Note 13, “Related Party Transactions” for further information regarding the investment balances and the related transactions of those long term equity investments.

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 carried at fair value and 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 exceed 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 have one reporting unit that has goodwill allocated to it.

We use the income approach, based on estimated future cash flows, to perform the quantitative goodwill impairment test when and if required. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates and future economic and market conditions. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. By their nature, these assumptions would not reflect unanticipated events and circumstances that may occur. Due to the significant unobservable inputs inherent in discounted cash flow methodologies, computations using this method are classified as Level 3 in the fair value hierarchy.

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.

See Note 7, “Goodwill and Intangible Assets” for further discussion of impairment analysis of goodwill and related charges recorded.

Derivative Financial Instruments

Although the majority of our transactions are in U.S. dollars, we enter into foreign exchange forward and option contracts to manage foreign currency exchange risk associated with our operations. From time to time, we purchase short-term, foreign exchange forward and option contracts to hedge the impact of foreign currency

 

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fluctuations on certain underlying assets, liabilities and commitments for operating expenses denominated in foreign currencies. The purpose of entering into these hedge transactions is to minimize the impact of foreign currency fluctuations on the results of operations. The contracts generally have maturity dates that do not exceed six months. We did not have any open foreign exchange forward and option contracts at March 31, 2014. We have entered into an interest rate swap to manage our variable interest rate exposure on the borrowing from IKB Deutsche Industriebank.

We do not purchase derivative contracts for trading purposes. We elected not to designate these contracts as accounting hedges and any changes in fair value are marked to market and other income (expense), net. See Note 4, “Fair Value” and Note 8, “Borrowing and Deferred Payment Arrangements” for further information on the borrowing from IKB Deutsche Industriebank.

Defined Benefit Plans

We maintain pension plans covering certain of our employees. For financial reporting purposes, net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increases for plan employees. All of these assumptions are based upon management’s judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans. The authoritative guidance provided by FASB requires us to recognize the funded status of our defined benefit pension and post-retirement benefit plans in our consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income, net of tax.

Fair Value of Financial Instruments

The assessment of fair value for our financial instruments is based on the authoritative guidance provided by FASB in connection with fair value measurements. It defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

Carrying amounts of some of our financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to their short maturities. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of notes payable to banks and loans payable approximate fair value and represent level 2 valuations.

Advertising Expense

We expense advertising as the costs are incurred. Advertising expense for the years ended March 31, 2014, 2013 and 2012 was $631,000, $649,000 and $655,000, respectively. Advertising expense is included in “Selling, general and administrative expenses” on our consolidated statements of operations.

Research and Development Expense

Research and development costs are charged to operations as incurred.

Income Taxes

Our provision for income taxes is comprised of our current tax liability and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is required to reduce the 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, we will increase

 

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our valuation allowance with a charge to income tax expense. Conversely, if we determine that it is more likely than not 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, the related portion of the valuation allowance will be released, which will have the effect of reducing income tax expense. Significant management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against 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 or increase an additional valuation allowance that could materially impact our financial position and results of operations. Our ability to utilize our deferred tax assets and the continuing need for related valuation allowances are monitored on an ongoing basis. See Note 17, “Income Taxes” in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion regarding income taxes.

Other Income and Expense

Other income and expense primarily consists of gains and losses on foreign currency transactions and interest income and expense, together with our share of income or loss from investments accounted for on the equity method and other than temporary impairment on available-for-sale securities.

Indemnification

Product guarantees and warranties have not historically proved to be material. 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 March 31, 2014 and 2013.

Legal Contingencies

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. The authoritative guidance provided by FASB requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a material loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position, results of operations or cash flows.

Net Income (Loss) per Share

Basic net income (loss) available per common share is computed using net income (loss) and the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed using net income (loss) 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 and assumed vesting of restricted stock units using the treasury stock method. See Note 12, “Computation of Earnings per Share.”

Accumulated Other Comprehensive Income

Accumulated other comprehensive income or loss represents foreign currency translation adjustments, unrealized gain or loss on equity investments classified as “available-for-sale” and minimum pension liability, net of tax. See Note 11, “Accumulated Other Comprehensive Income (Loss).”

 

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Concentration and Business Risks

Dependence on Third Parties for Wafer Fabrication and Assembly

Measured in dollars, in fiscal 2014 we manufactured approximately 56.4% of our wafers, an integral component of our products, in our facilities in Germany, the UK, Massachusetts and California. We relied on third party suppliers to provide the remaining 43.6%. There can be no assurance that material disruptions in supply will not occur in the future. In such event, we may have to identify and secure additional foundry capacity and may be unable to identify or secure sufficient foundry capacity to meet demand. Even if such capacity is available from another manufacturer, the qualification process could take six months or longer. If we were unable to qualify alternative manufacturing sources for existing or new products in a timely manner or if such sources were unable to produce semiconductor devices with acceptable manufacturing yields and at acceptable prices, our business, financial condition and results of operations would be materially and adversely affected.

Dependence on Suppliers

We purchase 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 terminate their relationship with us 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. There can be no assurance that problems will not occur in the future with suppliers.

Employees Covered by Collective Bargaining Arrangements

Approximately 52.6% and 96.9% of our employees in the United Kingdom and Germany, respectively, are covered by collective bargaining arrangements.

Concentration of Credit Risk

Financial instruments that potentially subject us to credit risk comprise principally cash and cash equivalents and trade accounts receivable. We invest our excess cash in accordance with our investment policy that has been approved by the Board of Directors and is reviewed periodically by management to minimize credit risk. Regarding cash and cash equivalents, the policy authorizes the investment of excess cash in deposit accounts, certificates of deposit, bankers’ acceptances, commercial paper rated AA or better and other money market accounts and instruments of similar liquidity and credit quality.

We invest our excess cash primarily in foreign and domestic banks in short term time deposit and money market accounts. Maturities are generally three months or less. Our non-interest bearing domestic cash balances exceed federally insured limits. Additionally, we may invest in commercial paper with financial institutions that management believes to be creditworthy. These securities mature within ninety days or less and bear minimal credit risk. We have not experienced any losses on such investments.

We sell our products primarily to distributors and original equipment manufacturers. We perform ongoing credit evaluations of our customers and generally do not require collateral. An allowance for potential credit losses is maintained by us. See Note 15, “Segment and Geographic Information” for a discussion of revenues by geography.

In fiscal 2014, 2013, and 2012, one distributor accounted for 10.8%, 10.3% and 11.3% of our net revenues, respectively; in fiscal 2013 and 2012, another distributor accounted for 13.2% and 11.1% of our net revenues, respectively.

We continually monitor the credit risk in our portfolio and mitigate our credit risk exposures in accordance with the policies approved by our Board of Directors.

 

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Stock-Based Compensation Plans

We have employee equity incentive plans, which are described more fully in Note 10, “Employee Equity Incentive Plans.” The authoritative guidance provided by FASB requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value. Accordingly, share-based compensation is measured at grant date, based on the fair value of the award and shares expected to vest.

Compensation cost for equity incentive awards is based on the grant-date fair value estimated in accordance with the authoritative guidance provided by FASB. We use the straight-line attribution method to recognize share-based compensation costs over the service period of the award.

The fair value of issuances under our Employee Stock Purchase Plan is estimated on the issuance date using the Black-Scholes options pricing model.

Accounting Changes and Recent Accounting Pronouncements

In December 2011, FASB issued authoritative guidance on disclosure about offsetting assets and liabilities. The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance is effective for us in the fiscal year that began on April 1, 2013 and did not have significant impact on our financial statements and disclosures.

In July 2012, FASB issued authoritative guidance on testing indefinite-lived intangible assets for impairment. Under the amendments in this guidance, an entity has the option to assess qualitative factors to determine whether it is more likely than not that the intangible asset is impaired. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, the entity is not required to take further action. If an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived asset and perform the quantitative impairment test by comparing the fair value with the carrying value. The amendments are effective for us in the fiscal year that began on April 1, 2013 and did not have any impact on our financial statements and disclosures since we do not have any indefinite-lived intangible assets; however, the amendments may affect us in the future if we acquire indefinite-lived intangible assets.

In February 2013, FASB issued authoritative guidance on reporting of amounts reclassified out of accumulated other comprehensive income. In addition to the current requirements for reporting net income or other comprehensive income in financial statements, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance is effective for us in the fiscal year that began on April 1, 2013 and did not have a material impact on our financial statements.

In July 2013, FASB issued authoritative guidance on the presentation of unrecognized tax benefits. This new guidance requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset in the case of a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent such a carryforward or loss is not available at the reporting date under the applicable tax law to settle any additional income taxes that would result from the disallowance of a tax position or the deferred tax asset will not be used for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability. The guidance becomes effective for us in the fiscal year that begins on April 1, 2014, with early adoption permitted. We do not expect the guidance to have a material impact on our financial statements.

In April 2014, FASB issued changes to the criteria for determining which disposals are required to be presented as discontinued operations. The changes require a disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results when any of the following occurs: the component of an entity or group of components of an entity meets the criteria to be classified as held for sale,

 

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the component of an entity or group or components of an entity is disposed of by sale, or the component of an entity or group of components of an entity is disposed of other than by sale. The amendments apply on a prospective basis to disposals of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years, with early adoption permitted. We are currently evaluating the impact of the adoption of the standard on our consolidated financial statements.

In May 2014, 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, 2016, including interim periods during the annual period. Early adoption is prohibited. 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 financial statements.

3.    Business Combination

On June 27, 2013, we completed the acquisition of a 4-bit and 8-bit microcontroller product line, or the Acquired MCU Business, of the System LSI Division of Samsung Electronics Co., Ltd. The acquired product line includes microcontrollers potentially useful in a number of applications, which have to date been principally used in consumer product applications. The acquisition is intended to bolster our product portfolio and empower customers to utilize products from across our multiple product lines.

The aggregate purchase price for the acquired assets is $50.0 million. The closing payment was $20.0 million and we are obligated to pay $30.0 million in two installment payments of $15.0 million each. The first installment is due on June 27, 2014 and the second installment is due on December 31, 2014. The installments bear simple interest at a variable annual rate equal to six-month LIBOR plus a 3 percentage point margin. The above deferred payments and interest are included in “Accrued expenses and other current liabilities” on our audited consolidated balance sheets.

As of March 31, 2014, we have incurred $403,000 in legal and consulting costs related to the acquisition. The costs incurred have been fully expensed and are included in “Selling, general and administrative” expenses, or SG&A expenses, on our audited consolidated statements of operations.

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

 

     Purchase
Price
Allocation
 

Inventories

   $ 800  

Property, plant and equipment

     36  

Identifiable intangible assets

     24,000  
  

 

 

 

Total identifiable net assets

     24,836  

Goodwill

     25,164  
  

 

 

 

Total purchase price

   $ 50,000  
  

 

 

 

 

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Identifiable intangible assets consisted of developed intellectual property, customer relationships, contract backlog and a noncompetition agreement. 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. In determining 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 and cost approach were 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, noncompetition agreement, 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 the Acquired MCU Business. The goodwill is not deductible for tax purposes.

The Acquired MCU Business contributed revenues of $36.1 million in our audited consolidated statements of operations for fiscal year 2014. As the Acquired MCU Business is fully integrated within our existing operations we are not able to calculate and report the net income contribution specific to the Acquired MCU Business.

Supplemental Pro Forma Financial Information

The following pro forma summary gives effect to the acquisition of the Acquired MCU Business as if it had occurred at the beginning of fiscal 2013. The pro forma financial information reflects the business combination accounting effects resulting from this acquisition including our amortization charges from acquired intangible assets, the acquisition related expenses and the interest expenses on deferred payments of the acquisition. The summary is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations for future periods.

The Acquired MCU Business’s fiscal year ended on December 31, while our fiscal year ends on March 31. As such, the financial information of the Acquired MCU Business is included in the following unaudited pro forma table so as to align with the reporting periods of our fiscal quarters. In the following unaudited pro forma table, the financial information for fiscal year 2014 includes the historical results of IXYS Corporation for the twelve months ended March 31, 2014 and the historical results of the Acquired MCU Business for the three months ended March 31, 2013; the financial information for fiscal year 2013 includes the historical results of IXYS Corporation for the twelve months ended March 31, 2013 and the historical results of the Acquired MCU Business for the twelve months ended December 31, 2012 (in thousands, except per share data):

 

     Years Ended March 31  
     2014      2013  
     (unaudited)  

Pro forma net revenues

   $ 360,228      $ 369,086  
  

 

 

    

 

 

 

Pro forma net income

   $ 15,364      $ 18,189  
  

 

 

    

 

 

 

Pro forma net income per share (basic)

   $ 0.49      $ 0.59  
  

 

 

    

 

 

 

Pro forma net income per share (diluted)

   $ 0.48      $ 0.57  
  

 

 

    

 

 

 

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 nonperformance. The fair value hierarchy is based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data

 

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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.

 

  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 March 31, 2014 and 2013 (in thousands):

 

     March 31, 2014(1)     March 31, 2013(1)  
     Total     Fair Value
Measured at
Reporting Date
Using
    Total     Fair Value
Measured at
Reporting Date
Using
 

Description

     Level 1      Level 2       Level 1      Level 2  

Money market funds(2)

   $ 59,706     $ 59,706      $     $ 67,959     $ 67,959      $  

Marketable equity securities(3)

     4,158       4,158              4,116       4,116         

Auction rate preferred securities(3)

     350              350       350              350  

Derivative liabilities(4)

     (112            (112     (198            (198
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 64,102     $ 63,864      $ 238     $ 72,227     $ 72,075      $ 152  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) We did not have any recurring assets whose fair value was measured using significant unobservable inputs.

 

(2) Included in “Cash and cash equivalents” on our consolidated balance sheets.

 

(3) Included in “Other assets” on our consolidated balance sheets.

 

(4) Included in “Accrued expenses and other current liabilities” on our 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.

From time to time, we use derivative instruments to manage exposures to changes in interest rates, and the fair values of these instruments are recorded on the balance sheets. We have elected not to designate these instruments as accounting hedges. 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. See Note 8, “Borrowing and Deferred Payment Arrangements” for further information regarding the terms of the derivative contract.

Auction rate preferred securities, or ARPS, are stated at par value based upon observable inputs including historical redemptions received from the ARPS issuers. All of our ARPS have credit ratings of at least AA, 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 300 percent. Accordingly, the remaining ARPS balance is categorized as Level 2 for fair value measurement in accordance with the

 

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authoritative guidance provided by FASB and was recorded at full par value on the consolidated balance sheets as of March 31, 2014 and 2013. 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 fair value in our 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 indebtedness for borrowed money and our installment payment obligations approximate fair value, as the interest rates either adjust according to the market rates or the interest rates approximate the market rates. The estimated fair value of these items was approximately $51.6 million and $21.4 million at March 31, 2014 and March 31, 2013, respectively. Our indebted for borrowed money, which primarily consists of loans from banks, and our installment payment obligations, which consist of the deferred payments for our Acquired MCU Business, are categorized as Level 2 for fair value measurement. See Note 9, “Pension Plans” for a discussion of pension liabilities.

5.    Other Assets

Other assets consist of the following (in thousands):

 

     March 31,  
     2014      2013  

Marketable equity securities

   $ 4,158      $ 4,116  

Auction rate preferred securities

     350        350  

Equity method investments

     5,921        5,449  

Other items

     1,352        320  
  

 

 

    

 

 

 

Total

   $ 11,781      $ 10,235  
  

 

 

    

 

 

 

In fiscal 2014 and 2013, based on evaluation of available evidence we concluded that certain marketable equity securities had impairment other than temporary. As a result, we realized an impairment loss totaling $7,000 and $1.3 million in each fiscal year, respectively. Available-for-sale investment securities have been stated at their fair value as of March 31, 2014 and include an unrealized gain, net of taxes, of $325,000 at March 31, 2014, and an unrealized gain, net of taxes, of $60,000 at March 31, 2013.

Available-for-sale investments as of March 31, 2014 and 2013 were as follows (in thousands):

 

    Fiscal Year 2014     Fiscal Year 2013  
     Cost     Gross
Unrealized
Gains
    Gross
Unrealized
(Losses)
    Fair
Value
    Cost     Gross
Unrealized
Gains
    Gross
Unrealized
(Losses)
    Fair
Value
 
Marketable equity securities   $ 3,658     $ 509     $ (9   $ 4,158     $ 4,024     $ 109     $ (17   $ 4,116  
Auction rate preferred securities   $ 350     $     $      $ 350     $ 350     $     $     $ 350  

The available-for-sale investments that were in a continuous unrealized loss position as of March 31, 2014 and March 31, 2013, aggregated by length of time that individual securities have been in a continuous loss position, were as follows (in thousands):

 

     Less than 12 Months      12 Months or Greater      Total  

Period

   Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
 

March 31, 2014

   $      $  —       $  9      $  307      $ 9      $  307  

March 31, 2013

   $      9      $  27      $  8      $  263      $  17      $  290  

 

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Gross unrealized losses on our available-for-sale portfolio were immaterial to the consolidated balance sheets at March 31, 2014 and March 31, 2013.

During fiscal 2014, we recognized a gain of $155,000 on the sale of available-for-sale investment securities. In respect of those securities, there was an unrealized gain of $88,000 included in accumulated other comprehensive income as of March 31, 2013.

Our equity method investments constitute investments accounted for under the equity method of accounting. See Note 2, “Summary of Significant Accounting Policies” and Note 13, “Related Party Transactions” for further information on these investments.

6.    Balance Sheet Details

Allowances Movement (in thousands):

 

     Balance at
Beginning
of Year
     Additions      Utilization     Translation
Adjustments
    Balance at
End of Year
 

Allowances for accounts receivable and for doubtful accounts

            

Year ended March 31, 2014

   $ 2,656      $ 8,563      $ (8,255   $ 49     $ 3,013  

Year ended March 31, 2013

   $ 2,473      $ 10,064      $ (9,851   $ (30   $ 2,656  

Year ended March 31, 2012

   $ 3,478      $ 8,524      $ (9,492   $ (37   $ 2,473  

Inventories

Inventories consist of the following (in thousands):

 

     March 31,  
     2014      2013  

Raw materials

   $ 19,957      $ 17,349  

Work in process

     44,165        41,036  

Finished goods

     28,906        25,444  
  

 

 

    

 

 

 

Total

   $ 93,028      $ 83,829  
  

 

 

    

 

 

 

Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):

 

     March 31,  
     2014     2013  

Property and plant (useful life of 24 years to 50 years)

   $ 34,271     $ 33,996  

Equipment owned (useful life of 1 to 14 years)

     107,378       97,104  

Equipment capital leases (useful life of 4 years)

     41,931       40,010  

Leasehold improvements (useful life of up to 8 years)

     1,253       917  
  

 

 

   

 

 

 
     184,833       172,027  

Accumulated depreciation

     (134,264     (120,032
  

 

 

   

 

 

 
   $ 50,569     $ 51,995  
  

 

 

   

 

 

 

Depreciation expense for fiscal years ended March 31, 2014, 2013 and 2012 amounted to $10.7 million, $10.2 million and $10.9 million, respectively.

 

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Accrued Expenses and Other Liabilities

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

 

     March 31,  
     2014      2013  

Uninvoiced goods and services

   $ 9,098      $ 8,204  

Compensation and benefits

     6,880        5,950  

Short-term installment payment obligations

     30,781         

Commission, royalties and other

     3,407        2,838  
  

 

 

    

 

 

 

Total

   $ 50,166      $ 16,992  
  

 

 

    

 

 

 

7.    Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in connection with our Acquired MCU Business. The acquisition was completed in June 2013 and resulted in goodwill of $25.2 million. The goodwill was evaluated based on the factors affecting the business and management concluded that there was no impairment of goodwill at the end of fiscal 2014.

During fiscal 2012, our Zilog reporting unit experienced a significant decline in net revenues and earnings. We performed our annual impairment review based on the declining business outlook of the reporting unit. The material assumptions used for the income approach were five years of projected net cash flows, a discount rate of 20% and a long-term growth rate of 2%. We considered historical rates and current market conditions to determine the discount and growth rates for the analysis. We concluded that the goodwill associated with the Zilog reporting unit was completely impaired. As a result, we wrote off all the outstanding goodwill related to the Zilog acquisition and recorded an impairment charge of $6.4 million.

The changes in the carrying amount of goodwill for the years ended March 31, 2014 and 2013 are as follows (in thousands):

 

     March 31,  
     2014     2013  

Goodwill

   $ 13,192     $ 13,192  

Accumulated impairment losses

     (13,192     (13,192
  

 

 

   

 

 

 

Net goodwill at beginning of period

            

Goodwill acquired in acquisition

     25,164        
  

 

 

   

 

 

 

Net goodwill at end of period

   $ 25,164     $  
  

 

 

   

 

 

 

Identifiable Intangible Assets

Identified intangible assets consisted of the following as of March 31, 2014 (in thousands):

 

     Gross
Intangible
Assets
     Accumulated
Amortization
     Net
Intangible
Assets
 

Developed intellectual property

   $ 16,304      $ 4,984      $ 11,320  

Customer relationships

     13,020        8,695        4,325  

Contract backlog

     7,155        7,155         

Other intangible assets

     1,608        906        702  
  

 

 

    

 

 

    

 

 

 

Total identifiable intangible assets

   $ 38,087      $ 21,740      $ 16,347  
  

 

 

    

 

 

    

 

 

 

 

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Identified intangible assets consisted of the following as of March 31, 2013 (in thousands):

 

     Gross
Intangible
Assets
     Accumulated
Amortization
     Net
Intangible
Assets
 

Developed intellectual property

   $ 4,800      $ 2,458      $ 2,342  

Customer relationships

     6,100        6,100         

Contract backlog

     2,000        2,000         

Other intangible assets

     1,187        636        551  
  

 

 

    

 

 

    

 

 

 

Total identifiable intangible assets

   $ 14,087      $ 11,194      $ 2,893  
  

 

 

    

 

 

    

 

 

 

In fiscal 2014, we reviewed our intangible assets associated with the acquisition of Acquired MCU Business and Zilog and concluded that they were not impaired. In fiscal 2013, we reviewed our intangible assets associated with the Zilog acquisition and concluded that they were not impaired.

The following table summarizes the components of the acquired identifiable intangible assets associated with the acquisitions of the Acquired MCU Business and Zilog. The fair value of the amortizable intangible assets was determined using the income approach, royalty savings approach and cost approach.

 

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

Acquired MCU Business

        

Developed intellectual property

   $ 11,504        Straight-line        60  

Customer relationships

     6,920        Accelerated        36  

Contract backlog

     5,155        Straight-line        9  

Trade name

     421        Straight-line        60  
  

 

 

       

Total for Acquired MCU Business

   $ 24,000        
  

 

 

       

Zilog

        

Developed intellectual property

   $ 4,800        Straight-line        72  

Customer relationships

     6,100        Accelerated        37  

Contract backlog

     2,000        Straight-line        12  

Trade name

     1,100        Straight-line        72  
  

 

 

       

Total for Zilog

   $ 14,000        
  

 

 

       

The amortization of intangible assets is expected to be approximately $6.0 million, $4.7 million, $2.7 million, $2.4 million and $596,000 in fiscal 2015, 2016, 2017, 2018 and 2019, respectively.

8.    Borrowing and Deferred Payment Arrangements

Bank of the West

On December 6, 2013, we entered into an Amended and Restated Credit Agreement with Bank of the West, or BOTW, for a revolving line of credit of $50.0 million. All amounts owed under the credit agreement are due and payable on November 30, 2015. Borrowings may be repaid and re-borrowed at any time during the term of the credit agreement. The obligations are guaranteed by two of our subsidiaries. At March 31, 2014, the outstanding principal balance under the credit agreement was $15.0 million.

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, an alternative base rate plus a margin or a floating rate plus a margin. The margin can range from 0.75% to 2.5%, depending on interest rate alternatives and on our leverage

 

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of liabilities to effective tangible net worth. The effective interest rate as of March 31, 2014 was 1.95%. An unused commitment fee is also payable. It ranges from 0.25% to 0.625%, depending on leverage.

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. As of March 31, 2014, we complied with all of these financial covenants.

The credit agreement also includes a $3.0 million letter of credit subfacility. See Note 18, “Commitments and Contingencies” for further information regarding the terms of the subfacility.

IKB Deutsche Industriebank

On June 10, 2005, IXYS Semiconductor GmbH, our German subsidiary, borrowed €10.0 million, or about $12.2 million at the time, from IKB Deutsche Industriebank. This loan is partially collateralized by a security interest in our facility in Lampertheim, Germany and is expected to be paid in full on June 30, 2020. The outstanding balance at March 31, 2014 was €4.2 million, or $5.7 million.

The interest rate on the loan is determined by adding the then effective three month Euribor rate and a margin. The margin can range from 0.7% to 1.25%, depending on the calculation of a ratio of indebtedness to cash flow for our German subsidiary. In June 2010, we entered into an interest rate swap agreement commencing June 30, 2010. The swap agreement has a fixed interest rate of 1.99% and expires on June 30, 2015. The effective interest rate as of March 31, 2014 was 2.69%. The swap is not designated as a hedge in the financial statements. See Note 4, “Fair Value” for further information regarding the derivative contract.

During each fiscal quarter, a principal payment of €167,000, or about $230,000, 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 at the end of a fiscal quarter without penalty. At March 31, 2014, we complied with the financial covenants. The loan is partially collateralized by a security interest in the facility owned by our company in Lampertheim, Germany.

Acquired MCU Business Deferred Payments

We are obligated to pay $30.0 million in two installment payments of $15.0 million each to Samsung Electronics Co, Ltd. that relate to the Acquired MCU Business. The first installment is due on June 27, 2014 and the second installment is due on December 31, 2014. The installments bear simple interest at a variable annual rate equal to six-month LIBOR plus a 3 percentage point margin. The above deferred payments and interest accruals are included in “Accrued expenses and other current liabilities” on our consolidated balance sheets. The effective interest rate of the deferred payments as of March 31, 2014 was 3.42%.

Aggregate Debt Maturities

Aggregate debt maturities at March 31, 2014 were as follows (in thousands):

 

Fiscal Year Payable

   Amount  

2015

   $ 31,809  

2016