UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-19032
ATMEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 77-0051991 (I.R.S. Employer Identification Number) | |
1600 Technology Drive, San Jose, California 95110
(Address of principal executive offices)
(408) 441-0311
(Registrant’s telephone number)
Title of Each Class Common Stock, par value $0.001 per share | Name of Exchange on Which Registered The NASDAQ Stock Market LLC (NASDAQ Global Select Market) | |
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 of 1933.
Yes x No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). Yes o No x
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. x
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. (Check one):
Large accelerated filer x | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting filer o | |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2013, the last business day of the Registrant's most recently completed second fiscal quarter, there were 427,930,699 shares of the Registrant's Common Stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ Global Select Market on June 28, 2013 was approximately $3,049,446,834. Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
On January 31, 2014, the Registrant had 425,452,217 outstanding shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the Registrant's 2014 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the Registrant's fiscal year ended December 31, 2013.
TABLE OF CONTENTS
Page | |
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
You should read the following discussion in conjunction with our Consolidated Financial Statements and the related “Notes to Consolidated Financial Statements” and “Financial Statement Schedules" and "Supplementary Financial Data” included in this Form 10-K. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2014 and beyond. Our statements regarding the following matters also fall within the meaning of “forward-looking” statements and should be considered accordingly: the expansion of the market for microcontrollers, revenue for our maXTouch® products, expectations for our XSense® products, our gross margin expectations and trends, anticipated revenue by geographic area and the ongoing transition of our revenue base to Asia, expectations or trends involving our operating expenses, capital expenditures, cash flow and liquidity, our factory utilization rates, the effect and timing of new product introductions, our ability to access independent foundry capacity and the corresponding financial condition and operational performance of those foundry partners, including insolvencies of, and litigation related to European foundry suppliers, the effects of our strategic transactions and restructuring efforts, the estimates we use in respect of the amount and/or timing for expensing unearned share-based compensation and similar estimates related to our performance-based restricted stock units, our expectations regarding tax matters and related tax audits, the outcome of litigation (including intellectual property litigation in which we may be involved or in which our customers may be involved, especially in the mobile device sector) and the effects of exchange rates and our ongoing efforts to manage exposure to exchange rate fluctuation. Our actual results could differ materially from those projected in any forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion and in Item 1A - Risk Factors, and elsewhere in this Form 10-K. Generally, the words “may,” “will,” “could,” “should,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-K is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. We undertake no obligation to update any forward-looking statements in this Form 10-K.
BUSINESS
General
We are one of the world’s leading designers, developers and suppliers of microcontrollers, which are self-contained computers-on-a-chip. Microcontrollers are generally less expensive, consume less power and offer enhanced programming capabilities compared to traditional microprocessors. Our microcontrollers and related products are used in many of the world’s leading industrial and automotive electronics, mobile computing and communications devices, including smartphones, tablets, Ultrabooks and personal computers, and other electronics products in which they provide core, embedded functionalities for, among other things, touch and proximity sensing, sensor management, security and encryption, wireless connectivity, lighting and system controls and battery management. We continue to extend our product portfolio through the ongoing development and introduction of additional wireless products that allow devices to communicate and connect with each other, having continued to integrate enhanced wireless capabilities into our product portfolio using technologies such as Zigbee and “Wi-Fi Direct,” that enable the so-called “Internet of Things,” where smart, connected devices and appliances seamlessly share data and information. We also expect these products to proliferate within the quickly evolving “wearables” sector, where our microcontrollers may be used to manage multiple accelerometers or sensors within a device, to communicate information from that device to a gateway, or to track or monitor other activities. We also continue to enable and enhance human computer interaction by leveraging our market leading capacitive touch products, our microcontroller know-how and our significant intellectual property ("IP") portfolio. In addition, we continuously seek new market opportunities that benefit from our corporate and technology strengths, as we did when we launched our XSense product, a new type of proprietary metal mesh technology for touch sensors. To maintain a broad market reach, we also design and sell other semiconductor products that complement our microcontroller business, including nonvolatile memory, radio frequency and mixed-signal components and application specific integrated circuits. Our product portfolio allows us to address a broad range of high growth applications, including, for example, industrial, building and home electronics systems, smart meters used for utility monitoring and billing, commercial, residential and architectural LED-based lighting systems, touch panels used on household and industrial appliances, medical devices, aerospace and military products and systems, and a growing universe of electronic-based automotive systems like keyless ignition and access, engine control, air-bag deployment, and lighting and entertainment systems. We expect the market for microcontrollers to continue to expand over time as tactile, gesture and proximity-based user interfaces become increasingly prevalent, as additional intelligence is built into an ever-growing universe of everyday products for the “Internet of Things” or integrated within “wearable” devices, as industrial and automotive customers accelerate the replacement of mechanical or passive controls in their products, and as power management, authentication, cryptographic, security and similar capabilities become increasingly critical to many industrial, automotive, consumer and medical products.
We have developed an extensive IP portfolio of more than 1,500 U.S. and foreign patents. Our patents, and patent applications, cover important and fundamental microcontroller, capacitive touch and other technologies that support and protect our products.
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We were originally incorporated in California in December 1984. In October 1999, we were reincorporated in Delaware. Our principal offices are located at 1600 Technology Drive, San Jose, California 95110, and our telephone number is (408) 441-0311. Our website is located at: www.atmel.com; however, the information in, or that can be accessed through our website is not part of this annual report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, through the “Investors” section of www.atmel.com and we make them available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). The SEC also maintains a website located at www.sec.gov that contains our SEC filings.
Products
We currently organize our business into four reportable operating segments (see Note 14 of Notes to Consolidated Financial Statements for further discussion). Each of those reportable operating segments offers products that compete in one or more of the end markets described below under the caption “Principal Markets and Customers.”
• | Microcontrollers. This segment includes Atmel's maXTouch capacitive touch product families and our general purpose microcontroller and microprocessor families, AVR® 8-bit and 32-bit products, ARM® based products, Atmel's 8051 8-bit products, designated commercial wireless products, including low power radio and SOC products that meet Zigbee and Wi-Fi specifications and optimized products for mobile sensor hub, smart energy, touch button and LED lighting applications. Our new XSense metal mesh touch sensor products are also included in this segment. The Microcontroller segment comprised 65% of our net revenue for the year ended December 31, 2013, compared to 62% of our net revenue for the year ended December 31, 2012. |
• | Nonvolatile Memories. This segment includes electrically erasable programmable read-only ("EEPROM") and erasable programmable read-only memory (“EPROM”) devices. In the third quarter of 2012, we sold our Serial Flash product line. The Nonvolatile Memories segment comprised 8% of our net revenue for the year ended December 31, 2013, compared to 12% of our net revenue for the year ended December 31, 2012. |
• | Radio Frequency (“RF”) and Automotive. This segment includes automotive electronics, wireless and wired devices for industrial, consumer and automotive applications and foundry services. The RF and Automotive segment comprised 13% of our net revenue for the year ended December 31, 2013, compared to 12% of our net revenue for the year ended December 31, 2012. |
• | Application Specific Integrated Circuits (“ASIC”). This segment includes custom application specific integrated circuits designed to meet specialized single-customer requirements for their high performance devices, including products that provide hardware security for embedded digital systems, products with military and aerospace applications and application specific standard products for space applications, power management and secure cryptographic memory products. The ASIC segment comprised 14% of our net revenue for the year ended December 31, 2013, compared to 14% of our net revenue for the year ended December 31, 2012. |
Within each reportable operating segment, we offer our customers products and solutions with a range of speed, density, power usage, specialty packaging, security and other features.
Microcontrollers
Our Microcontroller segment offers customers a full range of products to serve the industrial, consumer, security, communications, computing and automotive markets for embedded control and interface solutions. Our product portfolio consists of proprietary and non-proprietary architectures, with four major Flash-based microcontroller families targeted at the high volume embedded control market, including our:
• | Atmel SAM, 32-bit ARM product families; |
• | Atmel AVR proprietary 8-bit and 32-bit product families; |
• | Atmel 8051 8-bit product families; and |
• | Atmel maXTouch and QTouch® product families. |
We also offer ARM based microprocessor products that do not have integrated flash memory and both Wi-Fi and Zigbee wireless solutions, which enable personal area networks and direct device-to-device communication and connectivity.
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ARM-based Solutions
Our AT91SAM ARM-based products use the industry-standard 32-bit ARM™, ARM9™, ARM5 and ARM Cortex architectures. Those products allow us to offer a range of products with and without embedded nonvolatile memories. Our AT91SAM customers save significant development time using our proprietary integrated development platform known as Atmel Studio, supplemented by broad industry-standard development tools, operating systems (including Linux and Android), protocol stacks and applications.
Our Atmel Cortex M3-based, Cortex M4-based, Cortex M0+-based and ARM7TDMI-based microcontrollers provide a migration path from 8/16-bit microcontroller technology for applications where more system performance and larger on-chip Flash memory is required. These products are optimized for low power consumption and reduced system cost and support our QTouch technology. Selected devices integrate cryptographic accelerators and protection against physical attacks, making them suitable, as an example, for financial transaction applications requiring the highest security levels.
Our SAMA5 ARM A5-based products introduced in 2013 offer high performance embedded processors combined with high levels of integration and optimization for low power and small size that offer advantages in battery powered applications and embedded control systems.
Our SAM9 ARM926-based products are highly-integrated, high-performance 32-bit embedded microprocessors, with complex analog and digital peripherals integrated on the same chip, offering high-speed connectivity, optimal data bandwidth, and rich interface support.
AVR Microcontrollers
Atmel AVR microcontrollers, which incorporate our proprietary technology, combine a code-efficient architecture for “C” and assembly programming with the ability to tune system parameters throughout the product’s entire life cycle. Our AVR microcontrollers, available with both 8-bit and 32-bit processors, are designed to deliver enhanced computing performance at lower power consumption than any competitive products. We also offer a full suite of industry leading development tools and design support, enabling customers to easily and cost-effectively refine and improve their product offering. We have a significant development community that has evolved for our AVR products, with many developers actively collaborating through social networking sites dedicated to supporting our AVR microcontrollers.
Atmel 8051
Our 8051 8-bit microcontroller product offering is based on the standard 8051 CPU and ranges from products containing 2 kilobytes (“Kbytes”) of embedded Flash memory to the largest products offering 128 Kbytes of embedded Flash memory. Our 8051 products address a significant portion of the 8-bit microcontroller market in which customers already have an installed software and application base that uses standard 8051 architecture.
Atmel Wireless Solutions
Atmel wireless solutions are focused on enabling the market for smart connected devices and applications for the “Internet of Things” and “wearables” sectors, supporting industry standard Zigbee and Wi-Fi protocols as well as providing the option of integrations with Atmel microcontroller solutions and development tools.
All our microcontroller product families are supported by Atmel Studio, an online, integrated development platform for developing and debugging embedded processing systems. We believe that our portfolio of AVR and ARM-based products gives us one of the broadest microcontroller portfolios in the market.
Touch Solutions
Through our maXTouch and QTouch products, we are a leading supplier of capacitive sensing solutions enabling touch screens and other touch interfaces for mobile devices, automobiles and other industrial and consumer electronic systems.
Our maXTouch architecture combines touch sensing with sophisticated algorithms, enabling the most advanced touch capabilities on screen sizes ranging from gaming controls, through mobile phones to tablet devices and larger screen computers.
Our QTouch devices are microcontroller-based capacitive sensing solutions designed to enable discrete button, slider and wheel (“BSW”) touch applications. With the flexibility of our microcontroller architecture, a user is able to integrate multiple touch features in a single device such as “proximity sensing” or gesture recognition.
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XSense
XSense is a copper-based metal mesh touch sensor, which is manufactured using a proprietary fabrication process. It provides a thinner, flexible and higher performing alternative to existing touch sensors which are predominantly based on Indium Tin Oxide ("ITO”). XSense products are optimal for a wide range of touchscreen products, enabling thinner sensor stacks with superior performance and excellent optical clarity. XSense allows original equipment manufacturers ("OEMs") to develop larger, lighter, sleeker, curved and edgeless designs for smartphones, tablets, Ultrabooks and other touch-enabled products.
Nonvolatile Memories
EEPROM
EEPROM products offer customers the flexibility and ability to alter single bytes of data. Our EEPROM products consist of two main families, Serial EEPROM and Parallel EEPROM.
Atmel Serial EEPROMs
Our Serial EEPROM products were developed to meet market demand for delivery of nonvolatile memory content through specialized, low pin-count interfaces and packages. The product portfolio includes densities ranging from 1K-bit to 1M-bit. We currently offer three complete families of Serial EEPROMs, supporting industry standard I2C (2-wire), MicrowireTM (3-wire), and serial peripheral interface (“SPI”) protocols. Our Serial EE products are primarily used to store personal preference data and configuration/setup data, in consumer, automotive, telecommunications, medical, industrial, and PC applications, such as WLAN adapters, LCD TVs, video game systems and GPS devices.
Atmel Parallel EEPROMs
We are a leading supplier of high performance, in-system programmable Parallel EEPROMs. We believe that our Parallel EEPROM products represent the industry’s most complete offering. We emphasize high reliability in the design of our Parallel EEPROMs, which is achieved through the incorporation of on-chip error detection and correction features. Parallel EEPROMs offer high endurance programmability and are highly flexible, offering faster data transfer rates and higher memory densities when compared to some serial interface architectures. These products are generally used to store frequently updated data in communications infrastructure equipment and avionics navigation systems.
Atmel EPROMs
The general one-time programmable (“OTP”) EPROM market is a niche segment within the nonvolatile memory market, as Serial Flash and similar technologies have become more prevalent. Our OTP EPROM products address the high-performance end of this market where demand and pricing is relatively stable. These products are generally used to store the operating code of embedded microcontroller or DSP-based systems that need a memory solution for direct code execution where the memory contents cannot be tampered with or altered by the user.
Radio Frequency (“RF”) and Automotive
Automotive RF
We are a leading supplier of automobile access solutions, which include complete keyless entry products for wireless passive entry/go systems, corresponding ICs for access control unit receivers and transceivers, and components for tire pressure monitoring systems for automobiles. Our innovative immobilizer ICs, which incorporate the widely accepted advanced encryption standard (“AES”), offer enhanced car theft protection.
High Voltage
High voltage ICs are manufactured utilizing mixed signal high voltage technology, providing analog-bipolar, high voltage DMOS power and CMOS logic function on a single chip. Our high voltage ICs withstand and operate at high voltages that can be connected directly to the battery of a car, and focus on intelligent load drivers and local interconnect network in-vehicle networking (“LIN/IVN”). The applications for the load drivers are primarily motor and actuator drivers and smart valve controls. Our LIN/IVN in-vehicle networking products help car makers simplify the wire harness by using the LIN bus, which is rapidly gaining popularity. Many body electronic applications can be connected and controlled via the LIN network bus, including switches, actuators and sensors.
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RF Components
The RF product line includes low frequency RF identification tag ICs targeted toward the access control market and the
livestock and pet tagging markets. These ICs are used with a reader IC to make contactless identification possible for a variety of applications. Our RF products also target the industrial, scientific, and medical (“ISM”) RF markets, including wireless remote control applications such as home alarm systems, garage door openers, remote controlled toys and wireless game consoles.
ASIC
Custom ASICs
We design, manufacture and market ASICs to meet customer requirements for high-performance logic devices in a variety of customer-specific applications. Our design platform utilizes our extensive libraries of qualified analog and digital IP blocks. This approach integrates system functionality into a single chip based on our unique architecture platform combined with one of the richest libraries of qualified IP blocks in the industry. By combining a variety of logic functions on a single chip, costs are reduced, design risk is minimized, time-to-market is accelerated and performance can be optimized.
We design and manufacture ASICs in a range of products that includes standard digital and analog functions, as well as nonvolatile memory elements and large pre-designed macro functions all integrated on a single chip. We work closely with customers to develop and manufacture custom ASIC products so that we can provide them with IC solutions on a sole-source basis. Our ASIC products are targeted primarily at high-volume customers whose applications require high-speed, high-density or low and mixed-voltage devices such as customers in the medical, consumer and security markets.
Secure Products
Our hardware authentication devices offer a highly secure, hardened solution for reliable authentication of legitimate OEM offerings, storage for confidential information and trusted identification across wired and wireless networks. We produce our CryptoMemory®, CryptoRF® and secure microcontrollers, among other things, for point of sales terminals, to enable authentication of cartridges and other peripherals with host systems.
Field Programmable Gate Arrays (“FPGAs”)
Our foreign subsidiaries offer a family of radiation-hardened FPGAs for space applications that can replace one-time-programmable devices from other vendors. In addition, we offer FPGA-to-ASIC conversions for space and other aerospace applications.
Technology
For nearly 30 years, we have focused our efforts on developing advanced CMOS processes that can be used to manufacture reliable nonvolatile elements for memory and advanced logic integrated circuits. We believe that our experience in single and multiple-layer metal CMOS processing gives us a competitive advantage in developing and delivering high-density, high-speed and low-power memory and logic products.
We meet customers’ demands for constantly increasing functionality on ever-smaller ICs by increasing the number of layers we use to build the circuits on a wafer and by reducing the size of the transistors and other components in the circuit. To accomplish this we develop and introduce new wafer processing techniques as necessary. Our current ICs incorporate effective feature sizes as small as 65 nanometers. We are developing processes that will support effective feature sizes smaller than 45 nanometers, which we expect to produce at outside wafer foundries in the future. In 2010, we completed our transition to a “fab-lite” manufacturing model and now own and operate one wafer fabrication facility located in Colorado Springs, Colorado.
Principal Markets and Customers
Arrow Electronics, Inc., a distributor, and Samsung Electronics Co Ltd. ("Samsung"), an end-customer, each accounted for more than 10% of our revenue for both the years ended December 31, 2013 and 2012. There was no customer that accounted for more than 10% of our revenue for the year ended December 31, 2011. For further discussion see Note 14 of the Notes to the Consolidated Financial Statements.
Industrial
While the industrial electronics market has traditionally been considered a slow growth end-market compared to the communications or computing sectors, the use of digital electronics in industrial applications has continually increased. The demand for energy efficiency and productivity gains in electronic-enabled systems is driving the switch from mechanical to digital solutions
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for products such as temperature sensors, motor controls, factory lighting, smart energy meters, capacitive touch interface and commercial appliances. We provide microcontrollers, nonvolatile memory, high-voltage and mixed-signal products that are designed to work effectively in harsh environments.
Mobile Devices
Mobile devices, which use our capacitive touchscreen and sensor management technologies, are one of our largest end user markets. We offer solutions for screen sizes ranging from 1.5" to 23.0", thereby allowing us to address the smartphone, tablet, Ultrabook and personal computer, gaming and other developing segments. Product life cycles in these markets tend to be significantly shorter than the life cycle for products in the industrial market, requiring more frequent product refreshes and ongoing reviews and enhancements of feature sets.
We also expect our XSense touch sensor product to enable our customers to enhance the touch experience on their mobile devices. Our XSense touch sensors use copper-based mesh technologies to provide a high-performance alternative to existing touch sensors manufactured using primarily ITO.
We believe that our capacitive touch solutions and XSense products, either alone or in combination with each other, offer a compelling suite of products for the mobile device industry.
Consumer Goods
Our products are used in many consumer electronics products. We provide microcontrollers for batteries and battery chargers that minimize power usage by being “turned on” only when necessary. Our microcontrollers are also offered for lighting controls and touchscreen user interface applications. In addition, we provide secure tamper resistant circuits for embedded personal computer security applications.
We also sell BSW products that are used to provide tactile-based user interfaces for many consumer products. Our BSW technology can be found, for example, in many home appliances, such as washing machines, dryers and refrigerators.
Automotive
The automobile market continues to rely more extensively on electronics solutions. For automotive applications, we provide semiconductors used in electronics for passenger comfort and convenience, safety related subsystems such as air-bag drivers, and tire pressure monitors, keyless entry transmitters, capacitive touch interface including touch screens and receivers and in-vehicle infotainment components. With our introduction of high-voltage and high-temperature capable ICs we are broadening our automotive reach to systems and controls in the engine compartment. Virtually all of these are application‑specific mixed signal ICs. Although the automotive industry underwent significant disruption from 2008 to 2011 as a result of the global economic recession and several natural disasters, we believe that this market offers longer-term growth opportunities that will be driven by the ongoing demand for sophisticated automotive electronic systems.
Military and Aerospace
The military and aerospace industries require products that will operate under extreme conditions and are tested to higher standards than commercial products. Through foreign subsidiaries, we offer radiation‑hardened (“Rad-Hard”) products that meet the unique requirements of space and industrial applications. For these applications, our foreign subsidiaries provide Rad-Hard ASICs, FPGAs, SRAM, nonvolatile memories and microcontrollers. We also offer devices designed for aviation and military applications.
Communications, Networking and Telecommunications
We offer a range of products based on the IEEE 802.11 ("Wi-Fi") and 802.15.4 ("Zigbee") wireless protocols that enable instant connectivity between electronic devices. We also offer RF ASICs that are used for two-way pagers, mobile radios, cordless phones, and nonvolatile memory and programmable logic products that are used in the switches, routers, cable modem termination systems and digital subscriber line (“DSL”) access multiplexers, which are used to build internet infrastructure.
Manufacturing
Once we either produce or purchase fabricated wafers, we probe and test the individual circuits on them to identify those that do not function. After probe, we send all of our wafers to one of our independent assembly contractors where they are cut into individual chips and assembled into packages. Most of the finished products are given a final test by the assembly contractors although some are shipped to our test facilities in the Philippines, where we perform final electrical testing and visual inspection before delivery to customers.
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The raw materials and equipment we use to produce our integrated circuits are available from several suppliers. We are not dependent upon any single source of supply. However, some materials have been in short supply in the past and lead times on occasion have lengthened, especially during semiconductor expansion cycles.
As of December 31, 2013, we owned and operated one wafer fabrication facility located in Colorado Springs, Colorado. Consistent with our strategic determination made several years ago to maintain lower fixed costs and capital investment requirements, we rely primarily on third-party semiconductor foundry partners for our most advanced manufacturing requirements.
We manufacture our XSense touch sensors in our Colorado Springs, Colorado manufacturing facility, having converted a portion of that facility from wafer manufacturing to XSense production. We purchase base film for XSense from a supplier and apply the sensor circuitry to the film in our facility. The circuitized film is then shipped to touch panel manufacturing companies where it is assembled into touch panel modules ready for further integration into finished system products.
Environmental Compliance
We are subject to a variety of international, federal, state and local governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes.
Increasing public attention has been focused on the environmental impact of semiconductor operations. Although we have not experienced any material adverse effect on our operations from environmental regulations, any changes in such regulations or in their enforcement may impose the need for additional capital equipment or other requirements. If for any reason we fail to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations, we could be subject to substantial liability or our manufacturing operations could be suspended. See Item 1A - Risk Factors.
Marketing and Sales
We generate our revenue by selling our products directly to OEMs and indirectly to OEMs through our network of global distributors. We market our products worldwide to a diverse base of OEMs serving primarily commercial markets. We sell our products to large OEM accounts through our direct sales force, using manufacturers’ representatives or through national and regional distributors. Our agreements with our representatives and distributors are generally terminable by either party on short notice, subject to local laws. Direct sales to OEMs as a percentage of net revenue for the year ended December 31, 2013 were 48%, while sales to distributors were 52% of net revenue.
Our sales outside the U.S. represented 86%, 87% and 86% of net revenue in 2013, 2012 and 2011, respectively. We expect that revenue from our international customers and sales to distributors will continue to represent a significant portion of our net revenue. International sales and sales to distributors are subject to a variety of risks, including those arising from currency fluctuations, tariffs, trade barriers, taxes, export license requirements, foreign government regulations, and risk of non-payment by distributors. See Item 1A — Risk Factors.
Research and Development
We believe significant investment in research and development is vital to our success, growth and profitability, and we will continue to devote substantial resources, including management time, to this activity. Our primary objectives are to increase performance of our existing products, develop new wafer processing and design technologies and draw upon these technologies, and our experience in embedded applications to create new products.
For the years ended December 31, 2013, 2012 and 2011, we spent $266.4 million, $251.5 million and $255.7 million, respectively, on research and development. Research and development expenses are charged to operations as incurred. We expect these expenditures to continue to be significant in the future as we continue to invest in new products and new manufacturing process technology.
Competition
We operate in markets that are intensely competitive and characterized by rapid technological change, product obsolescence and price decline. Throughout our product line, we compete with a number of large semiconductor manufacturers, such as Cypress, Freescale, Infineon, Intel, Microchip, NXP Semiconductors, ON Semiconductor, Renesas, Samsung, Silicon Labs, Spansion, STMicroelectronics, Synaptics, and Texas Instruments. Some of these competitors have substantially greater financial, technical, marketing and management resources than we do. We also compete with emerging companies that are attempting to sell products in specialized markets that our products address. We compete principally on the basis of the technical innovation and performance of our products, including product speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. During the last three years, we have experienced significant price competition in several business segments, especially in our Nonvolatile Memory segment for EPROM and Serial EEPROM, and in our Microcontroller segment for commodity microcontrollers. We expect continuing competitive pressures in our markets from existing competitors and
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new entrants, new technology and cyclical demand, which, among other factors, will likely result in continuing pressure to reduce future average selling prices for our products.
Patents and Licenses
Our success and future product revenue growth depend, in part, on our ability to protect our intellectual property. We rely primarily on patents, copyrights, trademarks and trade secrets, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. However, these may not provide meaningful or adequate protection for all of our IP.
As of December 31, 2013, we had 1,503 U.S. and foreign patents and 581 published patent applications. These patents and patent applications cover important and fundamental microcontroller, capacitive touch and other technologies that support our product strategy. We operate an internal program to identify patentable developments and we file patent applications wherever necessary to protect our proprietary technologies.
The semiconductor industry is characterized by vigorous protection and pursuit of IP rights or positions, which have on occasion resulted in significant and often protracted and expensive litigation. From time to time, we receive communications from third parties asserting patent or other IP rights covering our products or processes. In order to avoid the significant costs associated with our defense in litigation involving such claims, we may license the use of the technologies that are the subject of these claims from such companies and be required to make corresponding royalty payments, which may adversely affect our operating results.
We have several patent license agreements with other companies. In the future, it may be necessary or advantageous for us to obtain additional patent licenses from existing or other parties, but these license agreements may not be available to us on acceptable terms, if at all.
Employees
We employed approximately 5,000 employees at both December 31, 2013 and December 31, 2012. Our future success depends in large part on the continued service of our key technical and management personnel and on our ability to continue to attract and retain qualified employees, particularly highly skilled design, process and test engineers necessary for the manufacture of existing products and the research and development of new products and processes. The competition for such personnel is intense, and the loss of key employees could adversely affect our business.
Backlog
We accept purchase orders for deliveries covering periods from one day up to approximately one year from the date on which the order is placed. However, purchase orders can generally be revised or cancelled by the customer without penalty. In addition, significant portions of our sales are ordered with relatively short lead times, often referred to as “turns business.” Considering these industry practices and our experience, we do not believe the total of customer purchase orders outstanding (backlog) provides meaningful information that can be relied on to predict actual sales for future periods.
Geographic Areas
In 2013, 14% of our net revenue was derived from customers in the United States, 59% from customers in Asia, 26% from customers in Europe and 1% from the rest of the world. We determine the location of our customers based on the destination to which we ship our products for the benefit of those customers.
As of December 31, 2013, we owned tangible long-lived assets in the United States with a net book value of $104.9 million, in France of $17.2 million, in Germany of $24.2 million, and in the Philippines of $50.5 million. See Note 14 of Notes to Consolidated Financial Statements for further discussion.
Seasonality
The semiconductor industry is increasingly characterized by annual seasonality and wide fluctuations of supply and demand. A significant portion of our revenue comes from sales to customers supplying consumer markets, particularly the mobile device market, and from international customers. As a result, our business may be subject to seasonally lower revenue in particular quarters of our fiscal year, especially as many of our larger consumer-focused customers tend to have stronger sales later in the fiscal year as they prepare for the major holiday selling seasons.
The industry has also been affected by significant shifts in consumer demand due to economic downturns or other factors, which may result in volatility in order patterns and lead times, sudden shifts in product demand and periodic production over-capacity. We have, in the past, experienced substantial quarter-to-quarter fluctuations in revenue and operating results and expect, in the future, to continue to experience short term period-to-period fluctuations in operating results due to general industry or economic conditions.
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ITEM 1A. RISK FACTORS
In addition to the other information contained in this Form 10-K, we have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operations. Investors should carefully consider the risks described below before making an investment decision. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment. In addition, these risks and uncertainties may affect the “forward-looking” statements described elsewhere in this Form 10-K and in the documents incorporated herein by reference. They could also affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.
OUR REVENUE AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO A VARIETY OF FACTORS.
Our future operating results will be subject to quarterly variations based upon a variety of factors, many of which are not within our control. As further discussed in this “Risk Factors” section, factors that could affect our operating results include:
• | uncertain global macroeconomic conditions, especially in Europe and Asia, and possible fiscal and budget uncertainties in the United States; |
• | the success of our customers’ end products, our ability to introduce new products into the market and our ability to improve and implement new manufacturing technologies, reduce manufacturing costs and achieve acceptable manufacturing yields; |
• | the cyclical nature of the semiconductor industry; |
• | disruption to our business caused by our increased dependence on outside foundries, and the financial instability or insolvency proceedings, and associated litigation, of those foundries in some cases; |
• | our dependence on selling through independent distributors and our ability to obtain accurate and timely sell-through information from these distributors; |
• | the complexity of our revenue reporting and dependence on our management’s ability to make judgments and estimates regarding inventory write-downs, future claims for returns and other matters affecting our financial statements; |
• | our reliance on non-binding customer forecasts and the effect of customer changes to forecasts and actual demand; |
• | the increasing complexity and added costs, compliance and otherwise, associated with laws and regulations around the world that affect our businesses and activities, including, for example, trade, export control, “conflict minerals”, foreign corrupt practices, and bribery regulations; |
• | the effect of fluctuations in currency exchange rates or continued political and monetary uncertainties within the European Union; |
• | the capacity constraints of our independent assembly contractors; |
• | restructuring activities and insolvencies affecting former manufacturing facilities; |
• | the effect of intellectual property and other litigation on us and our customers, and our ability to protect our intellectual property rights; |
• | the highly competitive nature of our markets and our ability to keep pace with technological change; |
• | our dependence on international sales and operations; |
• | information technology system failures or network disruptions and disruptions caused by our system integration efforts; |
• | business interruptions, natural disasters, terrorist acts or similar unforeseen events or circumstances; |
• | our ability to maintain relationships with our key customers, the absence of long-term supply contracts with most of our customers, and product liability claims our customers may bring; |
• | unanticipated changes to environmental, health and safety regulations or related compliance issues; |
• | our dependence on certain key personnel; |
• | uneven expense recognition related to our issuance of performance-based restricted stock units or expectations related to cash-based executive incentive plans; |
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• | the anti-takeover effects of provisions in our certificate of incorporation and bylaws; |
• | the unfunded nature of our foreign pension plans; |
• | the effect of acquisitions we may undertake, including our ability to effectively integrate acquisitions into our operations; |
• | disruptions in the availability of raw materials; |
• | limitations on our flexibility in operating our business imposed by restrictions under our revolving credit facility; |
• | the complexity of our global legal entity structure, the effect of intercompany loans within this structure, and the occurrence and outcome of income tax audits for these entities; and |
• | our receipt of economic grants in various jurisdictions, which may require repayment if we are unable to comply with the terms of such grants. |
Any unfavorable changes in any of these factors could harm our operating results and may result in volatility or a decline in our stock price.
UNCERTAIN GLOBAL MACRO-ECONOMIC CONDITIONS, ESPECIALLY IN EUROPE AND ASIA, AND POSSIBLE FISCAL AND BUDGET UNCERTAINTIES IN THE UNITED STATES CONTINUE TO AFFECT OUR BUSINESS.
Slow, uneven economic growth throughout the world, and continued uncertainty regarding macroeconomic conditions in Europe and Asia have adversely affected demand for our products. Continued adverse economic conditions, slow global growth, general uncertainty about the global economic recovery, and the possibility of fiscal and budgetary uncertainty in the United States, may continue to adversely affect our business prospects.
OUR REVOLVING CREDIT FACILITY IS SECURED BY SUBSTANTIALLY ALL OF OUR ASSETS AND MAY LIMIT OUR FLEXIBILITY IN OPERATING OUR BUSINESS. A DEFAULT UNDER THE CREDIT FACILITY COULD SIGNIFICANTLY HARM OUR BUSINESS AND FINANCIAL POSITION.
In December 2013, we entered into a five-year senior secured revolving credit facility for up to $300 million with a group of lenders. Our credit facility is secured by substantially all of our assets. It also imposes restrictions that may limit our ability to engage in certain business activities, including limitations on asset sales, mergers and acquisitions, the incurrence of indebtedness and liens, the making of restricted payments or investments and transactions with affiliates. In addition, the credit facility contains customary financial covenants, including a maximum total-leverage ratio, a maximum senior-secured-leverage ratio, and a minimum fixed-charge-coverage ratio. Our ability to comply with these financial covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control. If we breach any of the covenants under our credit facility and do not obtain appropriate waivers, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable, which could result in a foreclosure on the assets securing the credit facility, adversely affect our ability to operate our business or otherwise significantly harm our financial position.
WE DEPEND SUBSTANTIALLY ON THE SUCCESS OF OUR CUSTOMERS' END PRODUCTS, OUR INTRODUCTION OF NEW PRODUCTS INTO THE MARKET, AND OUR ABILITY TO IMPROVE AND IMPLEMENT NEW MANUFACTURING TECHNOLOGIES, REDUCE MANUFACTURING COSTS AND ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OVER TIME.
We believe that our future sales will depend substantially on the success of our customers' end products, our ability to introduce new products into the market, and our ability to reduce the manufacturing costs of our products over time. Our new products are generally incorporated into our customers' products or systems at their design stage. However, design wins can precede volume sales by a year or more. In addition, we may not be successful in achieving design wins or design wins may not result in future revenue, which depend in large part on our customers' ability to sell their end products or systems within their respective markets.
Rapid innovation within the semiconductor industry also continually increases pricing pressure, especially on products containing older technology. We experience continuous pricing pressure, just as many of our competitors do. Product life cycles in our industry are relatively short, and as a result, products tend to be replaced by more technologically advanced substitutes on a regular basis. In turn, demand for older technology falls, causing the price at which such products can be sold to drop, often quickly. As a result, the average selling price of each of our products usually declines as individual products mature and competitors enter the market. To offset average selling price decreases and to continue profitably supplying our products, we rely primarily on reducing costs to manufacture our products, improving our process technologies and production efficiency, increasing product sales to absorb fixed costs and introducing new, higher-priced products that incorporate advanced features or integrated technologies to address new or emerging markets. Our operating results could be harmed if such cost reductions, production improvements, increased product sales and new product introductions do not occur in a timely manner.
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THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY CREATES FLUCTUATIONS IN OUR OPERATING RESULTS AND MAY ALSO AFFECT JUDGMENTS, ESTIMATES AND ASSUMPTIONS WE APPLY IN PREPARING OUR FINANCIAL STATEMENTS.
The semiconductor industry has historically been cyclical, characterized by annual seasonality and wide fluctuations in product supply and demand. The semiconductor industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions.
Our operating results have been adversely affected in the past by industry-wide fluctuations in the demand for semiconductors, which resulted in under-utilization of our manufacturing capacity and a related decline in gross margin. Our business may be harmed in the future by cyclical conditions in the semiconductor industry as a whole and by conditions within specific markets served by our products. These fluctuations in demand may also affect inventory write-downs we take or other items in our financial statements. Our inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Determining market value for our inventories involves numerous judgments, estimates and assumptions, including assessing average selling prices and sales volumes for each of our products in future periods. The competitiveness of each product, market conditions and product lifecycles may change over time, resulting in a change in the judgments, estimates and assumptions we apply to establish inventory write-downs. The judgments, estimates and assumptions we apply in evaluating our inventory write-downs, including, for example, shortening or extending the anticipated life of our products, may have a material effect on our financial statements. If we overestimate demand, we may experience excess inventory levels. Inventory adjustments, based on the judgments, estimates and assumptions we make, may affect our results of operations, including our gross margin, in a positive or negative manner, depending on the nature of the adjustment.
A significant portion of our revenue comes from sales to customers supplying consumer markets and from international sales. As a result, our business may be subject to seasonally lower revenue in particular quarters of our fiscal year. The semiconductor industry has also been affected by significant shifts in consumer demand due to economic downturns or other factors, which can exacerbate the cyclicality within the industry and result in further diminished product demand and production over-capacity. We have, in the past, experienced substantial quarter-to-quarter fluctuations in revenue and operating results and expect in the future to continue to experience short-term period-to-period fluctuations in operating results due to general industry and economic conditions.
WE COULD EXPERIENCE DISRUPTION OF OUR BUSINESS DUE TO INCREASED DEPENDENCE ON OUTSIDE FOUNDRIES OR MANUFACTURING DISRUPTIONS AT OUR OWN WAFER FABRICATION FACILITY.
We rely substantially on independent third-party foundry manufacturing partners to manufacture products for us. As part of this fab-lite strategy, we have expanded and will continue to expand our foundry relationships by entering into new agreements with third-party foundries. If we cannot obtain sufficient capacity commitments, if our foundry partners suffer financial instability, liquidity issues, or insolvency proceedings affecting their ability to manufacture our products, or if our foundry partners experience production delays for other reasons, the supply of our products could be disrupted, which could adversely affect our business.
Disruptions at our own wafer manufacturing facility in Colorado Springs, Colorado could also adversely affect our business. For the year ended December 31, 2013, we manufactured approximately 52% of our products in our own wafer fabrication facility compared to 56% for the year ended December 31, 2012. In December 2013, we experienced an incident in the nitrogen plant at that facility, which disrupted manufacturing for several weeks and has affected our ability to fully meet demand in the first half of 2014. Because we still rely on our Colorado facility for a significant percentage of our wafer supply, disruptions, like the kind we experienced in December 2013 or others, could have an adverse affect on our business.
In addition, with respect to the use of external foundries, difficulties in production yields can occur when transitioning manufacturing processes to new third-party foundries. If our foundry partners fail to deliver quality products and components on a timely basis, our business could be harmed.
We expect over time that an increasing portion of our wafer fabrication will be undertaken by third-party foundries.
Our fab-lite strategy exposes us to the following risks:
• | reduced control over delivery schedules and product costs; |
• | financial instability, liquidity issues, or insolvency proceedings affecting our foundry partners; |
• | manufacturing disruptions at our Colorado Springs wafer fabrication facility or at those of our third-party foundries; |
• | higher-than-anticipated manufacturing costs; |
• | inability of our manufacturing subcontractors to develop manufacturing methods appropriate for our products and their unwillingness to devote adequate capacity to produce our products; |
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• | possible abandonment of key fabrication processes by our foundry subcontractors for products that are strategically important to us; |
• | reduced control over or decline in product quality and reliability; |
• | inability to maintain continuing relationships with our foundries; |
• | restricted ability to meet customer demand when faced with product shortages or order increases; and |
• | increased opportunities for potential misappropriation of our intellectual property. |
If any of the above risks occur, we could experience an interruption in our supply chain, an increase in costs or a reduction in our product quality and reliability, which could delay or decrease our revenue and adversely affect our business.
We attempt to mitigate these risks with a strategy of qualifying multiple foundry subcontractors. However, there can be no guarantee that this or any other strategy will eliminate or significantly reduce these risks. Additionally, since most independent foundries are located in foreign countries, we are subject to risks generally associated with contracting with foreign manufacturers, including currency exchange fluctuations, political and economic instability, trade restrictions, changes in tariff and freight rates, and import and export regulations. Accordingly, we may experience problems maintaining expected timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.
We closely monitor the financial condition of our foundry partners. On April 25, 2013, we received notice that Telefunken Semiconductors GmbH & Co ("TSG"), one of our suppliers, had filed an insolvency proceeding in Germany. On December 4, 2013, we received notice that a third party had purchased the business and assets of TSG. We continue to conduct limited business activities with the new owner of TSG, which remains a tenant of our facility. On June 26, 2013, LFoundry Rousset S.A.S. ("LFR"), one of our suppliers, filed an insolvency declaration in France. We have filed claims against LFR under applicable French bankruptcy procedures in respect of pre-filing matters and are pursuing claims in respect of post-filing matters. We, and several of our subsidiaries, are engaged in litigation with LFR and the Administrators arising out of the LFR insolvency. On December 26, 2013, we were informed that LFR had been placed in liquidation and had ceased operations. For a discussion of the issues involved in, and the risks associated with those litigations, see “We are, and may in the future be, engaged in litigation that is costly, time consuming to defend or prosecute and, if an adverse decision were to occur, could have a harmful effect on our business, results of operations, financial condition or liquidity depending on the outcome.” While we do not believe that the liquidation of LFR, the purchase of TSG’s business and assets, or any other material adverse financial event affecting the former TSG, LFR or other foundries from which we purchase products, would be likely, under current circumstances, to have a material adverse effect on our business, the financial instability of, or insolvency proceedings affecting, any foundry partner requires an investment of significant management time, may require additional changes in operational planning as conditions develop, may involve litigation, and could have other unexpected effects on our business.
The terms on which we will be able to obtain wafer production for our products, and the timing and volume of such production, will be substantially dependent on future agreements to be negotiated with independent foundries. We cannot be certain that the agreements we reach with such foundries will be on favorable terms. For example, any future agreements with independent foundries may be short-term in duration, may not be renewable, and may provide inadequate certainty regarding the future supply and pricing of wafers for our products.
If demand for our products increases significantly, we have no assurances that our third-party foundries will be able to increase their manufacturing capacity to a level that meets our requirements, potentially preventing us from meeting our customer demand and harming our business and customer relationships. Also, even if our independent foundries are able to meet our increased demand, those foundries may decide to charge significantly higher wafer prices to us, which could reduce our gross margin or require us to offset the increased prices by increasing prices to our customers, either of which could harm our business and operating results.
OUR REVENUE IS DEPENDENT TO A LARGE EXTENT ON SELLING TO END CUSTOMERS THROUGH INDEPENDENT DISTRIBUTORS. THESE DISTRIBUTORS MAY HAVE LIMITED FINANCIAL RESOURCES TO CONDUCT THEIR BUSINESS OR TO REPRESENT OUR INTERESTS EFFECTIVELY, AND THEY MAY TERMINATE OR MODIFY THEIR RELATIONSHIPS WITH US IN A MANNER THAT ADVERSELY AFFECTS OUR SALES.
Sales through distributors accounted for 52%, 51% and 57% of our net revenue for the years ended December 31, 2013, 2012 and 2011, respectively. We are dependent on our distributors to supplement our direct marketing and sales efforts. Our agreements with independent distributors can generally be terminated for convenience by either party upon relatively short notice. Generally, these agreements are non-exclusive and also permit our distributors to offer and promote our competitors’ products.
If any significant distributor or a substantial number of our distributors terminated their relationship with us, decided to market our competitors’ products in preference to our products, were unable or unwilling to sell our products, or were unable to pay us for products sold for any reason, our ability to bring our products to market could be adversely affected, we could have difficulty in collecting outstanding receivable balances, or we could incur other loss of revenue, charges or other adjustments, any of which could have a material adverse effect on our revenue and operating results. In some cases, certain of our distributors in Asia may
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also have more limited financial resources and constrained balance sheets than distributors in other geographic areas. If these distributors are unable effectively to finance their operations, or to represent our interests effectively because of financial limitations, our business could also be adversely affected.
OUR REVENUE REPORTING IS HIGHLY DEPENDENT ON RECEIVING ACCURATE AND TIMELY SELL-THROUGH INFORMATION FROM OUR DISTRIBUTORS. IF WE RECEIVE INACCURATE OR LATE INFORMATION FROM OUR DISTRIBUTORS, OUR FINANCIAL REPORTING COULD BE MISSTATED.
Our revenue reporting is highly dependent on receiving pertinent, accurate and timely data from our distributors. As our distributors resell products, they provide us with periodic data regarding the products sold, including prices, quantities, end customers, and the amount of our products they still have in stock. Because the data set is large and complex, and because there may be errors or delays in the reported data, we may use estimates and apply judgments to reconcile distributors’ reported inventories to their end customer sales transactions. Actual results could vary unfavorably from our estimates, which could affect our operating results and adversely affect our business.
OUR REVENUE REPORTING IS COMPLEX AND DEPENDENT, IN PART, ON OUR MANAGEMENT’S ABILITY TO MAKE JUDGMENTS AND ESTIMATES REGARDING FUTURE CLAIMS FOR RETURNS. IF OUR JUDGMENTS OR ESTIMATES ABOUT THESE MATTERS ARE INCORRECT OR INACCURATE, OUR REVENUE REPORTING COULD BE ADVERSELY AFFECTED.
Our revenue reporting is highly dependent on judgments and estimates that our management is required to make when preparing our financial statements. We currently recognize revenue for our distributors based in the U.S. and Europe in a different manner from the method we use for our distributors based in Asia (excluding Japan).
For sales to certain distributors (primarily based in the U.S. and Europe) with agreements allowing for price protection and product returns, we have not historically had the ability to estimate future claims at the point of shipment, and given that price is not fixed or determinable at that time, revenue is not recognized until the distributor sells the product to its end customer.
For sales to independent distributors in Asia, excluding Japan, we invoice these distributors at full list price upon shipment and issue a rebate, or “credit,” once product has been sold to the end customer and the distributor has met certain reporting requirements. After reviewing the pricing, rebate and quotation-related terms, we concluded that we could reliably estimate future claims; therefore, we recognize revenue at the point of shipment for these Asian distributors, assuming all of the other revenue recognition criteria are met, utilizing amounts invoiced, less estimated future claims. To the extent the percentage of our sales to Asia (excluding Japan) increases, a larger portion of our revenue reporting will be based on this methodology.
If our judgments or estimates are incorrect or inaccurate regarding future claims, our revenue reporting could be adversely affected. In addition, the fact that we recognize revenue differently in the U.S. and Europe than in Asia (excluding Japan) makes the preparation of our financial statements more complicated, and, therefore, potentially more susceptible to inaccuracies over time.
OUR STOCK PRICE MAY BE MORE VOLATILE AS OUR EXPOSURE TO, AND THE PERCENTAGE OF OUR REVENUE DERIVED FROM, THE MOBILE DEVICE AND CONSUMER MARKET SEGMENTS, WHICH TEND TO EXHIBIT MORE DYNAMIC CHANGE THAN INDUSTRIAL OR AUTOMOTIVE MARKETS, CHANGE.
Our exposure to, and the percentage of revenue we derive from, the mobile device and consumer market segments change over time. To the extent that these segments exhibit greater cyclicality, or change, than the industrial or automotive markets in which we also participate, our stock price may be more volatile. Product life cycles in the mobile device and consumer markets are typically shorter than product life cycles in industrial or automotive markets. Significant change continues to occur in the personal computer market as, for example, tablet devices gain additional market share. Mobile devices, as a further example, may undergo product refreshes on an annual basis or on even shorter time frames in some instances. As a result, our market share in those markets may increase or decrease more frequently than might be the case in other market segments in which we participate. The mobile device segment has also become dominated, to a large extent, by Apple and Samsung; other manufacturers have had difficulty retaining market share in recent years, with some well-known brands, including Nokia, Blackberry and HTC, being sold or facing significant financial distress. Those market dynamics necessarily affect our business, and if our products are not used in models sold by the dominant device manufacturers, our financial results may be adversely affected or be subject to greater volatility.
If our market share decreases in the mobile and consumer market segments, our revenue may also decline for a period of time until new devices are launched, or a product refresh occurs, incorporating our products. For those reasons, and due to the shorter product-life cycles generally occurring in the mobile and consumer-oriented markets, our stock price may be more volatile than might be the case if we had less exposure to those sectors or if we focused our investments principally on industrial, automotive and similar markets that generally do not experience the same rapid product change.
WE BUILD SEMICONDUCTORS BASED, FOR THE MOST PART, ON NON-BINDING FORECASTS FROM OUR CUSTOMERS. AS A RESULT, CHANGES TO FORECASTS FROM ACTUAL DEMAND MAY RESULT IN EXCESS INVENTORY OR OUR INABILITY TO FILL CUSTOMER ORDERS ON A TIMELY BASIS, WHICH MAY HARM OUR BUSINESS.
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We schedule production and build semiconductor devices based primarily on non-binding forecasts from customers and our own internal forecasts. Typically, customer orders, consistent with general industry practices, may be cancelled or rescheduled with short notice to us. In addition, our customers frequently place orders requesting product delivery in a much shorter period than our lead time to fully fabricate and test devices. Because the markets we serve are volatile and subject to rapid technological, price and end-user demand changes, our forecasts of unit quantities to build may be significantly incorrect. Changes to forecasted demand from actual demand may result in us producing unit quantities in excess of orders from customers, which could result in additional expense for the write-down of excess inventory and negatively affect our gross margin and results of operations.
Our forecasting risks may increase as a result of our fab-lite strategy because we have less control over modifying production schedules with our independent third-party manufacturing partners to match changes in forecasted demand. If we commit to order foundry wafers and cannot cancel or reschedule our commitment without significant costs or cancellation penalties, we may be forced to purchase inventory in excess of demand, which could result in a write-down of inventories and negatively affect our gross margin and results of operations.
Conversely, failure to produce or obtain sufficient wafers for increased demand could cause us to miss revenue opportunities and could affect our customers’ ability to sell products, which could adversely affect our customer relationships and thereby materially adversely affect our business, financial condition and results of operations.
OUR INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO COMPLEX LAWS RELATING TO TRADE, EXPORT CONTROLS, FOREIGN CORRUPT PRACTICES AND BRIBERY, AMONG MANY OTHER SUBJECTS. ADDED COMPLIANCE COSTS, AND A VIOLATION OF, OR CHANGE IN, THESE LAWS AND REGULTIONS, COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
For hardware, software or technology exported from, or otherwise subject to the jurisdiction of, the U.S., we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to, the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and U.S. economic and trade sanctions against embargoed countries and destinations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) and other regulatory agencies. Hardware, software and technology exported from, or otherwise subject to the jurisdiction of, other countries may also be subject to non-U.S. laws and regulations governing international trade and exports. Under these laws and regulations, we are responsible for obtaining all necessary licenses and approvals for exports of hardware, software and technology, as well as the provision of technical assistance. In many cases, a determination of the applicable export-control laws and related licensing requirements depends on the design intent, the source and origin of a specific technology, the specific technical contributions made by individuals to that technology, the destination, and other matters of an intensely factual nature. We are also required to obtain all necessary export licenses prior to transferring controlled technology or technical data to foreign persons.
In addition, we are required to obtain necessary export licenses prior to the export or re-export of hardware, software or technology to any person or entity identified on the U.S. Department of Commerce's Denied Persons or Entity or Unverified Lists, the U.S. Department of the Treasury’s Specially Designated Nationals or Blocked Persons List, or the U.S. Department of State’s Debarred List, or on similar lists in jurisdictions outside the United States. Products for use in certain space, satellite, military, nuclear, chemical/biological weapons, rocket systems or unmanned air vehicle applications may also require export licenses and involve many of the same complexities and risks of non-compliance in the U.S. and elsewhere. Due to U.S. economic and trade sanctions, we do not pursue business activities, directly or indirectly, in countries designated by the U.S. as a state sponsor of terrorism or otherwise subject to a U.S. trade embargo, including, as of the date of this Form 10-K, Cuba, Syria and Iran.
We continually seek to enhance our export-compliance program, including ongoing analysis of historical and current product shipments and technology transfers. We also work with, and assist, government officials, when requested, to ensure compliance with applicable export laws and regulations, and we continue to develop additional operational procedures to improve our compliance efforts. However, export laws and regulations are highly complex and vary from jurisdiction to jurisdiction; a determination by U.S. or other governments that we have failed to comply with any export-control laws or trade sanctions, including failure to properly restrict an export to the persons or countries set forth on government restricted-party lists, could result in significant civil or criminal penalties, including the imposition of significant fines, denial of export privileges, loss of revenue from certain customers or damages claims from any customers adversely affected by such penalties, and exclusion from participation in U.S. or foreign government contracts. As we review or audit our import and export practices, from time to time, we may discover previously unknown errors in our compliance practices that require corrective actions; these actions could include voluntary disclosures of those matters to appropriate government agencies, discontinuance or suspension of product sales pending a resolution of any reviews, or other adverse interim or final actions. Further, a change in these laws and regulations could restrict our ability to export to previously permitted countries, customers, distributors, foundries or other third parties. For example, in the past, one of our distributors was added to the U.S. Department of Commerce Entity List, resulting in the termination of our relationship with that distributor. Any one or more of these compliance errors, sanctions or a change in law or regulations could have a material adverse effect on our business, financial condition and results of operations. In addition, proposed rule changes remain pending as of the date of this Form 10-K to modify the classification of certain radiation-hardened semiconductor devices under U.S. export regulations. We monitor closely those types of proposed rules and potential changes as they progress through the regulatory process and seek to assess their likely effect on us.
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We are also subject to complex laws that seek to regulate the payment of bribes or other forms of compensation to foreign officials or persons affiliated with companies or organizations in which foreign governments may own an interest or exercise control. The U.S. Foreign Corrupt Practices Act requires U.S. companies to comply with an extensive legal framework to prevent bribery of foreign officials. The laws are complex and require that we closely monitor local practices of our overseas offices and distributors. The United States Department of Justice has recently heightened enforcement of these laws. In addition, other countries continue to implement similar laws that may have extraterritorial effect. The United Kingdom, for example, where we have operations, has enacted the U.K. Bribery Act, which could impose significant oversight obligations on us and could be applicable to our operations outside of the United Kingdom. The costs for complying with these and similar laws may be substantial and could reasonably be expected to require significant management time and focus. Any violation of these or similar laws, intentional or unintentional, could have a material adverse effect on our business, financial condition or results of operations. See also “Compliance With New Regulations Regarding the Use of ‘Conflicts Minerals’ May Force Us to Incur Additional Expenses and Could Limit the Supply and Increase the Cost of Certain Metals Used in Manufacturing Our Products.”
COMPLIANCE WITH NEW REGULATIONS REGARDING THE USE OF "CONFLICT MINERALS" MAY FORCE US TO INCUR ADDITIONAL EXPENSES AND COULD LIMIT THE SUPPLY AND INCREASE THE COST OF CERTAIN METALS USED IN MANUFACTURING OUR PRODUCTS.
On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use minerals and metals known as “conflict minerals,” in their products, whether or not these products are manufactured by third parties. Conflict minerals are commonly found in metals used in the manufacture of semiconductors and other products we manufacture. Implementation of these new requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, we may incur additional costs to comply with these new requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins of these minerals and metals used in our products, which could result in some of our customers electing to disqualify us as a supplier.
The new disclosure rules are scheduled to take effect in May 2014 for the 2013 calendar year and are the subject of ongoing court challenges. It is unclear if these challenges will delay the effectiveness of the new rules.
WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES THAT COULD NEGATIVELY AFFECT OUR FINANCIAL RESULTS AND CASH FLOWS, AND REVENUE AND COSTS DENOMINATED IN FOREIGN CURRENCIES COULD ADVERSELY AFFECT OUR OPERATING RESULTS AS A RESULT OF FOREIGN CURRENCY MOVES AGAINST THE DOLLAR. THE ELIMINATION OF THE EURO AS A COMMON CURRENCY OR THE WITHDRAWAL OF MEMBER STATES FROM THE EUROPEAN UNION COULD ALSO ADVERSELY AFFECT OUR BUSINESS AND INTRODUCE UNCERTAINTIES WITH RESPECT TO PAYMENT TERMS IN OUR CONTRACTS.
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse effect on our financial results and cash flows. Our primary exposure relates to revenue and operating expenses in Europe, which are denominated in Euros.
When we take an order denominated in a foreign currency, we will receive fewer dollars, and lower revenue, than we initially anticipated if that local currency weakens against the dollar before we ship our product. Conversely, revenue will be positively impacted if the local currency strengthens against the dollar before we ship our product. Costs may also be impacted by foreign currency fluctuation. For example, in Europe, where we have costs denominated in European currencies, costs will decrease if the local currency weakens against the dollar. Conversely, costs will increase if the local currency strengthens against the dollar. Our income from operations would have been approximately $4.0 million lower had the average exchange rate in the year ended December 31, 2013 remained the same as the average exchange rate in the year ended December 31, 2012.
We also face the risk that our accounts receivable denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Similarly, we face the risk that our accounts payable and debt obligations denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. We have not historically utilized hedging instruments to offset our foreign currency exposure, although we may determine to do so in the future.
Because we conduct business in Europe, we may have additional exposure to currency fluctuations if the Euro is eliminated as a common currency within the Eurozone, or if individual countries determine to stop using that currency. In any of those events, we would have to address exchange rate and conversion issues affecting the Euros we then held and the payments that we expected to receive, or to make, in Euros. There is no certainty regarding the potential economic effect of these Euro currency risks, nor is there any certainty regarding the effect on payment terms included within outstanding sales contracts if the Euro were eliminated or not accepted in some countries as legal tender. Because of those uncertainties, we are not able to assess fully, as of the date of this Form 10-K, the potential effect on our business or financial condition if the Eurozone were to disband, if a member state determined to substitute a new currency for the Euro within its borders, or if the Euro became generally less accepted as a global currency.
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WE DEPEND ON INDEPENDENT ASSEMBLY CONTRACTORS THAT MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS OR TO MEET OUR QUALITY AND DELIVERY REQUIREMENTS.
After wafer testing, we ship wafers to various independent assembly contractors, where the wafers are separated into die, packaged and, in some cases, further tested. Our reliance on independent contractors to assemble, package and test our products may expose us to significant risks, including the following:
• | reduced control over quality and delivery schedules; |
• | the potential lack of adequate capacity; |
• | discontinuance or phase-out of our contractors’ assembly processes; |
• | inability of our contractors to develop and maintain assembly and test methods and equipment that are appropriate for our products; |
• | lack of long-term contracts and the potential inability to secure strategically important service contracts on favorable terms, if at all; |
• | increased opportunities for potential misappropriation of our intellectual property; and |
• | financial instability, or liquidity issues, affecting our subcontractors. |
In addition, independent contractors could stop, suspend or delay the assembly, packaging or testing of our products for unforeseen reasons. Moreover, because most of our independent assembly contractors are located in foreign countries, we are subject to certain risks generally associated with contracting with foreign suppliers, including currency exchange fluctuations, political and economic instability, trade restrictions, including export controls, and changes in tariff and freight rates. Accordingly, we may experience problems with the time, adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.
WE MAY FACE BUSINESS DISRUPTION RISKS, AS WELL AS THE RISK OF SIGNIFICANT UNANTICIPATED COSTS, AS WE CONSIDER, OR AS A RESULT OF, CHANGES IN OUR BUSINESS AND ASSET PORTFOLIO.
We are continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations in order to enhance our overall competitiveness and viability. Disposal and restructuring activities that we have undertaken, and may undertake in the future, can divert significant time and resources, involve substantial costs and lead to production and product development delays and may fail to enhance our overall competitiveness and viability as intended, any of which can negatively impact our business. Our disposal activities have in the past and may, in the future, trigger restructuring, impairment and other accounting charges and/or result in a loss on sale of assets. Any of these charges or losses could cause the price of our common stock to decline.
We have in the past and may, in the future, experience labor union or workers’ council objections, or labor unrest actions (including possible strikes), when we seek to reduce our manufacturing or operating facilities in Europe and other regions. Many of our operations are located in countries and regions that have extensive employment regulations that we must comply with in order to reduce our workforce, and we may incur significant costs to complete such exercises. Any of those events could have an adverse effect on our business and operating results.
We continue to evaluate existing restructuring accruals related to restructuring plans previously implemented. As a result, there may be additional restructuring charges or reversals or recoveries of previous charges. We may incur additional restructuring and asset impairment charges in connection with additional restructuring plans adopted in the future. Any such restructuring or asset impairment charges recorded in the future could significantly harm our business and operating results. During 2013, we implemented various cost reduction actions and recorded restructuring charges of $50.0 million related mainly to workforce reductions. As of December 31, 2013, accrued restructuring charges amounted to $25.4 million, and we expect to complete the cash severance payments in respect of those accruals within the next twelve months.
IF WE ARE UNABLE TO IMPLEMENT NEW MANUFACTURING TECHNOLOGIES OR FAIL TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS, OUR BUSINESS WOULD BE HARMED.
Whether demand for semiconductors is rising or falling, we are constantly required by competitive pressures in the industry to successfully implement new manufacturing technologies in order to reduce the geometries of our semiconductors and produce more integrated circuits per wafer.
Fabrication of our integrated circuits is a highly complex and precise process, requiring production in a tightly-controlled, clean environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. Whether through the use of our foundries or third-party manufacturers, we may experience problems in achieving acceptable yields
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in the manufacture of wafers, particularly during a transition in the manufacturing process technology for our products or with respect to manufacturing of new products.
We have previously experienced production delays and yield difficulties in connection with earlier expansions of our wafer fabrication capacity or transitions in manufacturing process technology. Production delays or difficulties in achieving acceptable yields at our fabrication facility or at the fabrication facilities of our third party manufacturers could materially and adversely affect our operating results. We may not be able to obtain the additional cash from operations or external financing necessary to fund the implementation of new manufacturing technologies.
WE MAY, DIRECTLY AND INDIRECTLY, FACE THIRD-PARTY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO DEFEND, DISTRACT OUR MANAGEMENT TEAM AND EMPLOYEES, AND RESULT IN LOSS OF SIGNIFICANT RIGHTS.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have on occasion resulted in significant and often protracted and expensive litigation. From time to time we receive communications from third parties asserting patent or other intellectual property rights covering our products or processes. In order to avoid the significant costs associated with our defense in litigation involving such claims, we may license the use of the technologies that are the subject of these claims from such companies and make regular corresponding royalty payments, which may harm our cash position and operating results.
We have in the past been involved in intellectual property infringement lawsuits, which, because of the significant expense associated with the defense of those types of lawsuits, adversely affected our operating results. In addition to patent infringement lawsuits in which we may be directly involved and named as a defendant, we also may assist our customers, in many cases at our own cost, in defending intellectual property lawsuits involving technologies that are combined with our technologies. See Part I, Item 3 of this Form 10-K. The cost of defending against intellectual property lawsuits, responding to subpoenas, preparing our employees to testify, or assisting our customers in defending against such lawsuits, in terms of management time and attention, legal fees and product delays, can be substantial. If such infringement lawsuits are successful, we may be prohibited from using the technologies at issue in the lawsuits, and if we are unable to obtain a license on acceptable terms, license a substitute technology or design new technology to avoid infringement, our business and operating results may be significantly harmed.
Many of our new and existing products and technologies are intended to address needs in specialized and emerging markets. Given the aggressive pursuit and defense of intellectual property rights that are typical in the semiconductor industry, we expect to see an increase in intellectual property litigation in many of the key markets that our products and technologies serve. An increase in infringement lawsuits within these markets generally, even if they do not involve us, may divert management’s attention and resources, which may seriously harm our business, results of operations and financial condition.
As is customary in the semiconductor industry, our standard contracts provide remedies to our customers, such as defense, settlement, or payment of judgments for intellectual property claims related to the use of our products. From time to time, we will indemnify customers against combinations of loss, expense, or liability related to the sale and the use of our products and services. Even if claims or litigation against us are not valid or successfully asserted, defending these claims could result in significant costs and diversion of the attention of management and other key employees.
IF WE ARE UNABLE TO PROTECT OR ASSERT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE HARMED.
Our future success will depend, in part, upon our ability to protect and assert our intellectual property rights. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our proprietary technologies and processes, despite our efforts to protect them.
We hold numerous U.S. and foreign patents. We can provide no assurance, however, that these, or any of our future patents, will not be challenged, invalidated or circumvented in ways that detract from their value. Changes in laws may also result in us having less intellectual property protection than we may have experienced historically.
If our patents do not adequately protect our technology, competitors may be able to offer products similar to our products more easily. Our competitors may also be able to design around our patents, which would harm our business, financial position and results of operations.
SIGNIFICANT PATENT LITIGATION IN THE MOBILE-DEVICE SECTOR MAY ADVERSELY AFFECT SOME OF OUR CUSTOMERS. UNFAVORABLE OUTCOMES IN SUCH PATENT LITIGATION COULD AFFECT OUR CUSTOMERS’ ABILITY TO SELL THEIR PRODUCTS AND, AS A RESULT, COULD ULTIMATELY AFFECT THEIR ABILITY TO PURCHASE OUR PRODUCTS IF THEIR MOBILE DEVICE BUSINESS DECLINES.
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There is significant ongoing patent litigation throughout the world involving many of our customers, especially in the mobile-device sector. The outcome of these disputes is uncertain. While we may not have a direct involvement in these matters, an adverse outcome that affects the ability of our customers to ship or sell their products could ultimately have an adverse effect on our business. That could happen if these customers reduce their business exposure in the mobile-device sector, are prevented from selling their products in certain markets, including in the U.S. through import bans imposed by the International Trade Commission, seek to reduce their cost structures to help fund the payment of unanticipated licensing fees, or are required to take other actions that slow or hinder their market penetration.
OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY SUFFER PRICE REDUCTIONS, REDUCED REVENUE, REDUCED GROSS MARGIN AND LOSS OF MARKET SHARE.
We operate in markets that are intensely competitive and characterized by rapid technological change, product obsolescence and price decline. Throughout our product line, we compete with a number of large semiconductor manufacturers, such as Cypress, Freescale, Fujitsu, Hitachi, Infineon, Intel, Microchip, NXP Semiconductors, ON Semiconductor, Renesas, Samsung, Spansion, STMicroelectronics, Synaptics, and Texas Instruments. Many of these competitors have substantially greater financial, technical, marketing and management resources than we do. As we introduce new products, we are increasingly competing directly with these companies, and we may not be able to compete effectively. We also compete with emerging companies that are attempting to sell products in specialized markets that our products address. We compete principally on the basis of the technical innovation and performance of our products, including their speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. During the last several years, we have experienced significant price competition in several business segments, especially in our nonvolatile memory segment for EPROM and Serial EEPROM products, as well as in our commodity microcontrollers. Competitive pressures in the semiconductor market from existing competitors, new entrants, new technology and cyclical demand, among other factors, can result in declining average selling prices for our products. To the extent that such price declines affect our products, our revenue and gross margin could decline.
In addition to the factors described above, our ability to compete successfully depends on a number of factors, including the following:
• | our success in designing and manufacturing new products that implement new technologies and processes; |
• | our ability to offer integrated solutions using our advanced nonvolatile memory process with other technologies; |
• | the rate at which customers incorporate our products into their systems; |
• | product introductions by our competitors; |
• | the number and nature of our competitors in a given market; |
• | our ability to minimize production costs by outsourcing our manufacturing, assembly and testing functions; |
• | our ability to improve our process technologies and production efficiency; and |
• | general market and economic conditions. |
Many of these factors are outside of our control, and may cause us to be unable to compete successfully in the future, which would materially harm our business.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.
Our future success substantially depends on our ability to develop and introduce new products that compete effectively on the basis of price and performance and that address customer requirements. We are continually designing and commercializing new and improved products to maintain our competitive position. These new products typically are more technologically complex than their predecessors and have increased risk of deployment delays and quality and yield issues, among other risks.
The success of new product introductions is dependent upon several factors, including timely completion and introduction of new product designs, achievement of acceptable fabrication yields and market acceptance. Our development of new products and our customers’ decisions to design them into their systems can take as long as three years, depending upon the complexity of the device and the application. Accordingly, new product development requires a long-term forecast of market trends and customer needs, and the successful introduction of our products may be adversely affected by competing products or other technologies serving the markets addressed by our products. Our qualification process involves multiple cycles of testing and improving a product’s functionality to ensure that our products operate in accordance with design specifications. If we experience delays in the introduction of new products, our future operating results could be adversely affected.
In addition, new product introductions frequently depend on our development and implementation of new process technologies, and our future growth will depend in part upon the successful development and market acceptance of these process technologies. Our integrated solution products require more technically sophisticated sales and marketing personnel to market
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these products successfully to customers. We are developing new products with smaller feature sizes and increased functionality, the fabrication of which will be substantially more complex than fabrication of our current products. If we are unable to design, develop, manufacture, market and sell new products successfully, our operating results will be harmed. Our new product development, process development or marketing and sales efforts may not be successful, our new products may not achieve market acceptance, and price expectations for our new products may not be achieved, any of which could significantly harm our business.
OUR OPERATING RESULTS ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO VARIOUS RISKS.
Our revenue outside the United States accounted for 86%, 87% and 86% of our net revenue for the years ended December 31, 2013, 2012 and 2011, respectively. We expect that revenue derived from international sales will continue to represent a significant portion of net revenue. International sales and operations are subject to a variety of risks, including:
• | greater difficulty in protecting intellectual property; |
• | reduced flexibility and increased cost of effecting staffing adjustments; |
• | foreign labor conditions and practices; |
• | adverse changes in tax laws; |
• | credit and collectibility risks on our trade receivables with customers in certain jurisdictions; |
• | longer collection cycles; |
• | legal and regulatory requirements, including antitrust laws, import and export regulations, trade barriers, tariffs and tax laws, and environmental and privacy regulations and changes to those laws and regulations; |
• | negative effects from fluctuations in foreign currency exchange rates; |
• | international trade regulations, including duties and tariffs; |
• | cash repatriation restrictions; |
• | impact of natural disasters on local infrastructures, including those of our distributors and end-customers; and |
• | general economic and political conditions in these foreign markets. |
Some of our distributors, independent foundries, independent assembly, packaging and test contractors and other business partners also have international operations and are subject to the risks described above. Even if we are able to manage the risks of international operations successfully, our business may be adversely affected if our distributors, independent foundries and contractors, and other business partners are not able to manage these risks successfully.
WE MAY BE SUBJECT TO INFORMATION TECHNOLOGY SYSTEM FAILURES, NETWORK DISRUPTIONS OR OTHER SECURITY RISKS, INCLUDING CYBER-ATTACKS, THAT COULD DAMAGE OUR BUSINESS OPERATIONS, FINANCIAL CONDITION OR REPUTATION. MANAGING THESE RISKS MAY ALSO REQUIRE ADDITIONAL EXPENDITURES AND INCREASED OPERATING COSTS.
We rely on our information technology, or IT infrastructure and certain critical information systems for the effective operation of our business, including the reporting of our financial results. These IT systems may be subject to damage or interruption from a number of potential sources, including natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, cyber attacks, sabotage, vandalism, or similar events or disruptions. In addition, our IT infrastructure continues to evolve as we review and introduce new systems to share and store data and communicate internally and externally, including “cloud-based” systems and social networking technologies. While we believe that this type of IT evolution can enhance our operational and business efficiencies, we may not be able to adapt our business practices and internal security controls quickly enough to address all of the risks, known and unknown, that these changes create.
Technology companies also continue to face increased global security threats. Hackers may develop and deploy viruses, worms, and other malicious software programs that attack our products or seek to gain access to our networks and proprietary information. We may be required to allocate significant resources, financial and otherwise, to the oversight of these threats and the implementation of effective countermeasures, which could increase our operating expenses.
Our inability to use or access our IT systems at critical points in time could unfavorably affect our business. These disruptions, for example, could adversely affect our ability to access critical business applications, coordinate product development and testing, ship or distribute products, or timely report our financial results. Breaches of our IT system by unauthorized parties could also result in the theft or misuse of our intellectual property, the unauthorized release of customer or employee data, or a violation of privacy or other laws that may lead to significant reputation or other damage to our business.
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SYSTEM INTEGRATION DISRUPTIONS COULD HARM OUR BUSINESS.
We periodically make enhancements to our integrated financial and supply chain management systems. The enhancement process is complex, time-consuming and expensive. Operational disruptions during the course of such processes or delays in the implementation of such enhancements could impact our operations. Our ability to forecast sales demand, ship products, manage our product inventory and record and report financial and management information on a timely and accurate basis could be impaired while we are making these enhancements.
OUR OPERATIONS AND FINANCIAL RESULTS COULD BE HARMED BY BUSINESS INTERRUPTIONS, NATURAL DISASTERS, TERRORIST ACTS OR OTHER EVENTS BEYOND OUR CONTROL.
Our operations are vulnerable to interruption by fire, earthquake, floods and other natural disasters, power loss, public health issues, geopolitical uncertainties, telecommunications failures, terrorist acts and other events beyond our control. Our headquarters, some of our manufacturing facilities, the manufacturing facilities of third-party foundries and some of our major suppliers’ and customers’ facilities are located near major earthquake faults and in potential terrorist target areas. We do not have a comprehensive disaster recovery plan.
In the event of a major earthquake, other natural or manmade disaster or terrorist act, we could experience loss of life of our employees, destruction of facilities or other business interruptions. The operations of our suppliers could also be affected by natural disasters and other disruptions, which could cause shortages and price increases in various essential materials. We use third-party freight firms for nearly all our shipments from vendors and our manufacturing facilities and for shipments to customers of our final product. We maintain property and business interruption insurance, but there is no guarantee that such insurance will be available or adequate to protect against all costs associated with such disasters and disruptions.
In recent years, based on insurance market conditions, we have relied to a greater degree on self-insurance. If a major earthquake, other disaster, or a terrorist act affects us and insurance coverage is unavailable for any reason, we may need to spend significant amounts to repair or replace our facilities and equipment, we may suffer a temporary halt in our ability to manufacture and transport products, and we could suffer damages that could materially adversely harm our business, financial condition and results of operations.
WE MAY EXPERIENCE PROBLEMS WITH KEY CUSTOMERS THAT COULD HARM OUR BUSINESS.
Our ability to maintain close, satisfactory relationships with large customers is important to our business. A reduction, delay, or cancellation of orders from our large customers would harm our business. Similarly, the loss of one or more of our key customers, reduced orders by any of our key customers, or significant variations in the timing of orders, could adversely affect our business and results of operations.
WE ARE NOT PROTECTED BY LONG-TERM SUPPLY CONTRACTS WITH OUR CUSTOMERS.
We do not typically enter into long-term supply contracts with our customers, and we cannot be certain as to future order levels from our customers. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. In the event of an early termination by one of our major customers, it is unlikely that we would be able to replace that revenue source rapidly, which would harm our financial results.
WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY REGULATIONS, WHICH COULD IMPOSE UNANTICIPATED REQUIREMENTS ON OUR BUSINESS IN THE FUTURE. ANY FAILURE TO COMPLY WITH CURRENT OR FUTURE ENVIRONMENTAL REGULATIONS MAY SUBJECT US TO LIABILITY OR SUSPENSION OF OUR MANUFACTURING OPERATIONS.
We are subject to a variety of environmental laws and regulations in each of the jurisdictions in which we operate governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous substances and wastes, soil and groundwater contamination, and employee health and safety. We could incur significant costs as a result of any failure by us to comply with, or any liability we may incur under, environmental, health, and safety laws and regulations, including the limitation or suspension of production, monetary fines or civil or criminal sanctions, clean-up costs or other future liabilities in excess of our reserves. We are also subject to laws and regulations governing the recycling of our products, the materials that may be included in our products, and our obligation to dispose of our products at the end of their useful lives. For example, the European Directive 2002/95/EC on restriction of hazardous substances (RoHS Directive) bans the placing on the European Union market of new electrical and electronic equipment containing more than specified levels of lead and other hazardous compounds. As more countries enact requirements like the RoHS Directive, and as exemptions are phased out, we could incur substantial additional costs to convert the remainder of our portfolio to comply with such requirements, conduct required research and development, alter manufacturing processes, or adjust supply-chain management. Such changes could also result in significant inventory obsolescence. In addition, compliance with environmental, health and safety requirements could restrict our ability to expand our facilities or require us to acquire costly pollution-control equipment, incur other significant expenses or modify our manufacturing processes. We also are subject to cleanup obligations at properties that we currently own or at facilities that we may have owned in the past or at which
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we conducted operations. In the event of the discovery of new or previously unknown contamination, additional requirements with respect to existing contamination, or the imposition of other cleanup obligations at these or other sites for which we are responsible, we may be required to take remedial or other measures that could have a material adverse effect on our business, financial condition and results of operations.
THE LOSS OF ANY KEY PERSONNEL ON WHOM WE DEPEND MAY SERIOUSLY HARM OUR BUSINESS.
Our future success depends in large part on the continued service of our key technical and management personnel and on our ability to continue to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and in the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could harm our business.
ACCOUNTING FOR OUR PERFORMANCE-BASED RESTRICTED STOCK UNITS IS SUBJECT TO JUDGMENT AND MAY LEAD TO UNPREDICTABLE SHARE-BASED EXPENSE RECOGNITION. THE IMPLEMENTATION PLANS UNDER WHICH OUR PERFORMANCE-BASED RESTRICTED STOCK UNITS ARE ISSUED MAY ALSO AFFECT THE DEDUCTIBILITY OF SOME COMPENSATION PAID TO OUR NAMED EXECUTIVE OFFICERS.
We have issued, and may in the future continue to issue, performance-based restricted stock units to eligible employees, entitling those employees to receive restricted stock if they, and we, meet designated performance criteria established by our compensation committee. We are required to reassess the probability of vesting at each reporting date under any performance-based incentive plan, and any change in our forecasts may result in an increase or decrease to the expense recognized. As a result and as described in this paragraph, the expense recognition for performance-based restricted stock units could change over time, requiring adjustments to the financial statements to reflect changes in our judgment regarding the probability of achieving the performance goals. We recognize the share-based compensation expense for performance-based restricted stock units when we believe it is probable that we will achieve the specified performance criteria. If the performance goals are not achieved, no compensation expense is recognized and any previously recognized compensation expense is reversed. The fair value of each award is recognized over the service period and is reduced for estimated forfeitures.
For example, in May 2011, we adopted the 2011 Long-Term Performance-Based Incentive Plan (the "2011 Plan"), which provided for the grant of restricted stock units to eligible employees. The performance period under our 2011 Plan ended on December 31, 2013. We published our preliminary financial results for 2013 in a press release that we issued prior to the filing of this Form 10-K. Since the issuance of that press release, information became available that allowed us to make a final determination of performance achievement under the 2011 Plan. As a result, financial results reported in this Form 10-K reflect those actual determinations, which differ from estimates reflected in preliminary results. See "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion. These types of judgments, inherent in performance-based stock plans, may result in changes to share-based compensation expense recognition from time to time. Following the end of our 2011 Plan, we recently adopted a new 2014 Long-Term Performance-Based Incentive Plan (the "2014 Plan") with effect in 2014. Our 2014 Plan is subject to the same judgments and unpredictable expense recognition as our now ended 2011 Plan.
The implementation of our performance-based incentive plans may also affect our ability to receive federal income tax deductions for compensation in excess of $1.0 million paid, during any fiscal year, to our named executive officers. To the extent that aspects of performance-based compensation plans such as the ones we have typically adopted are adjusted in the discretion of the compensation committee, the exercise of that discretion, notwithstanding that it is expressly permitted by the terms of a plan, may result in plan compensation awarded to named executive officers not being deductible. Our compensation committee has retained the discretion to implement our performance-based incentive plans, including our now-ended 2011 Plan and our newly adopted 2014 Plan, notwithstanding any potential loss of deductibility, in the manner that it believes most effectively achieves the objectives of our compensation philosophies.
PROVISIONS IN OUR RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS MAY HAVE ANTI-TAKEOVER EFFECTS.
Certain provisions of our Restated Certificate of Incorporation, our Bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. Our Board of Directors has the authority to issue up to five million shares of preferred stock and to determine the price, voting rights, preferences and privileges, and restrictions of those shares without the approval of our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, by making it more difficult for a third party to acquire a majority of our stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders. We have no present plans to issue shares of preferred stock.
WE ARE, AND MAY IN THE FUTURE BE, ENGAGED IN LITIGATION THAT IS COSTLY, TIME CONSUMING TO DEFEND OR PROSECUTE AND, IF AN ADVERSE DECISION WERE TO OCCUR, COULD HAVE A HARMFUL EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION OR LIQUIDITY DEPENDING ON THE OUTCOME.
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We are subject to legal proceedings and claims that arise in the ordinary course of business. See Part I, Item 3 of this Form 10-K. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.
As discussed under Note 11 of Notes to Condensed Consolidated Financial Statements, and as referred to in Item 3 of Part I below, we are currently engaged, directly and indirectly through our subsidiaries Atmel Rousset S.A.S. (“Atmel Rousset”) and Atmel B.V., in two pending litigations in France related to the June 2013 insolvency of the owner of our former manufacturing facility in Rousset, France. Atmel Rousset sold that manufacturing facility, through an arms’-length process, in June 2010. In one case, the judicially-appointed receivers and administrator (the “Administrators”) of LFoundry Rousset S.A.S. ("LFR"), the entity that acquired the Atmel Rousset assets, sought to extend the LFR insolvency proceedings to include Atmel Rousset and its direct subsidiaries (those subsidiaries consist of another French entity, Atmel Nantes S.A.S., and a small Swedish entity, Atmel Nordic AB, collectively, the “French-Related Entities”). On February 12, 2014, the Commercial Court of Paris rejected the Administrators’ extension petition in its entirety. In a second case, LFR and its judicially-appointed receivers filed an action against the Company and Atmel B.V. (the “Second Suit”) seeking damages of approximately 135 million Euros in connection with the same transaction, as described under “Legal Proceedings - French Insolvency-Related Litigation - LFoundry and Atmel Corporation, et al.” We believe the claims in the Second Suit are without merit, specious and defamatory, and included in our responsive submission a counterclaim against LFR and the receivers for abuse of process, which we intend to prosecute vigorously. Nonetheless, if LFR and its judicially-appointed receivers were successful in their attempt to recover substantial damages against us in the Second Suit, payment of those damages, if payment were ever required or if any damages award were ever capable of enforcement, could have a material adverse effect on our results of operations, financial condition and liquidity. On December 26, 2013, LFR suspended operations and commenced a judicially-supervised liquidation. It is not yet clear what impact, if any, LFR’s liquidation will have on the French insolvency-related litigation.
OUR FOREIGN PENSION PLANS ARE UNFUNDED, AND ANY REQUIREMENT TO FUND THESE PLANS IN THE FUTURE COULD NEGATIVELY AFFECT OUR CASH POSITION AND OPERATING CAPITAL.
We sponsor defined benefit pension plans that cover substantially all of our French and German employees. Plan benefits are managed in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. The projected benefit obligation totaled $38.9 million at December 31, 2013 and $40.6 million at December 31, 2012. The plans are unfunded, in compliance with local statutory regulations, and we have no immediate intention of funding these plans. Benefits are paid when amounts become due, commencing when participants retire. We expect to pay approximately $0.5 million in 2014 for benefits earned. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively affect our cash position and operating capital.
FUTURE ACQUISITIONS MAY RESULT IN UNANTICIPATED ACCOUNTING CHARGES OR MAY OTHERWISE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND RESULT IN DIFFICULTIES IN INTEGRATING THE OPERATIONS, PERSONNEL, TECHNOLOGIES, PRODUCTS AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES OR BUSINESSES, OR BE DILUTIVE TO EXISTING STOCKHOLDERS.
A key element of our business strategy includes expansion through the acquisition of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our skilled engineering workforce or enhance our technological capabilities. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets, including tangible and intangible assets such as intellectual property.
Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses. We have in the past experienced and may in the future experience delays in the timing and successful integration of an acquired company’s technologies, products and product development plans as a result of unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, difficulties ramping up volume production, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to stay with us post-acquisition. The acquisition of another company or its products and technologies may also require us to enter into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation and increase our expenses. These challenges are magnified as the size of the acquisition increases. Furthermore, these challenges would be even greater if we acquired a business or entered into a business combination transaction with a company that was larger and more difficult to integrate than the companies we have historically acquired.
Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional share-based compensation expense and the recording and later amortization of amounts related to certain purchased intangible assets, any of which could adversely affect our results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our common stock to decline.
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Acquisitions or asset purchases made entirely or partially for cash may reduce our cash reserves. We may seek to obtain additional cash to fund an acquisition by selling equity or debt securities. Any issuance of equity or convertible debt securities may be dilutive to our existing stockholders.
We cannot assure you that we will be able to consummate any pending or future acquisitions or that we will realize any anticipated benefits or synergies from any of our historic or future acquisitions. We may not be able to find suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of our common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions.
We are required under GAAP to test goodwill for possible impairment on an annual basis and at any other time that circumstances arise indicating the carrying value of our goodwill may not be recoverable. At December 31, 2013, we had $108.2 million of goodwill. We completed our annual test of goodwill impairment in the fourth quarter of 2013 and concluded that we did not have any impairment at that time. However, if we continue to see deterioration in the global economy and the current market conditions in the semiconductor industry worsen, the carrying amount of our goodwill may no longer be recoverable, and we may be required to record a material impairment charge, which would have a negative impact on our results of operations.
DISRUPTIONS TO THE AVAILABILITY OF RAW MATERIALS CAN AFFECT OUR ABILITY TO SUPPLY PRODUCTS TO OUR CUSTOMERS, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
The manufacture of semiconductor devices requires specialized raw materials, primarily certain types of silicon wafers. We generally utilize more than one source to acquire these wafers, but there are only a limited number of qualified suppliers capable of producing these wafers in the market. In addition, the raw materials, which include specialized chemicals and gases, and the equipment necessary for our business, could become more difficult to obtain as worldwide use of semiconductors in product applications increases. We have experienced supply shortages and price increases from time to time in the past, and on occasion our suppliers have told us they need more time than expected to fill our orders. Any significant interruption of the supply of raw materials or increase in cost of raw materials could harm our business.
WE COULD FACE PRODUCT LIABILITY CLAIMS THAT RESULT IN SIGNIFICANT COSTS AND DAMAGE TO OUR REPUTATION WITH CUSTOMERS, WHICH WOULD NEGATIVELY AFFECT OUR OPERATING RESULTS.
All of our products are sold with a limited warranty. However, we could incur costs not covered by our warranties, including additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting their defective products, costs for product recalls or other damages. These costs could be disproportionately higher than the revenue and profits we receive from the sales of our products.
Our products have previously experienced, and may in the future experience, manufacturing defects, software or firmware bugs, or other similar quality problems. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers. In addition, any defects, bugs or other quality problems could interrupt or delay sales or shipment of our products to our customers.
We have implemented significant quality control measures to mitigate these risks; however, it is possible that products shipped to our customers will contain defects, bugs or other quality problems. Such problems may divert our technical and other resources from other development efforts. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur significant additional costs or delay shipments, which would negatively affect our business, financial condition and results of operations.
CHANGES IN OUR INCOME TAX POSITIONS OR ADVERSE OUTCOMES RESULTING FROM ONGOING OR FUTURE TAX AUDITS, IN THE U.S. OR FOREIGN JURISDICTIONS, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Income tax provisions are subject to significant judgment and estimates and may require material modification as new information is obtained regarding our tax positions, as our business performance changes, or as tax laws, regulations, treaties and interpretations in the U.S. or other jurisdictions change. Our provision for income taxes is subject to volatility and could be adversely affected by many factors including: earnings being lower than anticipated in countries where we operate that have lower tax rates and higher than anticipated in countries that have higher tax rates; changes in the valuation of our deferred tax assets and liabilities; expiration of or lapses in R&D tax credits or similar laws; expiration of or lapses in tax incentives; transfer pricing adjustments, including the effect of intercompany acquisitions under cost sharing arrangements; the legal structure of our foreign subsidiaries and changes to that structure; tax effects of nondeductible compensation; tax costs related to intercompany realignments; changes in accounting principles; or changes in tax laws and regulations, treaties, or interpretations, including possible changes to the taxation of earnings, or the deductibility of expenses (including expenses attributable to foreign income), of our foreign subsidiaries or foreign tax credit rules. If any of these circumstances were to arise, the initial judgments or estimates we use to prepare our financial statements may require adjustment, which could, if material, negatively affect our results of operations and financial condition. For example, the Organization for Economic Co-operation and Development, an international association of 34 countries
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including the United States, is contemplating changes to numerous long-standing tax principles. These contemplated changes, if finalized and adopted by countries in which we operate, will increase tax uncertainty and may adversely affect our provision for income taxes.
We are also subject to continued examination of our income tax returns by the Internal Revenue Service and other foreign and domestic tax authorities and typically have a number of open audits under way at any time. See "Note 12 - Income Taxes." We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. While we believe that the resolution of these audits will not have a material adverse effect on our results of operations, the outcome is subject to significant uncertainties. If we are unable to obtain agreements with the tax authority on the various proposed adjustments, there could be a material adverse effect on our results of operations, cash flows and financial position.
OUR LEGAL ENTITY ORGANIZATIONAL STRUCTURE IS COMPLEX, WHICH COULD RESULT IN UNFAVORABLE TAX OR OTHER CONSEQUENCES, WHICH COULD HAVE AN ADVERSE EFFECT ON OUR NET INCOME AND FINANCIAL CONDITION.
We currently operate legal entities in countries where we conduct manufacturing, design, and sales operations around the world. In some countries, we maintain multiple entities for tax or other purposes. Changes in tax laws, regulations, and related interpretations in the countries in which we operate may adversely affect our results of operations.
We have many entities globally and unsettled intercompany balances between some of these entities that could result, if changes in law, regulations or related interpretations occur, in adverse tax or other consequences affecting our capital structure, intercompany interest rates and legal structure.
FROM TIME TO TIME WE RECEIVE GRANTS FROM GOVERNMENTS, AGENCIES AND RESEARCH ORGANIZATIONS. IF WE ARE UNABLE TO COMPLY WITH THE TERMS OF THOSE GRANTS, WE MAY NOT BE ABLE TO RECEIVE OR RECOGNIZE GRANT BENEFITS OR WE MAY BE REQUIRED TO REPAY GRANT BENEFITS PREVIOUSLY PAID TO US AND RECOGNIZE RELATED CHARGES, WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL POSITION.
From time to time, we receive economic incentive grants and allowances from European governments, agencies and research organizations targeted at increasing employment at specific locations. The subsidy grant agreements typically contain economic incentive, headcount, capital and research and development expenditure and other covenants that must be met to receive and retain grant benefits and these programs can be subjected to periodic review by the relevant governments. Noncompliance with the conditions of the grants could result in the forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts received to date.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
At December 31, 2013, we owned the following facilities:
Number of Buildings | Location | Total Square Feet | Use | |||||||
6 | Colorado Springs, Colorado | 603,000 | Wafer fabrication, research and development, marketing, product design, final product testing. | |||||||
4 | Heilbronn, Germany | 778,000 | Research and development, marketing and product design. Primarily leased to other semiconductor companies. | |||||||
2 | Calamba City, Philippines | 338,000 | Probe operations and final product testing. | |||||||
5 | Rousset, France | 815,000 | Research and development, marketing and product design. Primarily leased to another semiconductor company. | |||||||
We sold our former corporate headquarters located in San Jose, California, and adjacent land parcels, in August 2011. We entered into a long-term lease for our new corporate headquarters in San Jose, California in August 2011.
In addition to the facilities we own, we lease numerous research and development facilities and sales offices in North America, Europe and Asia. We believe that existing facilities are adequate for our current requirements.
We do not identify facilities or other assets by operating segment. Each facility serves or supports multiple products and our product mix changes frequently.
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ITEM 3. LEGAL PROCEEDINGS
We are party to various legal proceedings. Our management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operations and statements of cash flows. If an unfavorable ruling were to occur in any of the legal proceedings described in Note 11 of Notes to Consolidated Financial Statements, there exists the possibility of a material adverse effect on our financial position, results of operations and cash flows. For more information regarding certain of these proceedings, see Note 11 of Notes to Consolidated Financial Statements, which is incorporated by reference into this Item. We accrue for losses related to litigation that we consider probable and for which the loss can be reasonably estimated. In the event that a loss cannot be reasonably estimated, we do not accrue for such losses. As we continue to monitor these matters or other matters that were not deemed material as of December 31, 2013, our determination could change, however, and we may decide, at some future date, to establish an appropriate reserve. With respect to each of the matters described in Note 11 of Notes to Consolidated Financial Statements, except where noted otherwise, management has determined a potential loss is not probable at this time and, accordingly, no amount has been accrued at December 31, 2013. Our management makes a determination as to when a potential loss is reasonably possible based on relevant accounting literature and then includes appropriate disclosure of the contingency. Except as otherwise noted in Note 11 of Notes to Consolidated Financial Statements, our management does not believe that the amount of loss or a range of possible losses is reasonably estimable.
French Insolvency-Related Litigation - LFoundry and Atmel Rousset. In June 2010, our French subsidiary, Atmel Rousset S.A.S. (“Atmel Rousset”), sold its wafer manufacturing facility in Rousset, France to LFoundry GmbH (“LF”). In connection with this transaction, Atmel Rousset also executed, among other agreements, a take-or-pay supply agreement (the “Supply Agreement”) requiring Atmel Rousset or its affiliates to purchase wafers from LF’s subsidiary, LFR, which operates the facility; Atmel Rousset’s commitment under that Supply Agreement was fully satisfied in mid-2013. On June 26, 2013, LFR filed an insolvency declaration with the Commercial Court of Paris (the “Paris Court”). Two months later, on August 22, 2013, Atmel Rousset received a petition through which LFR, by its judicially-appointed receivers and administrator (collectively, “Administrator”), sought to extend the bankruptcy proceedings to include Atmel Rousset. On February 12, 2014, the Paris Court rejected the Administrator’s petition in its entirety.
French Insolvency-Related Litigation - LFoundry and Atmel Corporation, et al. On June 26, 2013, LFR filed an insolvency declaration with the Paris Court, as described above under “Legal Proceedings - French Insolvency-Related Litigation - LFoundry and Atmel Rousset.” On September 6, 2013, LFR’s judicially-appointed receivers submitted a further petition to the Paris Court seeking to hold the Company and its subsidiary Atmel B.V. jointly and severally liable to LFR for damages in the approximate amount of 135 million Euros. LFR alleges that we and Atmel B.V. defrauded LFR (x) in connection with Atmel Rousset’s 2010 sale of its manufacturing facility to LF, the German parent of LFR, and (y) through their business conduct with LFR after the sale. The Company and Atmel B.V. consider LFR’s claims specious, defamatory and devoid of merit for at least the following reasons: (a) neither was a party to the sale transaction or the supply agreement executed in conjunction with the transaction; (b) the sale transaction, when consummated in 2010, fully complied with all applicable French laws; (c) the assets transferred by Atmel Rousset to LFR had a net value at the time of sale in excess of 80 million Euros, as confirmed, prior to the sale, by an independent auditor appointed by the Paris Court; (d) LFR assumed no debt in connection with the transaction; (e) LF was, at the time of the transaction, a financially stable and experienced foundry operator; (f) Atmel Rousset’s Workers’ Council (representing all Atmel Rousset employees prior to the sale), after receiving detailed information about LF and the transaction, and the analysis of its own independent financial expert, unanimously approved the transaction; (g) Atmel Rousset (or its affiliates) fully satisfied its commitment to purchase wafers from LFR, as acknowledged by LFR, by mid-2013; (h) in the three years after the sale, LFR received from Atmel Rousset (or present and past affiliates) payments for wafers and other services aggregating more than $400 million; and (i) any failure by LFR to diversify its revenue stream or reduce its dependence on Atmel Rousset over the course of three years resulted solely from ineffectual LFR management. The Company and Atmel B.V. intend to defend themselves vigorously in this matter, and included in their responsive submission a counterclaim against the receivers for abuse of process. On December 26, 2013, LFR suspended operations and commenced a judicially-supervised liquidation. It is not yet clear what impact, if any, LFR’s liquidation will have on this litigation.
From time to time, we are notified of claims that our products may infringe patents, or other intellectual property, owned by other parties. We periodically receive demands for indemnification from our customers with respect to intellectual property matters. We also periodically receive claims relating to the quality of our products, including claims for additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting defective products, costs for product recalls or other damages. Receipt of these claims and requests occurs in the ordinary course of our business, and we respond based on the specific circumstances of each event. We undertake an accrual for losses relating to those types of claims when we consider those losses “probable” and when a reasonable estimate of loss can be determined.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The NASDAQ Stock Market's Global Select Market under the symbol "ATML." The last reported price for our stock on January 31, 2014 was $8.36 per share. The following table presents the high and low sales prices per share for our common stock as quoted on The NASDAQ Global Select Market for the periods indicated.
High | Low | |||
Year ended December 31, 2012: | ||||
First Quarter | $10.73 | $8.26 | ||
Second Quarter | $9.72 | $6.21 | ||
Third Quarter | $6.77 | $5.26 | ||
Fourth Quarter | $6.55 | $4.44 | ||
Year ended December 31, 2013: | ||||
First Quarter | $7.28 | $6.13 | ||
Second Quarter | $8.20 | $6.07 | ||
Third Quarter | $8.03 | $7.13 | ||
Fourth Quarter | $7.83 | $6.58 | ||
As of January 31, 2014, there were approximately 1,336 stockholders of record of our common stock. As many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
We have never paid cash dividends on our common stock, and we currently have no plans to pay cash dividends in the future.
There were no sales of unregistered securities in fiscal 2013.
The following table provides information about the repurchase of our common stock during the three months ended December 31, 2013, pursuant to our Stock Repurchase Program.
Period | Total Number of Shares Purchased | Average Price Paid per Share ($) (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (3) | ||||
October 1 - October 31 | — | — | — | $363,661,615 | ||||
November 1 - November 30 | 2,210,781 | $7.29 | 2,210,781 | $347,554,944 | ||||
December 1 - December 31 | 1,078,360 | $7.51 | 1,078,360 | $339,455,570 | ||||
_________________________________________
(1)Represents the average price paid per share ($) exclusive of commissions.
(2)Represents shares purchased in open-market transactions under the stock repurchase plan approved by the Board of Directors.
(3)These amounts correspond to a plan announced in August 2010 whereby the Board of Directors authorized the repurchase of up to $200.0 million of our common stock. In May 2011, Atmel’s Board of Directors authorized an additional $300.0 million to our existing repurchase program. In April 2012, Atmel’s Board of Directors authorized an additional $200.0 million to our existing repurchase program. In October 2013, Atmel’s Board of Directors authorized an additional $300.0 million to our existing repurchase program. The repurchase program does not have an expiration date. Shares repurchased under the program may be retired or retained as treasury shares. Amounts remaining to be purchased are exclusive of commissions.
ITEM 6. SELECTED FINANCIAL DATA
The following tables include selected summary financial data for each of our last five years. This data is not necessarily indicative of results of future operations and should be read in conjunction with Item 8 - Financial Statements and Supplementary Data and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K. The consolidated statement of operations data for 2013, 2012, and 2011 and the consolidated balance sheet data for 2013 and 2012 are derived from our audited financial statements that are included in this Form 10-K. The consolidated statement of operations data for 2010 and 2009 and the consolidated balance sheet data for 2011, 2010 and 2009 are derived from our audited consolidated financial statements that are not included in this Form 10-K.
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Years Ended December 31, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(in thousands, except for per share data) | |||||||||||||||||||
Net revenue | $ | 1,386,447 | $ | 1,432,110 | $ | 1,803,053 | $ | 1,644,060 | $ | 1,217,345 | |||||||||
Cost of revenue | $ | 812,822 | $ | 830,791 | $ | 894,820 | $ | 915,876 | $ | 804,338 | |||||||||
Income (loss) from operations before income taxes(1)(3)(4) | $ | (513 | ) | $ | 42,238 | $ | 381,190 | $ | 116,352 | $ | (136,039 | ) | |||||||
Net income (loss) | $ | (22,055 | ) | $ | 30,445 | $ | 314,990 | $ | 423,075 | $ | (109,498 | ) | |||||||
Basic net income (loss) per share: | |||||||||||||||||||
Net income (loss) per share | $ | (0.05 | ) | $ | 0.07 | $ | 0.69 | $ | 0.92 | $ | (0.24 | ) | |||||||
Weighted-average shares used in basic net income (loss) per share calculations | 427,460 | 433,017 | 455,629 | 458,482 | 451,755 | ||||||||||||||
Diluted net income (loss) per share: | |||||||||||||||||||
Net income (loss) per share | $ | (0.05 | ) | $ | 0.07 | $ | 0.68 | $ | 0.90 | $ | (0.24 | ) | |||||||
Weighted-average shares used in diluted net income (loss) per share calculations | 427,460 | 437,582 | 462,673 | 469,580 | 451,755 | ||||||||||||||
As of December 31, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(in thousands) | |||||||||||||||||||
Cash and cash equivalents | $ | 276,881 | $ | 293,370 | $ | 329,431 | $ | 501,455 | $ | 437,509 | |||||||||
Cash and cash equivalents and short-term investments | $ | 279,062 | $ | 296,057 | $ | 332,510 | $ | 521,029 | $ | 476,140 | |||||||||
Fixed assets, net (2) | $ | 184,983 | $ | 221,044 | $ | 257,070 | $ | 260,124 | $ | 203,219 | |||||||||
Total assets | $ | 1,352,526 | $ | 1,433,533 | $ | 1,526,598 | $ | 1,650,042 | $ | 1,392,842 | |||||||||
Long-term debt and capital leases less current portion | $ | 7,010 | $ | 5,602 | $ | 4,599 | $ | 3,976 | $ | 9,464 | |||||||||
Stockholders’ equity | $ | 937,927 | $ | 996,638 | $ | 1,082,444 | $ | 1,053,056 | $ | 764,407 | |||||||||
(1) | We recorded a loss on sale of assets of $99.8 million for the year ended December 31, 2010 related to the sale of our manufacturing operations in Rousset, France and the sale of our Secure Microcontroller Solutions business. We recorded an income tax benefit related to release of valuation allowances of $116.7 million related to certain deferred tax assets, and recorded an additional benefit to income tax expense of approximately $151.2 million related to the release of previously accrued penalties and interest on the income tax exposures and a refund from the carryback of tax attributes for the year ended December 31, 2010. |
(2) | Fixed assets, net was reduced as of December 31, 2013, 2010 and 2009 as a result of the asset impairment charges of $7.5 million, $11.9 million and $79.8 million for the years then ended, respectively. We reclassified $83.2 million in fixed assets to assets held for sale as of December 31, 2009 relating to our fabrication facilities in Rousset, France. |
(3) | We recorded pre-tax, share-based compensation expense of $43.1 million, $72.4 million, $68.1 million, $60.5 million and $30.1 million for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 respectively, excluding acquisition-related stock compensation expenses. |
(4) | We recorded $5.5 million, $7.4 million, $5.4 million, $1.6 million and $16.3 million in acquisition-related charges for the years ended December 31, 2013, 2012, 2011, 2010 and 2009, respectively. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our Consolidated Financial Statements and the related “Notes to Consolidated Financial Statements” and “Financial Statement Schedules" and "Supplementary Financial Data” included in this Form 10-K. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2014 and beyond. Our statements regarding the following matters also fall within the meaning of “forward-looking” statements and should be considered accordingly: the expansion of the market for microcontrollers, revenue for our maXTouch® products, expectations for our XSense® products, our gross margin expectations and trends, anticipated revenue by geographic area and the ongoing transition of our revenue base to Asia, expectations or trends involving our operating expenses, capital expenditures, cash flow and liquidity, our factory utilization rates, the effect and timing of new product introductions, our ability to access independent foundry capacity and the corresponding financial condition and operational performance of those foundry partners, including insolvencies of, and litigation related to European foundry suppliers, the effects of our strategic transactions and restructuring efforts, the estimates we use in respect of the amount and/or timing for expensing unearned share-based compensation and similar estimates related to our performance-based restricted stock units, our expectations regarding tax matters and related tax audits, the outcome of litigation (including intellectual property litigation in which we may be involved or in which our customers may be involved, especially in the mobile device sector) and the effects of exchange rates and our ongoing efforts to manage exposure to exchange rate fluctuation. Our actual results could differ materially from those projected in any forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion and in Item 1A - Risk Factors, and elsewhere in this Form 10-K. Generally, the words “may,” “will,” “could,” “should,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-K is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. We undertake no obligation to update any forward-looking statements in this Form 10-K.
On February 5, 2014, we issued a press release announcing our preliminary financial results for the fourth quarter and full year ended December 31, 2013. In the press release, we reported a net income (loss) of $4.5 million and $ (24.8) million for the three months and year ended December, 31, 2013, respectively. Those preliminary results reflected our estimate of share-based compensation expense related to our 2011 Plan, which ended on December 31, 2013. Since the issuance of that press release and prior to the date of this Form 10-K, information became available that allowed us to make a final determination of performance achievement under the 2011 Plan. This final determination resulted in a non-cash adjustment to preliminary results of approximately $2.7 million, reducing total share-based compensation expense from the estimate reflected in our February 5, 2014 press release.
The following table presents a reconciliation of the preliminary net income (loss) and net income (loss) per share announced in our press release on February 5, 2014 to the final results reported in this Form 10-K:
Three Months Ended December 31, 2013 | Twelve Months Ended December 31, 2013 | ||||||
(in thousands, except for per share data) | |||||||
Net income (loss) announced on February 5, 2014 | $ | 4,512 | $ | (24,753 | ) | ||
Adjustment: | |||||||
Performance-based equity compensation | 2,698 | 2,698 | |||||
Net income (loss) reported in Form 10-K | $ | 7,210 | $ | (22,055 | ) | ||
Net income (loss) per share: | |||||||
Basic - announced on February 5, 2014 | $ | 0.01 | $ | (0.06 | ) | ||
Basic - reported in Form 10-K | $ | 0.02 | $ | (0.05 | ) | ||
Diluted - announced on February 5, 2014 | $ | 0.01 | $ | (0.06 | ) | ||
Diluted - reported in Form 10-K | $ | 0.02 | $ | (0.05 | ) | ||
OVERVIEW
We are one of the world’s leading designers, developers and suppliers of microcontrollers, which are self-contained computers-on-a-chip. Microcontrollers are generally less expensive, consume less power and offer enhanced programming capabilities compared to traditional microprocessors. Our microcontrollers and related products are used in many of the world’s leading industrial and automotive electronics, mobile computing and communications devices, including smartphones, tablets, Ultrabooks and personal computers, and other electronics products in which they provide core, embedded functionalities for, among
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other things, touch and proximity sensing, sensor management, security and encryption, wireless connectivity, lighting and system controls and battery management. We continue to extend our product portfolio through the ongoing development and introduction of additional wireless products that allow devices to communicate and connect with each other, having continued to integrate enhanced wireless capabilities into our product portfolio using technologies such as Zigbee and “Wi-Fi Direct,” that enable the so-called “Internet of Things,” where smart, connected devices and appliances seamlessly share data and information. We also expect these products to proliferate within the quickly evolving “wearables” sector, where our microcontrollers may be used to manage multiple accelerometers or sensors within a device, to communicate information from that device to a gateway, or to track or monitor other activities. We also continue to enable and enhance human computer interaction by leveraging our market leading capacitive touch products, our microcontroller know-how and our significant intellectual property ("IP") portfolio. In addition, we continuously seek new market opportunities that benefit from our corporate and technology strengths, as we did when we launched our XSense product, a new type of proprietary metal mesh technology for touch sensors. To maintain a broad market reach, we also design and sell other semiconductor products that complement our microcontroller business, including nonvolatile memory, radio frequency and mixed-signal components and application specific integrated circuits. Our product portfolio allows us to address a broad range of high growth applications, including, for example, industrial, building and home electronics systems, smart meters used for utility monitoring and billing, commercial, residential and architectural LED-based lighting systems, touch panels used on household and industrial appliances, medical devices, aerospace and military products and systems, and a growing universe of electronic-based automotive systems like keyless ignition and access, engine control, air-bag deployment, and lighting and entertainment systems. We expect the market for microcontrollers to continue to expand over time as tactile, gesture and proximity-based user interfaces become increasingly prevalent, as additional intelligence is built into an ever-growing universe of everyday products for the “Internet of Things” or integrated within “wearable” devices, as industrial and automotive customers accelerate the replacement of mechanical or passive controls in their products, and as power management, authentication, cryptographic, security and similar capabilities become increasingly critical to many industrial, automotive, consumer and medical products.
Management expects the Company to realize a gross margin benefit in 2014 from ongoing cost reductions and operational enhancements that were initiated in 2013, from the 2013 conclusions of our legacy “take-or-pay” wafer supply agreements, and from other savings achieved through restructuring activities. For further discussion of savings from restructuring activities, see “Restructuring Charges.”
During the year ended December 31, 2013, we repurchased 12.2 million shares of our common stock in the open market and subsequently retired those shares under our existing stock repurchase program. As of December 31, 2013, $339.5 million remained available for repurchasing common stock under this program.
RESULTS OF OPERATIONS
Years Ended | |||||||||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||||||||
(in thousands, except for percentage of net revenue) | |||||||||||||||||
Net revenue | $ | 1,386,447 | 100.0 | % | $ | 1,432,110 | 100.0 | % | $ | 1,803,053 | 100.0 | % | |||||
Gross margin | 573,625 | 41.4 | % | 601,319 | 42.0 | % | 908,233 | 50.4 | % | ||||||||
Research and development | 266,408 | 19.2 | % | 251,519 | 17.6 | % | 255,653 | 14.2 | % | ||||||||
Selling, general and administrative | 237,559 | 17.1 | % | 275,257 | 19.2 | % | 280,410 | 15.6 | % | ||||||||
Acquisition-related charges | 5,534 | 0.4 | % | 7,388 | 0.5 | % | 5,408 | 0.3 | % | ||||||||
Restructuring charges | 50,026 | 3.6 | % | 23,986 | 1.7 | % | 20,064 | 1.1 | % | ||||||||
(Recovery) impairment of receivables due from foundry supplier | (600 | ) | — | % | 6,495 | 0.5 | % | — | — | % | |||||||
Credit from reserved grant income | — | — | % | (10,689 | ) | (0.7 | )% | — | — | % | |||||||
Gain on sale of assets | (4,430 | ) | (0.3 | )% | — | — | % | (35,310 | ) | (2.0 | )% | ||||||
Settlement charges | 21,600 | 1.6 | % | — | — | % | — | — | % | ||||||||
(Loss) income from operations | $ | (2,472 | ) | (0.2 | )% | $ | 47,363 | 3.3 | % | $ | 382,008 | 21.2 | % | ||||
Net Revenue
Our net revenue totaled $1,386.4 million for the year ended December 31, 2013, a decrease of 3%, or $45.7 million, from $1,432.1 million in net revenue for the year ended December 31, 2012. Revenue for the year ended December 31, 2013 was lower than 2012 primarily as a result of the sale of our Serial Flash product line in September 2012.
Our net revenue for the year ended December 31, 2012 decreased by 21%, or $370.9 million, from $1,803.1 million in net revenue for the year ended December 31, 2011. Revenue for the year ended December 31, 2012 was lower than 2011 primarily as a result of lower sales throughout our distribution channel, particularly in Asia.
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Net revenue denominated in Euros was 21%, 19% and 21% of total net revenue for the years ended December 31, 2013, 2012 and 2011, respectively. Average exchange rates utilized to translate foreign currency revenue and expenses in Euros were approximately 1.32, 1.29 and 1.39 Euros to the dollar for the years ended December 31, 2013, 2012 and 2011, respectively. Our net revenue for the year ended December 31, 2013 would have been approximately $8.2 million lower had the average exchange rate in such year remained the same as the average exchange rate in effect for the year ended December 31, 2012.
Net Revenue — By Operating Segment
Our net revenue by operating segment is summarized as follows:
Years Ended | ||||||||||||||
December 31, 2013 | December 31, 2012 | Change | % Change | |||||||||||
(in thousands, except for percentages) | ||||||||||||||
Microcontroller | $ | 896,916 | $ | 892,839 | $ | 4,077 | — | % | ||||||
Nonvolatile Memory | 114,264 | 170,736 | (56,472 | ) | (33 | )% | ||||||||
RF and Automotive | 182,857 | 174,237 | 8,620 | 5 | % | |||||||||
ASIC | 192,410 | 194,298 | (1,888 | ) | (1 | )% | ||||||||
Total net revenue | $ | 1,386,447 | $ | 1,432,110 | $ | (45,663 | ) | (3 | )% | |||||
Years Ended | ||||||||||||||
December 31, 2012 | December 31, 2011 | Change | % Change | |||||||||||
(in thousands, except for percentages) | ||||||||||||||
Microcontroller | $ | 892,839 | $ | 1,113,579 | $ | (220,740 | ) | (20 | )% | |||||
Nonvolatile Memory | 170,736 | 255,683 | (84,947 | ) | (33 | )% | ||||||||
RF and Automotive | 174,237 | 202,013 | (27,776 | ) | (14 | )% | ||||||||
ASIC | 194,298 | 231,778 | (37,480 | ) | (16 | )% | ||||||||
Total net revenue | $ | 1,432,110 | $ | 1,803,053 | $ | (370,943 | ) | (21 | )% | |||||
Microcontroller
Microcontroller segment net revenue increased to $896.9 million for the year ended December 31, 2013 compared to $892.8 million for the year ended December 31, 2012. Microcontroller net revenue represented 65%, 62% and 62% of total net revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
Microcontroller segment net revenue decreased 20% to $892.8 million for the year ended December 31, 2012 from $1,113.6 million for the year ended December 31, 2011. Revenue decreased primarily due to weaker demand in industrial and consumer markets, with ARM and maXTouch products most affected.
Nonvolatile Memory
Nonvolatile Memory segment net revenue decreased 33% to $114.3 million for the year ended December 31, 2013 from $170.7 million for the year ended December 31, 2012. The decrease was primarily due to the lower demand in our serial EE products and the sale of our Serial Flash product line which accounted for 23% of total nonvolatile memory segment revenue for the year ended December 31, 2012.
Nonvolatile Memory segment net revenue decreased 33% to $170.7 million for the year ended December 31, 2012 from $255.7 million for the year ended December 31, 2011. The decline in our memory business resulted primarily from reduced market demand, a weaker pricing environment and the end of life for several flash products, including Serial EE and Serial Flash products, which saw revenue decrease by 22% and 51% for the years ended December 31, 2012 and 2011, respectively. On September 28, 2012, we sold our Serial Flash product line and discontinued the products included in that line. Revenue for our Serial Flash product lines was $39.4 million for the year ended December 31, 2012 compared to $80.7 million for the year ended December 31, 2011.
RF and Automotive
RF and Automotive segment net revenue increased 5% to $182.9 million for the year ended December 31, 2013 from $174.2 million for the year ended December 31, 2012. This increase was primarily related to an increase in demand for our high-voltage products, partially offset by a decline in demand for legacy GPS products.
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RF and Automotive segment net revenue decreased 14% to $174.2 million for the year ended December 31, 2012 from $202.0 million for the year ended December 31, 2011. This decrease was primarily related to continued decline in demand for our non-core radio frequency products within this segment, related generally to adverse macro-economic conditions and seasonality effects within the automotive sector, partially offset by an increase of 3% in net revenue from sales of our high-voltage products, which are used primarily in automotive applications.
ASIC
ASIC segment net revenue decreased 1% to $192.4 million for the year ended December 31, 2013 from $194.3 million for the year ended December 31, 2012. This decrease was primarily due to a decrease in demand for our legacy custom and programmable products, partially offset by an increase in demand for our aerospace products specifically space and military/aerospace products.
ASIC segment net revenue decreased 16% to $194.3 million for the year ended December 31, 2012 from $231.8 million for the year ended December 31, 2011. Our military and aerospace business revenue, which represents approximately 28% of overall ASIC revenue, decreased approximately 36% during the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily from reduced market demand.
Net Revenue by Geographic Area
Our net revenue by geographic area for the year ended December 31, 2013, compared to the years ended December 31, 2012 and 2011, is summarized in the table below. Revenue is attributed to regions based on the location to which we ship. See Note 14 of Notes to Consolidated Financial Statements for further discussion.
Years Ended | ||||||||||||||
December 31, 2013 | December 31, 2012 | Change | % Change | |||||||||||
(in thousands, except for percentages) | ||||||||||||||
Asia | $ | 818,703 | $ | 862,901 | $ | (44,198 | ) | (5 | )% | |||||
Europe | 354,409 | 353,377 | 1,032 | — | % | |||||||||
United States | 192,878 | 189,699 | 3,179 | 2 | % | |||||||||
Other* | 20,457 | 26,133 | (5,676 | ) | (22 | )% | ||||||||
Total net revenue | $ | 1,386,447 | $ | 1,432,110 | $ | (45,663 | ) | (3 | )% | |||||
Years Ended | ||||||||||||||
December 31, 2012 | December 31, 2011 | Change | % Change | |||||||||||
(in thousands, except for percentages) | ||||||||||||||
Asia | $ | 862,901 | $ | 1,062,584 | $ | (199,683 | ) | (19 | )% | |||||
Europe | 353,377 | 462,566 | (109,189 | ) | (24 | )% | ||||||||
United States | 189,699 | 249,887 | (60,188 | ) | (24 | )% | ||||||||
Other* | 26,133 | 28,016 | (1,883 | ) | (7 | )% | ||||||||
Total net revenue | $ | 1,432,110 | $ | 1,803,053 | $ | (370,943 | ) | (21 | )% | |||||
_________________________________________
* Primarily includes South Africa, and Central and South America
Net revenue outside the United States accounted for 86%, 87% and 86% of our net revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
Our net revenue in Asia decreased $44.2 million, or 5%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. The decrease was primarily due to the sale of our Serial Flash product line in September 2012 and the loss of revenue related to that business.
Our net revenue in Asia decreased $199.7 million, or 19%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease was primarily due to lower shipments of our microcontroller products as a result of weaker demand in industrial and consumer markets, with ARM and maXTouch products principally affected. In the year ended December 31, 2012, our Asian distributors significantly reduced their inventory of our products as compared to the year ended December 31, 2011. Net revenue for the Asia region was 59%, 60% and 59% of total net revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
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Our net revenue in Europe remained relatively flat for the year ended December 31, 2013, compared to the year ended December 31, 2012. Our net revenue in Europe decreased $109.2 million, or 24%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease was primarily a result of the continued decline in industrial markets. Net revenue for the Europe region was 26%, 25% and 26% of total net revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
Our net revenue in the United States increased by $3.2 million, or 2%, for the year ended December 31, 2013, compared to the year ended December 31, 2012 primarily due to increased demand for microcontrollers partially offset by the sale of our Serial Flash product line in September 2012 and the loss of revenue related to that business.
Our net revenue in the United States decreased by $60.2 million, or 24%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease resulted from a continued decline in industrial markets, primarily in the markets for energy-related products. Net revenue for the U.S. region was 14%, 13% and 14% of total net revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
Revenue and Costs — Impact from Changes to Foreign Exchange Rates
Changes in foreign exchange rates have historically had an effect on our net revenue and operating costs. Net revenue denominated in foreign currencies was 21%, 19% and 21% of our total net revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
Costs denominated in foreign currencies were 18%, 19% and 19% of our total costs for the years ended December 31, 2013, 2012 and 2011, respectively.
Average exchange rates utilized to translate foreign currency revenue and expenses denominated in Euros were approximately 1.32, 1.29 and 1.39 Euros to the dollar for the years ended December 31, 2013, 2012 and 2011, respectively.
For the year ended December 31, 2013, changes in foreign exchange rates had a favorable overall effect on our operating results. Our net revenue for the year ended December 31, 2013 would have been approximately $8.2 million lower had the average exchange rate in such year remained the same as the average rate in effect for the year ended December 31, 2012. Our income from operations would have been approximately $4.0 million lower had the average exchange rate in the year ended December 31, 2013 remained the same as the average exchange rate in the year ended December 31, 2012.
For the year ended December 31, 2012, changes in foreign exchange rates had an unfavorable overall effect on our operating results. Our net revenue for the year ended December 31, 2012 would have been approximately $23.1 million higher had the average exchange rate in such year remained the same as the average rate in effect for the year ended December 31, 2011. Our income from operations would have been approximately $7.7 million higher had the average exchange rate in the year ended December 31, 2012 remained the same as the average exchange rate in the ended December 31, 2011.
Gross Margin
Gross margin decreased to 41.4% for the year ended December 31, 2013, compared to 42.0% for the year ended December 31, 2012. Gross margin in 2013 was negatively affected by lower sales, a weaker pricing environment on selected products, the residual effects of our legacy European "take-or-pay" wafer supply agreements, a $7.4 million charge related to loss from a foundry arrangement and a $2.2 million loss from the damage and shutdown that occurred at our Colorado Springs wafer manufacturing facility in late December 2013. The total decrease was partially offset by manufacturing cost improvements. We expect to realize gross margin benefit in 2014 from the conclusion in 2013 of our legacy "take-or-pay" wafer supply agreements and ongoing cost reductions and other operational enhancements.
Gross margin declined to 42.0% for the year ended December 31, 2012, compared to 50.4% for the year ended December 31, 2011. Gross margin in 2012 was negatively affected by lower sales, which resulted in lower utilization rates at our Colorado Springs wafer facility, and a weaker pricing environment. Our gross margin for 2012 was also negatively affected by a $10.6 million charge related to loss from a foundry arrangement. Over the past several years, we transitioned our business to a "fab-lite" manufacturing model, lowering our fixed costs and capital investment requirements by selling manufacturing operations and transitioning to foundry partners. We currently own and operate one wafer fabrication facility in Colorado Springs, Colorado.
Inventory decreased to $275.0 million at December 31, 2013 from $348.3 million at December 31, 2012. This decrease was driven by the conclusion of the take-or-pay arrangements with previously divested factories and the resulting improved alignment between customer demand and inventory on hand. In addition, we recorded higher inventory write-downs for potentially unsellable inventory. Inventory write-downs, if undertaken, may affect our results of operations, including gross margin, depending on the nature of those adjustments. If the demand for certain semiconductor products declines or does not materialize as we expect, we could be required to record additional write-downs, which would adversely affect our gross margin.
For the year ended December 31, 2013, we manufactured approximately 52% of our products in our own wafer fabrication facility compared to 56% for the year ended December 31, 2012.
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Our cost of revenue includes the costs of wafer fabrication, assembly and test operations, inventory write-downs, royalty expense, freight costs and share-based compensation expense. Our gross margin as a percentage of net revenue fluctuates depending on product mix, manufacturing yields, utilization of manufacturing capacity, reserves for excess and obsolete inventory, and average selling prices, among other factors.
Research and Development
Research and development ("R&D") expenses increased 6%, or $14.9 million, to $266.4 million for the year ended December 31, 2013 from $251.5 million for the year ended December 31, 2012. This increase was primarily due to higher material expense required for the continued development of XSense products. R&D expenses for the year ended December 31, 2013, were unfavorably affected by approximately $2.1 million of foreign exchange rate fluctuations, compared to rates in effect for the year ended December 31, 2012. As a percentage of net revenue, R&D expenses totaled 19% for the year ended December 31, 2013, compared to 18% for the year ended December 31, 2012.
R&D expenses decreased 2%, or $4.1 million, to $251.5 million for the year ended December 31, 2012 from $255.7 million for the year ended December 31, 2011. R&D expenses for the year ended December 31, 2012, were favorably affected by approximately $9.6 million of foreign exchange rate fluctuations, compared to rates in effect for the year ended December 31, 2011. As a percentage of net revenue, R&D expenses totaled 18% for the year ended December 31, 2012, compared to 14% for the year ended December 31, 2011.
We receive R&D grants from various European research organizations, the benefit of which is recognized as an offset to related research and development costs. We recognized benefits of $5.0 million, $4.2 million and $3.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Our internally developed process technologies are an important part of new product development. We continue to invest in developing process technologies emphasizing wireless, high voltage, analog, digital, and embedded memory manufacturing processes. Our technology development groups, in partnership with certain external foundries, are developing new and enhanced fabrication processes. We believe this investment allows us to bring new products to market faster, add innovative features and achieve performance improvements. We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses decreased 14%, or $37.7 million, to $237.6 million for the year ended December 31, 2013 from $275.3 million for the year ended December 31, 2012. The decrease in SG&A expense was primarily due to lower share-based compensation, reduced legal fees and reduced employee-related costs resulting from restructuring activities. SG&A expenses were unfavorably affected by approximately $1.3 million of foreign exchange rate fluctuations, compared to rates in effect for the year ended December 31, 2012. As a percentage of net revenue, SG&A expenses totaled 17% for the year ended December 31, 2013, compared to 19% for the year ended December 31, 2012.
SG&A expenses decreased 2%, or $5.2 million, to $275.3 million for the year ended December 31, 2012 from $280.4 million for the year ended December 31, 2011. SG&A expenses were favorably affected by approximately $4.5 million of foreign exchange rate fluctuations, compared to rates in effect for the year ended December 31, 2011. As a percentage of net revenue, SG&A expenses totaled 19% for the year ended December 31, 2012, compared to 16% for the year ended December 31, 2011.
Share-Based Compensation
We primarily issue restricted stock units to our employees as equity compensation. Employees may also participate in an Employee Stock Purchase Program ("ESPP") that offers the ability to purchase stock through payroll withholdings at a discount to the market price. We did not issue stock options to our employees as equity compensation in any of the years ended December 31, 2013, 2012 and 2011. Share-based compensation expense for any stock options and ESPP shares is based on the fair value of the award at the measurement date (grant date). The compensation amount for those options is calculated using a Black-Scholes option valuation model.
For restricted stock unit awards, the compensation amount is determined based upon the market price of our common stock on the grant date. Share-based compensation for restricted stock units, other than performance-based units described below, is recognized as an expense over the applicable vesting term for each employee receiving restricted stock units.
The recognition as expense of the fair value of performance-related share-based awards is determined based upon management’s estimate of the probability and timing for achieving the associated performance criteria, utilizing the fair value of the common stock on the grant date. Share-based compensation for performance-related awards is recognized over the estimated performance period, which may vary from period to period based upon management’s estimates of achievement and the timing to achieve the related performance goals. These awards vest once the performance criteria are met.
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The following table summarizes share-based compensation included in operating results:
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
Cost of revenue | $ | 5,889 | $ | 8,052 | $ | 7,840 | |||||
Research and development | 14,852 | 22,825 | 22,916 | ||||||||
Selling, general and administrative | 22,383 | 41,565 | 37,369 | ||||||||
Total share-based compensation expense, before income taxes | 43,124 | 72,442 | 68,125 | ||||||||
Tax benefit | (7,707 | ) | (12,060 | ) | (10,453 | ) | |||||
Total share-based compensation expense, net of income taxes | $ | 35,417 | $ | 60,382 | $ | 57,672 | |||||
In December 2013, we adopted the Atmel 2014 Long-Term Performance-Based Incentive Plan (the “2014 Plan”), which provides for the grant of restricted stock units to Company participants. The performance period under our prior 2011 Plan, adopted in May 2011, ended on December 31, 2013.
Performance metrics for the 2014 Plan are based principally on corporate level and business unit non-GAAP semiconductor gross margin metrics, calculated at the end of each 2014 calendar quarter (other than our XSense business unit for which the performance metric will be based on 2014 cumulative calendar year revenue). Vesting of restricted stock units under the 2014 Plan is expected to commence, assuming achievement of the underlying performance metrics, in the first calendar quarter of 2015.
We recognized a share-based compensation credit of $14.5 million under the 2011 Plan in the year ended December 31, 2013. The credit recorded in the year ended December 31, 2013 resulted from finalizing our estimates regarding the achievement of certain performance criteria established under the 2011 Plan and increasing our forfeiture rate estimates for those performance-based restricted stock units. We recorded total share-based compensation expense related to performance-based restricted stock units of $12.7 million and $7.5 million under the 2011 Plan in the years ended December 31, 2012 and 2011, respectively.
In the quarter ended June 30, 2011, 8.5 million performance based restricted stock units issued under our 2008 Incentive Plan (the "2008 Plan") vested upon Board of Directors' approval on May 23, 2011 as a result of us achieving all of the performance criteria as of March 31, 2011. A total of 5.1 million shares were issued to participants, net of withholding taxes of 3.3 million shares, which represented all remaining shares available under the 2008 Plan. These vested performance based restricted stock units had a weighted average grant date fair value of $4.22 per share on the vesting date. We recorded total share-based compensation expense related to performance based restricted stock units of $6.5 million under the 2008 Plan in the year ended December 31, 2011.
Until restricted stock units are vested, they do not have the voting rights of common stock and the shares underlying the awards are not considered issued and outstanding.
Acquisition-Related Charges
We recorded total acquisition-related charges of $5.5 million, $7.4 million and $5.4 million for the years ended December 31, 2013, 2012 and 2011, respectively, related to our acquisitions of Integrated Device Technology (“IDT”) in March 2013, Ozmo, Inc. ("Ozmo") in December 2012 and Advanced Digital Design ("ADD") in October 2011.
Included in those acquisition-related charges is amortization of $6.0 million, $5.6 million and $4.6 million for the years ended December 31, 2013, 2012 and 2011, respectively, associated with customer relationships, developed technology, trade name, non-compete agreements and backlog. We estimate that charges related to amortization of intangible assets will be approximately $5.2 million for 2014.
We also recorded other compensation related (credit) charges for these acquisitions of $(0.5) million, $1.8 million and $0.8 million for the years ended December 31, 2013, 2012 and 2011, respectively, related to our acquisitions noted above.
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Gain on Sale of Assets
Years Ended | |||||||
December 31, 2013 | December 31, 2011 | ||||||
(in thousands) | |||||||
Serial Flash Product Line | $ | (4,430 | ) | $ | — | ||
Former San Jose Corporate Headquarters | — | (33,428 | ) | ||||
DREAM, France | — | (1,882 | ) | ||||
Total gain on sale of assets | $ | (4,430 | ) | $ | (35,310 | ) | |
Serial Flash Product Line
On September 28, 2012, we sold our Serial Flash product line. Under the terms of the sale agreement, we transferred assets to the buyer, which assumed certain liabilities, in return for cash consideration of $25.0 million. As part of the sale transaction, we granted the buyer an exclusive option to purchase our remaining $7.0 million of Serial Flash inventory, which the buyer fully exercised during 2013. As a result of the sale of that $7.0 million of remaining inventory, we recorded a gain of $4.4 million in our consolidated statements of operations in fiscal 2013 to reflect receipt of payment upon exercise of the related purchase option and the completion of the sale of the Serial Flash product line.
Former San Jose Corporate Headquarters
In 2011, we completed the sale of our former San Jose corporate headquarters and adjacent parcels of land to Ellis Partners LLC for an aggregate purchase price of $48.5 million. A gain of $33.4 million was recorded in the year ended December 31, 2011, which is summarized below:
(in thousands) | |||
Sales price | $ | (48,500 | ) |
Net book value of assets transferred | 12,262 | ||
Transaction-related costs | 2,810 | ||
Gain on sale of assets | $ | (33,428 | ) |
DREAM
In 2011, we sold our DREAM business, including our French subsidiary, Digital Research in Electronics, Acoustics and Music SAS (DREAM), which sold custom designed ASIC chips for karaoke and other entertainment machines, for $2.3 million. We recorded a gain of $1.9 million, which is reflected in gain on sale of assets in the consolidated statements of operations for the year ended December 31, 2011.
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Restructuring Charges
The following table summarizes the activity related to the accrual for restructuring charges detailed by event:
December 31, 2013
Q2'10 | Q2'12 | Q4'12 | Q1'13 | Q3'13 | Total 2013 activity | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance at January 1, 2013 - Restructuring Accrual | $ | 439 | $ | 7,418 | $ | 8,365 | $ | — | $ | — | $ | 16,222 | |||||||||||
Charges (credits) - Employee termination costs, net of change in estimate | — | (13 | ) | (1,720 | ) | 44,084 | 2,043 | 44,394 | |||||||||||||||
Charges - Other | — | — | — | 453 | — | 453 | |||||||||||||||||
Payments - Employee termination costs | (158 | ) | (6,508 | ) | (6,400 | ) | (21,873 | ) | (723 | ) | (35,662 | ) | |||||||||||
Payments - Other | — | — | (229 | ) | (453 | ) | — | (682 | ) | ||||||||||||||
Foreign exchange (gain) loss | — | — | (16 | ) | 738 | (6 | ) | 716 | |||||||||||||||
Balance at December 31, 2013 - Restructuring Accrual | $ | 281 | $ | 897 | $ | — | $ | 22,949 | $ | 1,314 | $ | 25,441 | |||||||||||
Non-cash charges (see discussion below) | $ | — | $ | — | $ | 68 | $ | 5,111 | $ | — | $ | 5,179 | |||||||||||
December 31, 2012
Q3'08 | Q2'10 | Q2'12 | Q4'12 | Total 2012 activity | |||||||||||||||
(in thousands) | |||||||||||||||||||
Balance at January 1, 2012 - Restructuring Accrual | $ | 301 | $ | 1,846 | $ | — | $ | — | $ | 2,147 | |||||||||
Charges - Employee termination costs, net of change in estimate | — | 924 | 11,724 | 10,843 | 23,491 | ||||||||||||||
Charges - Other | — | — | — | 495 | 495 | ||||||||||||||
Payments - Employee termination costs | (301 | ) | (1,902 | ) | (4,486 | ) | (2,973 | ) | (9,662 | ) | |||||||||
Foreign exchange (gain) loss | — | (429 | ) | 180 | — | (249 | ) | ||||||||||||
Balance at December 31, 2012 - Restructuring Accrual | $ | — | $ | 439 | $ | 7,418 | $ | 8,365 | $ | 16,222 | |||||||||
December 31, 2011
Q3'02 | Q2'08 | Q3'08 | Q1'09 | Q2'10 | Total 2011 activity | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance at January 1, 2011 - Restructuring Accrual | $ | 1,592 | $ | 3 | $ | 460 | $ | 136 | $ | 1,286 | $ | 3,477 | |||||||||||
Charges (credits) - Employee termination costs, net of change in estimate | — | (3 | ) | — | — | 21,659 | 21,656 | ||||||||||||||||
Credits - Other | (1,592 | ) | — | — | — | — | (1,592 | ) | |||||||||||||||
Payments - Employee termination costs | — | — | — | — | (21,461 | ) | (21,461 | ) | |||||||||||||||
Payments - Other | — | — | — | (136 | ) | — | (136 | ) | |||||||||||||||
Currency translation adjustment | — | — | 15 | — | 1,165 | 1,180 | |||||||||||||||||
Foreign exchange gain | — | — | (174 | ) | — | (803 | ) | (977 | ) | ||||||||||||||
Balance at December 31, 2011 - Restructuring Accrual | $ | — | $ | — | $ | 301 | $ | — | $ | 1,846 | $ | 2,147 | |||||||||||
We record restructuring liabilities related to workforce reductions when the accounting recognition criteria are met and consistent with management's approval and commitment to the restructuring plans in each particular quarter. The restructuring plans identify the number of employees to be terminated, job classifications and functions, location and the date the plan is expected to be completed.
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2013 Restructuring Charges
Restructuring charges were recorded in the first and third quarters of 2013. The charge in the first quarter of 2013 was primarily related to workforce reductions at our subsidiaries in Rousset, France ("Rousset"), Nantes, France (“Nantes”), and Heilbronn, Germany ("Heilbronn"). The charge in the third quarter of 2013 related primarily to workforce reduction in the U.S. and Norway.
Rousset and Nantes
In 2013, each of Rousset and Nantes restructured operations to further align operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. In connection with formulating this restructuring plan, during the first quarter of 2013, Rousset and Nantes each confidentially negotiated and developed “social plans” in coordination and consultation with their respective local Works Councils, subject to French law; these social plans set forth general parameters, terms and benefits for employee dismissals, both voluntary and involuntary. The restructuring charges related to Rousset and Nantes were $32.9 million, including net non-cash charges of $5.1 million. Total net non-cash charges comprised impairment charges of $6.7 million, which was partially offset by pension curtailment gain of $1.6 million, as discussed further below.
Substantially all of the affected employees ceased active service as of December 31, 2013. There were no significant changes to the plan and no material modifications or changes were made after implementation began.
We vacated a building in Rousset, France in September 2013. Due to ongoing restructuring activities, we evaluated the carrying value of this building and a building located in Greece which is also no longer used in operations. Based on this evaluation, we determined that the Rousset and Greece buildings with carrying amounts of $10.1 million and $2.7 million, respectively, were impaired and wrote them down to their estimated fair value of $5.0 million and $1.1 million, respectively. Total impairment charges of $6.7 million were recorded as restructuring expense. Fair value was based on independent third-party appraisal or estimated selling price.
As a result of these workforce reductions, we recognized pension curtailment gain of $1.6 million in the fourth quarter of 2013 upon termination of the affected employees. Such amount was recorded as a credit to the total restructuring expense in 2013.
Heilbronn
In 2013, Heilbronn, and a related site in Ulm, Germany, restructured operations to further align operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. In connection with formulating this restructuring plan, initial discussions with local Works Councils in Heilbronn and Ulm began in the first quarter of 2013. The restructuring charges related to Heilbronn were $15.8 million.
We anticipate all affected employees will cease active service on or before the end of the fourth quarter of 2014. We are not expecting significant changes to the plan or material modifications or changes after implementation.
The restructuring charges recorded in the first quarter of 2013 also included $0.9 million relating to U.S. and other countries.
U.S. and Norway
Restructuring charges recorded in the third quarter of 2013 were primarily related to workforce reductions in the U.S. and Norway amounting to $2.0 million. The workforce reductions were designed to further align operating expenses with macroeconomic conditions and revenue outlook, and to improve operational efficiency, competitiveness and business profitability. Restructuring charges related to these workforce reductions either were paid to affected employees after their dismissal dates in 2013 or, to the extent affected employees’ dismissal dates are expected to occur in 2014, we anticipate payments in respect of those restructuring charges will be made after the actual scheduled dismissal date for those employees.
There have been no significant changes to the plan, and no material modifications or changes have been made after the implementation began.
2012 Restructuring Charges
Restructuring charges were recorded in the second and fourth quarters of 2012. The charge in the second quarter of 2012 related primarily to workforce reductions at our subsidiaries in Heilbronn and in the U.S. The charge in the fourth quarter of 2012 related primarily to workforce reductions in the U.S. and at certain European and Asian subsidiaries.
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Heilbronn
In connection with formulating a workforce-reduction plan in Heilbronn, initial discussions with the local Works Council began in the first quarter of 2012. The workforce reduction was intended to improve Heilbronn's operating efficiency, competitiveness and business profitability. The restructuring charges recorded in 2012 related to Heilbronn were $8.5 million.
Substantially all of the affected employees ceased active service as of December 31, 2013. There were no significant changes to the plan and no material modifications or changes were made after implementation began.
U.S. and other locations
With respect to the restructuring charge recorded in the second quarter of 2012, we started formulating the underlying restructuring plan during the second quarter. With respect to the restructuring charge recorded in the fourth quarter of 2012, we started formulating the underlying restructuring plan during the third quarter. These workforce reductions were designed to further align our global operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. The restructuring charges recorded in 2012 related to U.S. and other locations were $14.6 million, including $0.5 million related to a building lease termination.
All affected employees have ceased active service. There were no significant changes to the plans and no material modifications or changes were made after implementation began.
2011 Restructuring Charges
Restructuring charges recorded in 2011 totaling $21.7 million were related to workforce reductions at our subsidiary in Rousset. The reductions were part of an operational restructuring intended to reflect changes to, and significant deterioration in, Rousset's ASICs business and to improve competitiveness. Also, we recorded a restructuring credit of $1.6 million in 2011 in connection with the resolution of a litigation matter related to our earlier sale of a manufacturing facility in Irving, Texas.
In connection with formulating the workforce-reduction plan, during the first quarter of 2011, Rousset confidentially negotiated and developed a “social plan” in coordination and consultation with the local Works Council, subject to French law. The social plan set forth general parameters, terms and benefits for employee dismissals, both voluntary and involuntary.
All affected employees have ceased active service. There were no significant changes to the plan and no material modifications or changes to the plan after implementation began.
Based on the information available to us as of the date of this Form 10-K and the dates on which employees affected by the restructuring are currently expected to cease their service with us, and assuming the absence of material labor discord, litigation or other unforeseen issues arising with respect to these matters, we believe that the estimated savings in 2013 from our restructuring actions were approximately $30.0 million to $35.0 million, comprising approximately $13.0 million to $15.0 million from cost of sales, approximately $11.0 million to $13.0 million from research and development expense and approximately $6.0 million to $7.0 million from selling, general and administrative expense. We expect, to the extent consistent with our assumptions regarding these matters as discussed above and assuming no other material changes in our business, incremental annual savings after these restructuring actions have been completed of approximately $12.5 million to $16.0 million per year, comprising approximately $4.0 million to $5.5 million from cost of sales, approximately $6.0 million to $7.0 million from research and development expense and approximately $2.5 million to $3.5 million from selling, general and administrative expense. Actual savings realized may, however, differ if our assumptions are incorrect or if other unanticipated events occur. Savings may also be offset, or additional expenses incurred, if, and when, we make additional investments in labor, materials or capital in our business in the future; savings achieved in connection with one series of restructuring activities may not necessarily be indicative of savings that may be realized in other restructuring activities. Nor may the timing of savings realized in connection with our restructuring actions be similar to, or consistent with, the timing of benefits realized in other restructuring activities that we may undertake at any time.
Loss From European Foundry Arrangements
In December 2008, a subsidiary entered into a take-or-pay agreement to purchase wafers from a European foundry that had acquired one of our former European manufacturing operations. In connection with the anticipated expiration of this agreement, we notified customers, in the fourth quarter of 2012, of our end-of-life process and requested that customers provide to us last-time-buy orders. To the extent that we believe we have excess wafers that remain after satisfying anticipated customer demand, we estimated a probable loss for those excess wafers, which was approximately $10.6 million. We, therefore, recorded a charge in that amount to cost of revenue in the consolidated statements of operations for the year ended December 31, 2012. During 2013, we recognized a charge to cost of revenue of $7.4 million, which comprised a write-off of excess wafers in the amount of $10.4 million and a write-off of wafer prepayment in the amount of $1.9 million, which were partially offset by a reduction of a previously recorded liability from a take-or-pay arrangement of $4.9 million. These transactions resulted from the insolvencies of two of our foundry suppliers.
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In June 2010, in connection with the sale of one of our former European manufacturing operations, one of our subsidiaries leased facilities to the acquirer of those operations and has charged that acquirer for rent and other occupancy costs. In the fourth quarter of 2012, we recorded a loss of $6.5 million on receivables from that tenant based on financial and other circumstances affecting the collectibility of those receivables, which is reflected under the caption of "impairment of receivables from foundry supplier" in the consolidated statements of operations for the year ended December 31, 2012.
Credit from Reserved Grant Income
In March 2012, the Greek government executed a ministerial decision related to an outstanding state grant previously made to a Greek subsidiary. Consequently, we recognized a benefit of $10.7 million in our results for the year ended March 31, 2012, resulting from the reversal of a reserve previously established for that grant.
Interest and Other Income (Expense), Net
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
Interest and other income (expense) | $ | 1,911 | $ | (1,358 | ) | $ | 177 | ||||
Interest expense | (2,208 | ) | (4,130 | ) | (7,028 | ) | |||||
Foreign exchange transaction gains | 2,256 | 363 | 6,033 | ||||||||
Total | $ | 1,959 | $ | (5,125 | ) | $ | (818 | ) | |||
Interest and other expense, net, for the year ended December 31, 2013 resulted in income of $2.0 million when compared to the same period in 2012, primarily due to lower interest expense, lower loss from an equity investment in a privately held entity and higher foreign exchange gains. We continue to have balance sheet exposures in foreign currencies subject to exchange rate fluctuations and may incur further gains or losses in the future as a result of such foreign exchange exposures.
Interest and other expense, net, for the year ended December 31, 2012 resulted in expense of $5.1 million when compared to the same period in 2011, primarily related to a write-off from a private company investment of $1.2 million and other than temporary impairment charge of $1.2 million related to an equity investment. The decrease in foreign exchange transaction gains for the year ended December 31, 2011 was primarily due to changes to our foreign exchange exposures from intercompany balances between our subsidiaries.
Provision for Income Taxes
We recorded a provision for income taxes of $21.5 million, $11.8 million and $66.2 million in the years ended December 31, 2013, 2012 and 2011, respectively. For the year ended December 31, 2013, the effective tax rate is higher than the 35% U.S. federal statutory income tax rate, primarily due to a discrete tax reserve of $11.5 million related to an ongoing foreign tax audit and a tax provision of $4.2 million as a result of a foreign audit settlement. For the years ended December 31, 2012 and 2011, the significant components of the tax provision were from operations in jurisdictions with operating profits. Our effective tax rate for the years ended December 31, 2012 and 2011 was lower than the U.S. federal statutory income tax rate of 35%, primarily due to income recognized in lower tax rate jurisdictions.
Similar to our position during the fourth quarter of 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our deferred tax assets in the future, except certain assets related to state net operating losses and state tax credits, including R&D credit carryforwards. As a result, we continue to provide a full valuation allowance on the deferred tax assets relating to those items for the year ended December 31, 2013.
The tax attribute carryforwards as of December 31, 2013 consist of the following:
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Tax Attributes | December 31, 2013 | Nature of Expiration | |||
(in thousands) | |||||
Foreign net operating loss carry forwards | $ | 219,503 | beginning of 2014 | ||
Federal net operating loss carry forwards | $ | 19,336 | beginning of 2025 | ||
State net operating loss carry forwards | $ | 511,749 | 2014-2033 | ||
Federal R&D credits, net of those related to stock option deductions | $ | 9,925 | beginning of 2019 | ||
Federal R&D credits related to stock option deductions | $ | 32,171 | beginning of 2019 | ||
State R&D credits | $ | 18,605 | indefinite | ||
Foreign tax credits | $ | 45,583 | beginning of 2017 | ||
State investment tax credits | $ | 1,925 | beginning of 2014 | ||
Foreign R&D credits | $ | 44,344 | refundable | ||
We believe we may not be able to utilize the net operating loss carry forwards in non-U.S. jurisdictions before they expire, starting in 2014.
Included in the unrecognized tax benefits ("UTBs") at December 31, 2013, 2012 and 2011, were $43.4 million, $27.2 million and $25.2 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits at December 31, 2013, 2012 and 2011 were $44.1 million, $45.5 million and $42.8 million, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred tax assets.
In the year ended December 31, 2013, a foreign tax authority completed its field examination of tax year 2010 for one of our foreign subsidiaries and issued a preliminary audit assessment report. We plan to file a protest with the appeal office of the foreign tax authority. We believe that our reserves for unrecognized tax benefits are adequate to cover any potential settlements that may result from this examination. However, given the unpredictable nature of the appeals process, it is reasonably possible that our unrecognized tax benefits related to these tax positions could change within the next twelve months. To the extent the final tax liabilities are substantially different from the amounts originally accrued, there may be a material adverse effect on the financial statements.
During the fourth quarter of 2013, we were able to complete negotiations and conclude a foreign income tax audit for another of our foreign subsidiaries for years 2007 to 2009, primarily related to transfer pricing. As a result of the settlement of this audit, we recorded $4.2 million of income tax including interest and penalties.
As of the date of this Form 10-K, we have tax audits in progress in various other foreign jurisdictions. To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the consolidated statements of operations. We believe that before December 31, 2014, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain income tax examination periods will expire, or both. As such, after we reach settlement with the tax authorities, we expect to record a corresponding adjustment to our UTBs. Given the uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, the range of estimated potential decreases in underlying uncertain tax positions is between $0 and $29 million in the next twelve months. The calculation of UTBs involves dealing with uncertainties in the application of complex global tax regulations. We regularly assess our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which we do business.
Liquidity and Capital Resources
At December 31, 2013, we had $279.1 million of cash, cash equivalents and short-term investments, compared to $296.1 million at December 31, 2012. The decrease in cash balances in the year ended December 31, 2013 resulted principally from payments made for acquisitions, payments in respect of settlement charges, prepayment made to a supplier related to XSense production, timing of vendor payables and customer receivables and common stock repurchases. Our current asset to liability ratio, calculated as total current assets divided by total current liabilities, was 2.90 at December 31, 2013 compared to 2.84 at December 31, 2012. Working capital, calculated as total current assets less total current liabilities, decreased to $559.1 million at December 31, 2013, compared to $621.1 million at December 31, 2012. Cash provided by operating activities was $127.1 million and $200.7 million for the year ended December 31, 2013 and 2012, respectively, and capital expenditures totaled $35.1 million and $38.3 million for the year ended December 31, 2013 and 2012, respectively.
As of December 31, 2013, of the $279.1 million aggregate cash and cash equivalents and short-term investments held by us, the amount of cash and cash equivalents held by our foreign subsidiaries was $181.0 million. If the funds held by our foreign subsidiaries were needed for our operations in the United States, the repatriation of some of these funds to the United States could require payment of additional U.S. taxes.
Senior Secured Revolving Credit Facility
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On December 6, 2013, we entered into a $300 million, senior secured revolving credit facility, the terms of which are set forth in a Credit Agreement dated as of December 6, 2013 among Atmel, the Lenders from time to time party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent, and Union Bank N.A., BNP Paribas and SunTrust Bank as co-syndication agents. We may increase the aggregate availability under the credit facility through a customary “accordion” feature in an amount not to exceed $250 million.
Borrowings under the credit facility are available for general corporate purposes, including working capital, stock repurchases, acquisitions and other purposes. The credit facility matures on the earlier of (x) December 6, 2018 or (y) 180 days prior to the maturity date of any Permitted Convertible Notes (as defined in the credit facility) if we do not otherwise have available sufficient unrestricted cash and other investments to redeem the “Permitted Convertible Notes.”
As of the date of this Form 10-K, there were no amounts outstanding under the credit facility and we were in compliance with all financial covenants.
Operating Activities
Net cash provided by operating activities was $127.1 million for the year ended December 31, 2013, compared to $200.7 million for the year ended December 31, 2012. Net cash provided by operating activities for the year ended December 31, 2013 was determined primarily by adjusting net loss of $22.1 million for non-cash depreciation and amortization charges of $75.1 million and share-based compensation charges of $43.1 million.
Net cash provided by operating activities was $200.7 million for the year ended December 31, 2012, compared to $221.1 million for the year ended December 31, 2011. Net cash provided by operating activities for the year ended December 31, 2012 was determined primarily by adjusting net income of $30.4 million for certain non-cash charges for depreciation and amortization of $76.9 million and share-based compensation charges of $72.4 million.
Accounts receivable increased by 10% or $18.3 million to $206.8 million at December 31, 2013, from $188.5 million at December 31, 2012. The average number of days of accounts receivable outstanding increased to 53 days for the three months ended December 31, 2013 from 50 days for the three months ended December 31, 2012.
Inventories decreased to $275.0 million at December 31, 2013 from $348.3 million at December 31, 2012. Inventories consist of raw wafers, purchased foundry wafers, work-in-progress and finished units. Our number of days of inventory decreased to 124 days for the three months ended December 31, 2013 from 148 days for the three months ended December 31, 2012.
Investing Activities
Net cash used in investing activities was $59.1 million for the year ended December 31, 2013, compared to net cash used in investing activities of $51.9 million for the year ended December 31, 2012. For the year ended December 31, 2013, we paid $35.1 million for acquisitions of fixed assets as compared to $38.3 million in the year ended December 31, 2012. For the year ended December 31, 2013, we paid $25.9 million for acquisitions of businesses, net of cash acquired, as compared to $43.5 million for the year ended December 31, 2012.
Net cash used in investing activities was $51.9 million for the year ended December 31, 2012, compared to $43.2 million for the year ended December 31, 2011. For the year ended December 31, 2012, we paid $38.3 million for acquisitions of fixed assets as compared to $84.6 million in the year ended December 31, 2011 resulting principally from reduced purchases of testing equipment. For the year ended December 31, 2012, we paid $43.5 million for acquisitions of businesses, net of cash acquired, as compared to $20.3 million for the year ended December 31, 2011. We also received $26.9 million in cash from the sale of our Serial Flash product lines during the year ended December 31, 2012.
We anticipate expenditures for capital purchases in 2014 to be similar to expenditures in 2013, and to be used principally to maintain existing manufacturing operations and improve IT systems.
Financing Activities
Net cash used in financing activities was $88.6 million and $182.6 million for the years ended December 31, 2013 and 2012, respectively. The cash used was primarily related to stock repurchases of $87.8 million in the year ended December 31, 2013, compared to stock repurchases of $179.6 million in the year ended December 31, 2012 and tax payments related to shares withheld for vested restricted stock units of $20.3 million for the year ended December 31, 2013, compared to $19.8 million for the year ended December 31, 2012. During the year ended December 31, 2013, we repurchased 12.2 million shares of our common stock in the open market and subsequently retired those shares under our existing stock repurchase program. As of December 31, 2013, $339.5 million remained available for repurchases under this program. Proceeds from the issuance of common stock related to exercises of stock options and our employee stock purchase plan totaled $22.9 million and $15.5 million for the years ended December 31, 2013 and 2012, respectively.
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Net cash used in financing activities was $182.6 million and $346.2 million for the years ended December 31, 2012 and 2011, respectively. The cash used was primarily related to stock repurchases of $179.6 million in the year ended December 31, 2012, compared to stock repurchases of $304.2 million in the year ended December 31, 2011 and tax payments related to shares withheld for vested restricted stock units of $19.8 million for the year ended December 31, 2012, compared to $73.3 million in 2011. Proceeds from the issuance of common stock in respect of stock options and our employee stock purchase plan totaled $15.5 million and $28.7 million for the years ended December 31, 2012 and 2011, respectively.
We believe our existing balances of cash, cash equivalents and short-term investments, together with anticipated cash flow from operations, and borrowing availability under our credit facility will be sufficient to meet our liquidity and capital requirements over the next twelve months. We also expect our operations to generate positive cash flow over that twelve month period.
Since a substantial portion of our operations is conducted through our foreign subsidiaries, our cash flow, ability to service debt, and payments to vendors are partially dependent upon the liquidity and earnings of our subsidiaries as well as the distribution of those earnings, or repayment of loans or other payments of funds by those subsidiaries, to us. Our foreign subsidiaries are separate and distinct legal entities and may be subject to local legal or tax requirements, or other restrictions that may limit their ability to transfer funds to other group entities including the U.S. parent entity, whether by dividends, distributions, loans or other payments.
During 2014 and in future years, our ability to make necessary capital investments or strategic acquisitions will depend on our ability to continue to generate sufficient cash flow from operations and to obtain adequate financing if necessary. We believe we have sufficient working capital to fund our future operations, with $279.1 million in cash, cash equivalents and short-term investments as of December 31, 2013, expected future cash flows from operations and borrowing availability under our credit facility or other financing arrangements.
Off-Balance Sheet Arrangements (Including Guarantees)
See the paragraph under the heading “Guarantees” in Note 11 of Notes to Consolidated Financial Statements for a discussion of off-balance sheet arrangements.
Contractual Obligations
The following table describes our commitments to settle contractual obligations in cash as of December 31, 2013. See Note 11 of Notes to Consolidated Financial Statements for further discussion.
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations: | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-term debt (a) | $ | — | $ | 9,611 | $ | — | $ | — | $ | 9,611 | ||||||||||
Capital purchase commitments | 5,291 | — | — | — | 5,291 | |||||||||||||||
Manufacturing suppliers open commitments | 36,821 | — | — | — | 36,821 | |||||||||||||||
Estimated pension plan benefit payments (b) | 474 | 1,320 | 1,958 | 9,614 | 13,366 | |||||||||||||||
Operating leases (c) | 9,015 | 14,998 | 13,072 | 22,480 | 59,565 | |||||||||||||||
Other obligations (d) | 8,596 | 2,463 | — | 2,941 | 14,000 | |||||||||||||||
Total | $ | 60,197 | $ | 28,392 | $ | 15,030 | $ | 35,035 | $ | 138,654 | ||||||||||
(a) | Long-term debt relates to an amount previously advanced from a foreign government which is repayable in 2015. The balance is increased on a quarterly basis as a result of interest accretion. The repayment amount is expected to be approximately $9.6 million in 2015. |
(b) | The "More than 5 years" amount represents the estimated payments to be made in years 5 through 10. Estimated payments beyond 10 years are not practical to estimate. See Note 13 to the Notes to Consolidated Financial Statements for further discussion. |
(c) | Operating leases include the San Jose headquarters lease of $46.1 million and other worldwide operating leases of $13.5 million. |
(d) | Other obligations consist of $6.4 million of obligations relating to software rights, $2.9 million relating to a loan from an entity in which we have an equity investment and $4.7 million of various other long-term obligations. |
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The contractual obligation table above excludes certain estimated tax liabilities of $52.6 million as of December 31, 2013 because we cannot make a reliable estimate of the timing of tax audits, related outcomes and related future tax payments. However, these estimated tax liabilities for uncertain tax positions are included in our consolidated balance sheet. See Notes 2 and 12 of Notes to Consolidated Financial Statements for further discussion.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standard Board issued an Accounting Standards Update on Income Taxes, to improve the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is expected to permit a presentation that better reflects the manner in which an entity would settle at the reporting date any additional income taxes resulting from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This guidance is effective for our interim and annual periods beginning after December 15, 2013. We do not believe that the implementation of this authoritative guidance will have any material effect on our financial position or results of operations.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. We consider the accounting policies described below to be our critical accounting policies. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported based on these policies.
Revenue Recognition
We sell our products to original equipment manufacturers and distributors and recognize revenue when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable, and collection is reasonably assured. Allowances for sales returns and other credits are recorded at the time of sale.
Contracts and customer purchase orders are used to determine the existence of an arrangement. Shipping documents are used to verify delivery. We assess whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history. Sales terms do not include post-shipment obligations except for product warranty, as described in Note 1 of Notes to Consolidated Financial Statements.
For sales to certain distributors (primarily based in the U.S. and Europe) with agreements allowing for price protection and product returns, historically we have not had the ability to estimate future claims at the point of shipment, and given that price is not fixed or determinable at that time, revenue is not recognized until the distributor sells the product to its end customer.
For sales to independent distributors in Asia, excluding Japan, we invoice these distributors at full list price upon shipment and issue a rebate, or "credit," once product has been sold to the end customer and the distributor has met certain reporting requirements. After reviewing the more limited pricing, rebate and quotation-related terms, we concluded that we could reliably estimate future credits or rebates, and therefore, recognize revenue at the point of shipment for our Asian (excluding Japan) distributors, assuming all of the other revenue recognition criteria are met, utilizing amounts invoiced, less estimated future credits or rebates.
Our revenue reporting is highly dependent on receiving accurate and timely data from our distributors. Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. Because the data set is large and complex and because there may be errors in the reported data, we must use estimates and apply judgments to reconcile distributors' reported inventories to their activities. Actual results could vary from those estimates.
Allowance for Doubtful Accounts and Sales Returns
We must make estimates of potential future product returns and revenue adjustments related to current period product revenue. Management analyzes historical returns, current economic trends in the semiconductor industry, changes in customer demand and acceptance of our products when evaluating the adequacy of our allowance for sales returns. If management made different judgments or utilized different estimates, material differences in the amount of our reported revenue may result. We provide for sales returns based on our customer experience and our expectations for revenue adjustments based on economic conditions within the semiconductor industry.
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We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers' inability to make required payments. We make our estimate of the uncollectibility of our accounts receivable by analyzing specific customer creditworthiness, historical bad debts and current economic trends. At December 31, 2013 and 2012, the allowance for doubtful accounts was approximately $1.9 million and $11.0 million, respectively.
Income Taxes
In calculating our income tax expense, it is necessary to make certain estimates and judgments for financial statement purposes that affect the recognition of tax assets and liabilities.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the net deferred tax asset would decrease income tax expense in the period such determination is made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the net deferred tax asset would increase income tax expense in the period such determination is made.
In assessing the realizability of deferred tax assets, we evaluate both positive and negative evidence that may exist and consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Any adjustment to the net deferred tax asset valuation allowance would be recorded in the consolidated statements of operations for the period that the adjustment is determined to be required.
Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the consolidated statements of operations.
Valuation of Inventory
Our inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Cost includes labor, including share-based compensation costs, materials, depreciation and other overhead costs, as well as factors for estimated production yields and scrap. Determining market value of inventories involves numerous judgments, including average selling prices and sales volumes for future periods. We primarily utilize selling prices in our period ending backlog for measuring any potential declines in market value below cost. Any adjustment for market value provision is charged to cost of revenue at the point of market value decline.
We evaluate our ending inventories for excess quantities and obsolescence on a quarterly basis. This evaluation includes analysis of historical and forecasted sales levels by product and other factors, including, but not limited to, competitiveness of product offerings, market conditions and product lifecycles. Actual demand may be lower, or market conditions less favorable, than those projected by us. This difference could have a material adverse effect on our gross margin should inventory write-downs beyond those initially recorded become necessary. Alternatively, should actual demand and market conditions be more favorable than those estimated by us, gross margin could be favorably impacted.
We adjust the cost basis for inventories on hand in excess of forecasted demand. In addition, we write off inventories that are considered obsolete. Obsolescence is determined based on several factors, including competitiveness of product offerings, market conditions and product life cycles. Increases to the provision for excess and obsolete inventory are charged to cost of revenue. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If this lower-cost inventory is subsequently sold, it will result in lower costs and higher gross margin for those products.
Fixed Assets
We review the carrying value of fixed assets for impairment when events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the estimated future cash flows expected to result from its use and/or disposition. Factors which could trigger an impairment review include the following: (i) significant negative industry or economic trends, (ii) exiting an activity in conjunction with a restructuring of operations, (iii) current, historical or projected losses that demonstrated continuing losses associated with an asset, (iv) significant decline in our market capitalization for an extended period of time relative to net book value, (v) recent changes in our manufacturing model, and (vi) management's assessment of
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future manufacturing capacity requirements. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the estimated fair value of the assets. The estimation of future cash flows involves numerous assumptions, which require our judgment, including, but not limited to, future use of the assets for our operations versus sale or disposal of the assets, future-selling prices for our products and future production and sales volumes. In addition, we must use our judgment in determining the groups of assets for which impairment tests are separately performed.
Our business requires investment in manufacturing facilities that are technologically advanced but can quickly become significantly underutilized or rendered obsolete by rapid changes in demand for semiconductors produced in those facilities.
We estimate the useful life of our manufacturing equipment, which is the largest component of our fixed assets, to be five years. We base our estimate on our experience with acquiring, using and disposing of equipment over time. Useful lives for fixed assets may be evaluated from time to time to determine whether they require adjustment to reflect new or additional information. Depreciation and amortization, over specified periods, may be affected by any change in estimated useful lives. Depreciation expense is a major element of our manufacturing cost structure. We begin depreciation on new equipment when it is ready for its intended use. The aggregate amount of fixed assets under construction for which depreciation was not being recorded was approximately $17.2 million and $2.7 million as of December 31, 2013 and 2012, respectively.
Valuation of Goodwill and Intangible Assets
Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired. We review goodwill and intangible assets with indefinite lives for impairment annually at the beginning of the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. While we are permitted to conduct a qualitative assessment to determine whether it is necessary to perform a two-step quantitative goodwill impairment test, for our annual goodwill impairment test in the fourth quarter of fiscal 2013, we performed a quantitative test for all of our reporting units with goodwill. The performance of the test involves a two-step process. The first step requires comparing the fair value of each of our reporting units to its net book value, including goodwill. We have three reporting units with goodwill, the fair values of which are determined based on an income approach, whereby we calculate the fair value of the reporting unit based on the present value of estimated future cash flows, which are formed by evaluating operating plans. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process is only performed if a potential impairment exists, and it involves determining the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference. We have not been required to perform this second step of the process because the fair value of our reporting units have exceeded their net book value for the year ended December 31, 2013.
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 may include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, and future economic and market conditions. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount for each reporting unit.
Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that we may not be able to recover the asset's carrying amount.
Share-Based Compensation
We determine the fair value of options and ESPP on the measurement date utilizing an option-pricing model, which is affected by our common stock price as well as a change in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: expected common stock price volatility over the term of the option awards, as well as the projected employee option exercise behaviors during the expected period between the stock option vesting date and the stock option exercise date. For performance-based restricted stock units, we are required to assess the probability of achieving certain financial objectives at the end of each reporting period. Based on the assessment of this probability, which requires subjective judgment, we record share-based compensation expense before the performance criteria are actually fully achieved, which may then be reversed in future periods if we determine that it is no longer probable that the objectives will be achieved. The expected cost of each award is reflected over the performance period and is reduced for estimated forfeitures. The fair value of a restricted stock unit is equivalent to the market price of our common stock on the measurement date.
Restructuring Charges
Our restructuring accruals include primarily payments to employees for severance, termination fees associated with leases, and other contracts and other costs related to the closure of facilities. Accruals are recorded when management has approved a plan to restructure operations and a liability has been incurred. The restructuring accruals are based upon management estimates at the time they are recorded. These estimates can change depending upon changes in facts and circumstances subsequent to the date the original liability was recorded.
47
Litigation
We accrue for losses related to litigation, including intellectual property, commercial and other litigation, if a loss is probable and the loss can be reasonably estimated. We regularly evaluate current information available to determine whether accruals for litigation should be made. If we were to determine that such a liability was probable and could be reasonably estimated, the adjustment would be charged to income in the period such determination was made.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We maintain investment portfolio holdings of various issuers, types and maturities whose values are dependent upon short-term interest rates. We generally classify these securities as available-for-sale, and consequently record them on the consolidated balance sheets at fair value with unrealized gains and losses being recorded as a separate part of stockholders’ equity. We do not currently hedge these interest rate exposures. Given our current profile of interest rate exposures and the maturities of our investment holdings, we believe that an unfavorable change in interest rates would not have a significant negative impact on our investment portfolio or statements of operations through December 31, 2013.
Foreign Currency Risk
When we take an order denominated in a foreign currency we will receive fewer dollars, and lower revenue, than we initially anticipated if that local currency weakens against the dollar before we ship our product. Conversely, revenue will be positively impacted if the local currency strengthens against the dollar before we ship our product. Costs may also be affected by foreign currency fluctuation. For example, in Europe, where we have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, all costs will increase if the local currency strengthens against the dollar. This impact is determined assuming that all foreign currency denominated transactions that occurred for the year ended December 31, 2013 were recorded using the average foreign currency exchange rates in the year ended December 31, 2012. We do not use derivative instruments to hedge our foreign currency risk.
Changes in foreign exchange rates have historically had an effect on our net revenue and operating costs. Net revenue denominated in foreign currencies was 21%, 19% and 21% of our total net revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
Costs denominated in foreign currencies were 18%, 19% and 19% of our total costs for the years ended December 31, 2013, 2012 and 2011, respectively.
Average exchange rates utilized to translate foreign currency revenue and expenses in Euros were approximately 1.32, 1.29 and 1.39 Euros to the dollar for the years ended December 31, 2013, 2012 and 2011, respectively.
For the year ended December 31, 2013, changes in foreign exchange rates had a favorable overall effect on our operating results. Our net revenue for the year ended December 31, 2013 would have been approximately $8.2 million lower had the average exchange rate in such year remained the same as the average rate in effect for the year ended December 31, 2012. Our income from operations would have been approximately $4.0 million lower had the average exchange rate in the year ended December 31, 2013 remained the same as the average exchange rate in the ended December 31, 2012.
For the year ended December 31, 2012, changes in foreign exchange rates had an unfavorable overall effect on our operating results. Our net revenue for the year ended December 31, 2012 would have been approximately $23.1 million higher had the average exchange rate in such year remained the same as the average rate in effect for the year ended December 31, 2011. Our income from operations would have been approximately $7.7 million higher had the average exchange rate in the year ended December 31, 2012 remained the same as the average exchange rate in the ended December 31, 2011.
We also face the risk that our accounts receivable denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Approximately 22% and 18% of our accounts receivable were denominated in foreign currency as of December 31, 2013 and 2012, respectively.
Similarly, we face the risk that our accounts payable and debt obligations denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. Approximately 8% our accounts payable were denominated in foreign currencies at December 31, 2013 and 2012. All of our debt obligations were denominated in foreign currencies at December 31, 2013 and 2012. We have not historically sought to hedge our foreign currency exposure, although we may determine to do so in the future.
There remains ongoing uncertainty regarding the future of the Euro as a common currency and the Eurozone. While we continue to monitor the situation, the elimination of the Euro as a common currency, the withdrawal of member states from the
48
Eurozone, or other events affecting the liquidity, volatility or use of the Euro could have a significant effect on our revenue and operations.
Liquidity and Valuation Risk
Approximately $1.1 million of our investment portfolio is invested in auction-rate securities at December 31, 2013 and 2012.
49
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Consolidated Financial Statements of Atmel Corporation | |
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP | |
Financial Statement Schedules | |
The following Financial Statement Schedules for the years ended December 31, 2013, 2012 and 2011 should be read in conjunction with the Consolidated Financial Statements, and related notes thereto: | |
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto | |
Supplementary Financial Data | |
50
Atmel Corporation
Consolidated Statements of Operations
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands, except for per share data) | |||||||||||
Net revenue | $ | 1,386,447 | $ | 1,432,110 | $ | 1,803,053 | |||||
Operating expenses | |||||||||||
Cost of revenue | 812,822 | 830,791 | 894,820 | ||||||||
Research and development | 266,408 | 251,519 | 255,653 | ||||||||
Selling, general and administrative | 237,559 | 275,257 | 280,410 | ||||||||
Acquisition-related charges | 5,534 | 7,388 | 5,408 | ||||||||
Restructuring charges | 50,026 | 23,986 | 20,064 | ||||||||
(Recovery) impairment of receivables from foundry supplier | (600 | ) | 6,495 | — | |||||||
Credit from reserved grant income | — | (10,689 | ) | — | |||||||
Gain on sale of assets | (4,430 | ) | — | (35,310 | ) | ||||||
Settlement charges | 21,600 | — | — | ||||||||
Total operating expenses | 1,388,919 | 1,384,747 | 1,421,045 | ||||||||
Income (loss) from operations | (2,472 | ) | 47,363 | 382,008 | |||||||
Interest and other income (expense), net | 1,959 | (5,125 | ) | (818 | ) | ||||||
Income (loss) before income taxes | (513 | ) | 42,238 | 381,190 | |||||||
Provision for income taxes | (21,542 | ) | (11,793 | ) | (66,200 | ) | |||||
Net income (loss) | $ | (22,055 | ) | $ | 30,445 | $ | 314,990 | ||||
Basic net income (loss) per share: | |||||||||||
Net income (loss) per share | $ | (0.05 | ) | $ | 0.07 | $ | 0.69 | ||||
Weighted-average shares used in basic net income (loss) per share calculations | 427,460 | 433,017 | 455,629 | ||||||||
Diluted net income (loss) per share: | |||||||||||
Net income (loss) per share | $ | (0.05 | ) | $ | 0.07 | $ | 0.68 | ||||
Weighted-average shares used in diluted net income (loss) per share calculations | 427,460 | 437,582 | 462,673 | ||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Atmel Corporation
Consolidated Statements of Comprehensive Income (Loss)
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
Net income (loss) | $ | (22,055 | ) | $ | 30,445 | $ | 314,990 | ||||
Other comprehensive income (loss), net of tax: | |||||||||||
Foreign currency translation adjustments, net of tax benefit (expense) of $0 in 2013, $(27) in 2012 and $147 in 2011 | 3,325 | 3,902 | (6,863 | ) | |||||||
Actuarial gains (losses) related to defined benefit pension plans, net of tax benefit (expense) of $(1,210) in 2013, $2,628 in 2012 and $0 in 2011 | 2,913 | (6,778 | ) | (197 | ) | ||||||
Unrealized holding gains (losses) on investments arising during period, net of tax benefit of $339 in 2013, $155 in 2012 and $0 in 2011 | 147 | (946 | ) | 179 | |||||||
Reclassification adjustment for other-than-temporary impairment in value of investments, net of tax benefit of $450 in 2012 | — | 786 | — | ||||||||
Other comprehensive income (loss) | 6,385 | (3,036 | ) | (6,881 | ) | ||||||
Total comprehensive income (loss) | $ | (15,670 | ) | $ | 27,409 | $ | 308,109 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Atmel Corporation
Consolidated Balance Sheets
December 31, 2013 | December 31, 2012 | ||||||
(in thousands, except for par value) | |||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 276,881 | $ | 293,370 | |||
Short-term investments | 2,181 | 2,687 | |||||
Accounts receivable, net of allowance for doubtful accounts of $1,926 and $11,005, respectively | 206,757 | 188,488 | |||||
Inventories | 274,967 | 348,273 | |||||
Prepaids and other current assets | 92,234 | 125,019 | |||||
Total current assets | 853,020 | 957,837 | |||||
Fixed assets, net | 184,983 | 221,044 | |||||
Goodwill | 108,240 | 104,430 | |||||
Intangible assets, net | 28,116 | 27,257 | |||||
Other assets | 178,167 | 122,965 | |||||
Total assets | $ | 1,352,526 | $ | 1,433,533 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities | |||||||
Trade accounts payable | $ | 95,872 | $ | 103,980 | |||
Accrued and other liabilities | 155,406 | 203,510 | |||||
Deferred income on shipments to distributors | 42,594 | 29,226 | |||||
Total current liabilities | 293,872 | 336,716 | |||||
Other long-term liabilities | 120,727 | 100,179 | |||||
Total liabilities | 414,599 | 436,895 | |||||
Commitments and contingencies (Note 11) | |||||||
Stockholders’ equity | |||||||
Preferred stock; par value $0.001; Authorized: 5,000 shares; no shares issued and outstanding | — | — | |||||
Common stock; par value $0.001; Authorized: 1,600,000 shares; Shares issued and outstanding: 425,390 at December 31, 2013 and 428,593 at December 31, 2012 | 425 | 429 | |||||
Additional paid-in capital | 838,908 | 881,945 | |||||
Accumulated other comprehensive income | 12,797 | 6,412 | |||||
Retained earnings | 85,797 | 107,852 | |||||
Total stockholders’ equity | 937,927 | 996,638 | |||||
Total liabilities and stockholders’ equity | $ | 1,352,526 | $ | 1,433,533 | |||
The accompanying notes are an integral part of these Consolidated Financial Statements.
53
Atmel Corporation
Consolidated Statements of Cash Flows
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
Cash flows from operating activities | |||||||||||
Net income (loss) | $ | (22,055 | ) | $ | 30,445 | $ | 314,990 | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | |||||||||||
Depreciation and amortization | 75,084 | 76,933 | 76,986 | ||||||||
Curtailment gain | (1,607 | ) | — | — | |||||||
(Gain) loss from foundry arrangement | (3,034 | ) | 10,628 | — | |||||||
(Recovery) impairment of receivable from foundry supplier | (600 | ) | 6,495 | — | |||||||
Asset impairment charges | 7,502 | — | — | ||||||||
Non-cash (gains) losses on sale of fixed assets, net | (886 | ) | 264 | (36,333 | ) | ||||||
Deferred income taxes | (8,660 | ) | (23,459 | ) | 44,233 | ||||||
Realized loss (gain) on short-term investments | — | 1,037 | (6,240 | ) | |||||||
Accretion of interest on long-term debt | 1,113 | 1,017 | 784 | ||||||||
Share-based compensation expense | 43,124 | 72,442 | 68,125 | ||||||||
Excess tax benefit on share-based compensation | (2,260 | ) | (1,264 | ) | (2,650 | ) | |||||
Non-cash acquisition-related and other (credits) charges | (1,223 | ) | 2,916 | (14 | ) | ||||||
Changes in operating assets and liabilities, net of acquisitions | |||||||||||
Accounts receivable | (18,171 | ) | 24,362 | 19,787 | |||||||
Inventories | 69,460 | 10,250 | (100,695 | ) | |||||||
Current and other assets | (14,050 | ) | 32,406 | (15,932 | ) | ||||||
Trade accounts payable | (13,655 | ) | 38,644 | (60,113 | ) | ||||||
Accrued and other liabilities | 12,912 | (66,255 | ) | (47,055 | ) | ||||||
Income taxes payable | (9,238 | ) | 2,251 | (15,639 | ) | ||||||
Deferred income on shipments to distributors | 13,368 | (18,394 | ) | (19,088 | ) | ||||||
Net cash provided by operating activities | 127,124 | 200,718 | 221,146 | ||||||||
Cash flows from investing activities | |||||||||||
Acquisitions of fixed assets | (35,117 | ) | (38,289 | ) | (84,564 | ) | |||||
Proceeds from the sale of business | 5,092 | 26,908 | 1,597 | ||||||||
Proceeds from the sale of fixed assets | 3,100 | — | 47,250 | ||||||||
Acquisition of businesses, net of cash acquired | (25,852 | ) | (43,499 | ) | (20,256 | ) | |||||
Acquisitions of intangible assets | (6,328 | ) | (4,000 | ) | (4,000 | ) | |||||
Sales or maturities of marketable securities | — | 4,450 | 16,739 | ||||||||
Investment in private companies | — | (2,500 | ) | — | |||||||
Decrease in long-term restricted cash | — | 5,000 | — | ||||||||
Net cash used in investing activities | (59,105 | ) | (51,930 | ) | (43,234 | ) | |||||
Cash flows from financing activities | |||||||||||
Principal payments on debt and capital leases | (3,644 | ) | — | (85 | ) | ||||||
Debt issuance cost | (2,051 | ) | — | — | |||||||
Repurchases of common stock | (87,781 | ) | (179,579 | ) | (304,236 | ) | |||||
Proceeds from issuance of common stock | 22,948 | 15,537 | 28,746 | ||||||||
Tax payments related to shares withheld for vested restricted stock units | (20,315 | ) | (19,830 | ) | (73,286 | ) | |||||
Excess tax benefit on share-based compensation | 2,260 | 1,264 | 2,650 | ||||||||
Net cash used in financing activities | (88,583 | ) | (182,608 | ) | (346,211 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 4,075 | (2,241 | ) | (3,725 | ) | ||||||
Net decrease in cash and cash equivalents | (16,489 | ) | (36,061 | ) | (172,024 | ) | |||||
Cash and cash equivalents at beginning of the period | 293,370 | 329,431 | 501,455 | ||||||||
Cash and cash equivalents at end of the period | $ | 276,881 | $ | 293,370 | $ | 329,431 | |||||
Supplemental cash flow disclosures: | |||||||||||
Interest paid | $ | 912 | $ | 242 | $ | 1,857 | |||||
Income taxes paid | $ | 13,761 | $ | 16,064 | $ | 31,986 | |||||
Supplemental non-cash investing and financing activities disclosures: | |||||||||||
Increase (decreases) in accounts payable related to fixed assets purchases | $ | 4,825 | $ | (803 | ) | $ | (21,000 | ) | |||
Decreases in liabilities related to intangible assets purchases | $ | (6,328 | ) | $ | (4,000 | ) | $ | (4,000 | ) | ||
Additional consideration payable related to acquisition | $ | — | $ | 18,225 | $ | — | |||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
54
Atmel Corporation
Consolidated Statements of Stockholders’ Equity
Common Stock | ||||||||||||||||||||||
Shares | Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Retained Earnings (Accumulated Deficit) | Total | |||||||||||||||||
(in thousands) | ||||||||||||||||||||||
Balances, December 31, 2010 | 456,788 | $ | 457 | $ | 1,273,853 | $ | 16,329 | $ | (237,583 | ) | $ | 1,053,056 | ||||||||||
Net income | — | — | — | — | 314,990 | 314,990 | ||||||||||||||||
Other comprehensive loss | — | — | — | (6,881 | ) | — | (6,881 | ) | ||||||||||||||
Share-based compensation expense | — | — | 69,102 | — | — | 69,102 | ||||||||||||||||
Tax benefit on share-based compensation expense | — | — | 939 | — | — | 939 | ||||||||||||||||
Exercise of stock options | 4,285 | 4 | 19,336 | — | — | 19,340 | ||||||||||||||||
Issuance of common stock under employee stock purchase plan | 1,514 | 2 | 9,404 | — | — | 9,406 | ||||||||||||||||
Vested restricted stock units | 6,345 | 6 | — | — | — | 6 | ||||||||||||||||
Vested performance restricted stock units | 8,485 | 8 | — | — | — | 8 | ||||||||||||||||
Shares withheld for employee taxes related to vested restricted stock units | (6,252 | ) | (6 | ) | (73,280 | ) | — | — | (73,286 | ) | ||||||||||||
Repurchase of common stock | (28,776 | ) | (29 | ) | (304,207 | ) | — | — | (304,236 | ) | ||||||||||||
Balances, December 31, 2011 | 442,389 | $ | 442 | $ | 995,147 | $ | 9,448 | $ | 77,407 | $ | 1,082,444 | |||||||||||
Net income | — | — | — | — | 30,445 | 30,445 | ||||||||||||||||
Other comprehensive loss | — | — | — | (3,036 | ) | — | (3,036 | ) | ||||||||||||||
Share-based compensation expense | — | — | 71,974 | — | — | 71,974 | ||||||||||||||||
Equity related restructuring charges | — | — | 413 | — | — | 413 | ||||||||||||||||
Tax benefit on share-based compensation expense | — | — | (1,738 | ) | — | — | (1,738 | ) | ||||||||||||||
Exercise of stock options | 1,239 | 2 | 4,578 | — | — | 4,580 | ||||||||||||||||
Issuance of common stock under employee stock purchase plan | 1,770 | 2 | 10,955 | — | — | 10,957 | ||||||||||||||||
Vested restricted stock units | 7,975 | 8 | — | — | — | 8 | ||||||||||||||||
Shares withheld for employee taxes related to vested restricted stock units | (2,100 | ) | (2 | ) | (19,828 | ) | — | — | (19,830 | ) | ||||||||||||
Repurchase of common stock | (22,680 | ) | (23 | ) | (179,556 | ) | — | — | (179,579 | ) | ||||||||||||
Balances, December 31, 2012 | 428,593 | $ | 429 | $ | 881,945 | $ | 6,412 | $ | 107,852 | $ | 996,638 | |||||||||||
Net loss | — | — | — | — | (22,055 | ) | (22,055 | ) | ||||||||||||||
Other comprehensive income | — | — | — | 6,385 | — | 6,385 | ||||||||||||||||
Share-based compensation expense | — | — | 42,454 | — | — | 42,454 | ||||||||||||||||
Equity related restructuring charges | — | — | 566 | — | — | 566 | ||||||||||||||||
Tax benefit on share-based compensation expense | — | — | (913 | ) | — | — | (913 | ) | ||||||||||||||
Exercise of stock options | 2,990 | 3 | 12,340 | — | — | 12,343 | ||||||||||||||||
Issuance of common stock under employee stock purchase plan | 1,920 | 2 | 10,603 | — | — | 10,605 | ||||||||||||||||
Vested restricted stock units | 7,335 | 7 | (7 | ) | — | — | — | |||||||||||||||
Shares withheld for employee taxes related to vested restricted stock units | (3,256 | ) | (4 | ) | (20,311 | ) | — | — | (20,315 | ) | ||||||||||||
Repurchase of common stock | (12,192 | ) | (12 | ) | (87,769 | ) | — | — | (87,781 | ) | ||||||||||||
Balances, December 31, 2013 | 425,390 | $ | 425 | $ | 838,908 | $ | 12,797 | $ | 85,797 | $ | 937,927 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
55
Atmel Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Atmel Corporation and its wholly-owned subsidiaries (collectively "Atmel" or the "Company") is one of the world’s leading designers, developers and suppliers of microcontrollers, which are self-contained computers-on-a-chip. Microcontrollers are generally less expensive, consume less power and offer enhanced programming capabilities compared to traditional microprocessors. The Company's microcontrollers and related products are used in many of the world’s leading industrial and automotive electronics, mobile computing and communications devices, including smartphones, tablets, Ultrabooks and personal computers, and other electronics products in which they provide core, embedded functionalities for, among other things, touch and proximity sensing, sensor management, security and encryption, wireless connectivity, lighting and system controls and battery management. The Company continues to extend its product portfolio through the ongoing development and introduction of additional wireless products that allow devices to communicate and connect with each other, having continued to integrate enhanced wireless capabilities into the Company's product portfolio using technologies such as Zigbee and “Wi-Fi Direct,” that enable the so-called “Internet of Things,” where smart, connected devices and appliances seamlessly share data and information. The Company also expects these products to proliferate within the quickly evolving “wearables” sector, where its microcontrollers may be used to manage multiple accelerometers or sensors within a device, to communicate information from that device to a gateway, or to track or monitor other activities. The Company also continues to enable and enhance human computer interaction by leveraging its market leading capacitive touch products, its microcontroller know-how and its significant intellectual property ("IP") portfolio. In addition, the Company continuously seeks new market opportunities that benefit from its corporate and technology strengths, as it did when the Company launched its XSense product, a new type of proprietary metal mesh technology for touch sensors. To maintain a broad market reach, the Company also designs and sells other semiconductor products that complement its microcontroller business, including nonvolatile memory, radio frequency and mixed-signal components and application specific integrated circuits. The Company's product portfolio allows the Company to address a broad range of high growth applications, including, for example, industrial, building and home electronics systems, smart meters used for utility monitoring and billing, commercial, residential and architectural LED-based lighting systems, touch panels used on household and industrial appliances, medical devices, aerospace and military products and systems, and a growing universe of electronic-based automotive systems like keyless ignition and access, engine control, air-bag deployment, and lighting and entertainment systems. The Company expects the market for microcontrollers to continue to expand over time as tactile, gesture and proximity-based user interfaces become increasingly prevalent, as additional intelligence is built into an ever-growing universe of everyday products for the “Internet of Things” or integrated within “wearable” devices, as industrial and automotive customers accelerate the replacement of mechanical or passive controls in their products, and as power management, authentication, cryptographic, security and similar capabilities become increasingly critical to many industrial, automotive, consumer and medical products.
Principles of Consolidation
The consolidated financial statements include the accounts of Atmel and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
2011 Out-of-Period Adjustments
The Company recorded an out-of-period adjustment to reverse test and assembly subcontractor accruals for $6.9 million, related to cost of revenues for the year ended December 31, 2011. In addition, the Company corrected excess depreciation for certain fixed assets for $1.7 million, related to research and development for the year ended December 31, 2011. The correction of these errors resulted in an increase to the Company's net income of $8.0 million for the year ended December 31, 2011. Management assessed the impact of these errors and concluded that the amounts were not material, either individually or in the aggregate, to any prior periods' annual or interim financial statements, nor was the impact of the errors material to the financial statements for the year ended December 31, 2011. On that basis, the Company recorded these corrections, in the aggregate, in the year ended December 31, 2011.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates in these financial statements include provision for excess and obsolete inventory, sales return reserves, share-based compensation expense, allowances for doubtful accounts receivable, warranty accruals, estimates for useful lives associated with long-lived assets, asset impairment charges, recoverability of goodwill and intangible assets, restructuring charges, fair value of net assets held for sale, liabilities for uncertain tax positions, and deferred tax asset valuation allowances. Actual results could differ from those estimates.
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Fair Value of Financial Instruments
For certain of Atmel's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and other current assets and current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these items. Investments in debt securities are carried at fair value based on quoted market prices. The estimated fair value has been determined by the Company using available market information. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that Atmel could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents
Investments with an original or remaining maturity of 90 days or less, as of the date of purchase, are considered cash equivalents, and consist of highly liquid money market instruments.
Atmel maintains its cash balances at a variety of financial institutions and has not experienced any material losses relating to such instruments. Atmel invests its excess cash in accordance with its investment policy that has been reviewed and approved by the Board of Directors.
Investments
All of the Company's investments are classified as available-for-sale. Available-for-sale securities with an original or remaining maturity of greater than 90 days, as of the date of purchase, are classified as short-term when they represent investments of cash that are intended for use in current operations. Investments in available-for-sale securities are reported at fair value with unrealized (losses) gains, net of related tax, included as a component of accumulated other comprehensive income.
The Company's marketable securities include corporate equity securities and auction-rate securities. The Company monitors its investments for impairment periodically and recognizes an impairment charge when the decline in the fair value of these investments is judged to be other-than temporary. Significant judgment is used to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. The Company considers various factors in determining whether impairment is other-than-temporary, including the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the Company's ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. The Company's investments include an auction-rate security with a fair value of $1.1 million at both December 31, 2013 and 2012, which is structured with short-term interest rate reset dates of either 7 days or 28 days, and contractual maturities that can be in excess of 10 years. The Company evaluates its portfolio by continuing to monitor the credit rating and interest yields of these auction-rate securities and status of reset at each auction date.
Accounts Receivable
An allowance for doubtful accounts is calculated based on the aging of Atmel's accounts receivable, historical experience, and management judgment. Atmel writes off accounts receivable against the allowance when Atmel determines a balance is uncollectible and no longer intends to actively pursue collection of the receivable. The Company's bad debt expenses (recoveries) were not material for the years ended December 31, 2013, 2012 and 2011.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Market is based on estimated net realizable value. Determining market value of inventories involves numerous judgments, including estimating average selling prices and sales volumes for future periods. The Company establishes provisions for lower of cost or market and excess and obsolescence write-downs, which are charged to cost of revenue. The Company makes a determination regarding excess and obsolete inventory on a quarterly basis. This determination requires an estimation of the future demand for the Company’s products and involves an analysis of historical and forecasted sales levels by product, competitiveness of product offerings, market conditions, product lifecycles, as well as other factors. Excess and obsolete inventory write-downs are recorded when the inventory on hand exceeds management’s estimate of future demand for each product and are charged to cost of revenue.
The Company’s inventories include parts that have a potential for rapid technological obsolescence and are sold in a highly competitive industry. The Company writes down inventory that is considered excess or obsolete. When the Company recognizes a loss on such inventory, it establishes a new, lower-cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis. If inventory with a lower-cost basis is subsequently sold, it will result in higher gross margin for the products making up that inventory.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the following estimated useful lives:
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Building and improvements | 10 | to | 20 years |
Machinery, equipment and software | 3 | to | 5 years |
Furniture and fixtures | 5 years | ||
Maintenance, repairs and minor upgrades are expensed as incurred.
Investments in Privately-Held Companies
Periodically, the Company makes minority investments in certain privately-held companies to further its strategic objectives. Investments in privately-held companies are accounted for at historical cost or, if Atmel has significant influence over the investee, using the equity method of accounting. Atmel's proportionate share of income or losses from investments accounted for under the equity method, and any gain or loss on disposal, are recorded in interest and other income (expense), net. Investments in privately- held companies are included in other assets on the Company's consolidated balance sheets.
For investments in privately-held companies, the Company monitors for impairment annually, or when indicators arise, and reduces their carrying values to fair value when the declines are determined to be other-than-temporary.
Revenue Recognition
The Company sells its products to original equipment manufacturers ("OEMs") and distributors and recognizes revenue when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. Allowances for sales returns and other credits are recorded at the time of sale.
Contracts and customer purchase orders are used to determine the existence of an arrangement. Shipping documents are used to verify delivery. The Company assesses whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company assesses collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history. Sales terms do not include post-shipment obligations except for product warranty.
For sales to certain distributors (primarily based in the U.S. and Europe) with agreements allowing for price protection and product returns, the Company historically has not had the ability to estimate future claims at the point of shipment, and given that price is not fixed or determinable at that time, revenue is not recognized until the distributor sells the product to its end customer. At the time of shipment to these distributors, the Company records a trade receivable for the selling price as there is a legally-enforceable right to payment, relieves inventory for the carrying value of goods shipped since legal title has passed to the distributor, and records the gross margin in deferred income on shipments to distributors on the consolidated balance sheets.
For sales to independent distributors in Asia, excluding Japan, the Company invoices these distributors at full list price upon shipment and issues a rebate, or "credit," once product has been sold to the end customer and the distributor has met certain reporting requirements. After reviewing the more limited pricing, rebate and quotation-related terms, the Company concluded that it could reliably estimate future claims, and therefore recognized revenue at the point of shipment for its Asian distributors (excluding Japan), assuming all of the other revenue recognition criteria are met, utilizing amounts invoiced, less estimated future claims.
Grant Recognition
Subsidy grants from government organizations are amortized as a reduction of expenses over the period the related obligations are fulfilled. Recognition of future subsidy benefits will depend on the Company's achievement of certain technical milestones, capital investment spending goals, employment goals and other requirements. The Company recognized subsidy grant benefits as a reduction of either cost of revenue or research and development expenses, depending on the nature of the grant. The reduction to research and development expenses amounted to $5.0 million, $4.2 million and $3.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. The amounts recognized as a reduction of cost of revenue were not material in each of those years.
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From time to time, the Company receives economic incentive grants and allowances from European governments, agencies and research organizations targeted at preserving employment at specific locations. The subsidy grant agreements typically contain economic incentive, headcount, capital and research and development expenditures and other conditions that must be met to receive and retain grant benefits. Noncompliance with the conditions of the grants could result in the forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts previously received. In addition, the Company may need to record charges to reverse grant benefits recorded in prior periods as a result of changes to its plans for headcount, project spending, or capital investment at any of these specific locations. If the Company is unable to comply with any of the conditions in the grant agreements, the Company may face adverse actions from the government agencies providing the grants. If the Company were required to repay grant benefits, its results of operations and financial position could be materially adversely affected by the amount of such repayments.
In March 2012, the Greek government executed a ministerial decision related to an outstanding state grant previously made to a Greek subsidiary of the Company. Based on the execution of the ministerial decision and the subsequent publication of that decision by the Greek government, the Company determined that its Greek subsidiary would not be required to repay the full amount of that grant. As a result, the Company recognized a benefit of $10.7 million in its results for the year ended December 31, 2012 resulting from the reversal of a reserve previously established for that grant.
As of December 31, 2013 and 2012, the total liability for grant benefits subject to repayment was $0.6 million and $5.1 million, respectively, and is included in accrued and other liabilities on the consolidated balance sheets.
Advertising Costs
Atmel expenses all advertising costs as incurred. Advertising costs were not significant for the years ended December 31, 2013, 2012 and 2011.
Foreign Currency Translation
Certain of Atmel's major international subsidiaries use their local currencies as their respective functional currencies. Financial statements of these foreign subsidiaries are translated into U.S. dollars at current rates, except that revenue, costs and expenses are translated at average current rates during each reporting period. The effect of translating the accounts of these foreign subsidiaries into U.S. dollars has been included in the consolidated statements of stockholders' equity and comprehensive (loss) income as a foreign currency translation adjustment. Gains and losses from re-measurement of assets and liabilities denominated in currencies other than the respective functional currencies are included in the consolidated statements of operations. Gains due to foreign currency re-measurement included in interest and other income (expense), net for the years ended December 31, 2013, 2012 and 2011 were $2.3 million, $0.4 million and $6.0 million, respectively.
Share-Based Compensation
The Company determines the fair value of options and ESPP shares on the measurement date utilizing an option-pricing model, which is affected by its common stock price, as well as changes in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: expected common stock price volatility over the term of the option awards, as well as the projected employee option exercise behaviors during the expected period between the stock option grant date and stock option exercise date. For performance-based restricted stock units, the Company is required to assess the probability of achieving certain financial objectives at the end of each reporting period. Based on the assessment of this probability, which requires subjective judgment, the Company records share-based compensation expense before the performance criteria are actually fully achieved, which may then be reversed in future periods if the Company determines that it is no longer probable that the objectives will be achieved. The expected cost of each award is reflected over the performance period and is reduced for estimated forfeitures. The fair value of a restricted stock unit is equivalent to the market price of the Company's common stock on the measurement date.
Valuation of Goodwill and Intangible Assets
Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired. The Company reviews goodwill and intangible assets with indefinite lives for impairment annually at the beginning of the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. While the Company is permitted to conduct a qualitative assessment to determine whether it is necessary to perform a two-step quantitative goodwill impairment test, for the annual goodwill impairment test in the fourth quarter of fiscal 2013, the Company performed a quantitative test for all of our reporting units with goodwill. The performance of the test involves a two-step process. The first step requires comparing the fair value of each of the reporting units to its net book value, including goodwill. The Company has three reporting units with goodwill, the fair values of which are determined based on an income approach, whereby the Company calculates the fair value of the reporting unit based on the present value of estimated future cash flows, which are formed by evaluating operating plans. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process is only performed if a potential impairment exists, and it involves determining the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference. The Company has not been required to perform this second
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step of the process because the fair value of the reporting units have exceeded their net book value for the year ended December 31, 2013.
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 may include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit. In addition, the Company makes certain judgments and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount for each reporting unit.
Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the Company may not be able to recover the asset's carrying amount.
Certain Risks and Concentrations
Atmel sells its products primarily to OEMs and distributors in North America, Europe and Asia, generally without requiring any collateral. Atmel performs ongoing credit evaluations and seeks to maintain adequate allowances for potential credit losses. One distributor accounted for 20% of accounts receivable at December 31, 2013 and no customer accounted for 10% or more of accounts receivable at December 31, 2013. Two distributors accounted for 14% and 12%, respectively, of accounts receivable at December 31, 2012 and one customer accounted for 10% of accounts receivable at December 31, 2012. The Company had one distributor and one customer that accounted for 14% and 12%, respectively, of net revenue in the year ended December 31, 2013. The Company had one distributor and one customer that accounted for 12% and 10%, respectively, of net revenue in the year ended December 31, 2012. No single customer accounted for 10% or more of net revenue in the year ended December 31, 2011.
The semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. The Company's financial results are affected by a wide variety of factors, including general economic conditions worldwide, economic conditions specific to the semiconductor industry, the timely introduction of new products and implementation of new manufacturing process technologies and the ability to safeguard patents and intellectual property in a rapidly evolving market. In addition, the semiconductor industry has historically been cyclical and subject to significant economic downturns at various times. As a result, Atmel may experience significant period-to-period fluctuations in future operating results due to the factors mentioned above or other factors. Atmel believes that its existing cash, cash equivalents and investments together with cash flow from operations and future withdrawals from a new credit facility, will be sufficient to support its liquidity and capital investment activities for the next twelve months.
Additionally, the Company relies on a limited number of contract manufacturers to provide assembly services for its products. The inability of a contract manufacturer or supplier to fulfill supply requirements of the Company could materially affect future operating results.
Income Taxes
The Company's (provision for) benefit from income tax comprises its current tax liability and change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that in management's judgment is more likely than not to be recoverable against future taxable income. No U.S. taxes are provided on earnings of non-U.S. subsidiaries to the extent such earnings are deemed to be indefinitely reinvested.
The Company's income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. The Company's tax filings, however, are subject to audit by the relevant tax authorities. Accordingly, the Company recognizes tax liabilities based upon its estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the consolidated statements of operations.
In assessing the realizability of deferred tax assets, the Company evaluates both positive and negative evidence that may exist and considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Any adjustment to the net deferred tax asset valuation allowance would be recorded in the consolidated statements of operations for the period that the adjustment is determined to be required.
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Long-Lived Assets
Atmel periodically evaluates the recoverability of its long-lived assets. Factors which could trigger an impairment review include the following: (i) significant negative industry or economic trends; (ii) exiting an activity in conjunction with a restructuring of operations; (iii) current, historical or projected losses that demonstrate a likelihood of continuing losses associated with an asset; (iv) significant decline in the Company's market capitalization for an extended period of time relative to net book value; (v) material changes in the Company's manufacturing model; and (vi) management's assessment of future manufacturing capacity requirements. When the Company determines that there is an indicator that the carrying value of long-lived assets may not be recoverable, the assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset from the expected future undiscounted pre-tax cash flows of the related operations. These estimates include assumptions about future conditions such as future revenue, gross margin, operating expenses, and the fair values of certain assets based on appraisals and industry trends. If these cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. The evaluation is performed at the lowest levels for which there are identifiable, independent cash flows.
Costs that the Company incurs to acquire completed product and process technology are capitalized and amortized on a straight-line basis over three to five years. Capitalized product and process technology costs are amortized over the shorter of the estimated useful life of the technology or the term of the technology agreement.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of stock options, upon vesting of restricted stock units, contingently issuable shares for all periods and assumed issuance of shares under the Company's employee stock purchase plan. No dilutive potential common shares are included in the computation of any diluted per share amount when a loss from continuing operations is reported by the Company.
Research and Development
Cost incurred in the research and development of Atmel's products is expensed as incurred. Research and development expenses were $266.4 million, $251.5 million and $255.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standard Board issued an Accounting Standards Update on Income Taxes, to improve the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is expected to permit a presentation that better reflects the manner in which an entity would settle at the reporting date any additional income taxes resulting from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This guidance is effective for the Company's interim and annual periods beginning after December 15, 2013. The Company does not believe that the implementation of this authoritative guidance will have any material effect on its financial position or results of operations.
Note 2 BALANCE SHEET DETAILS
Inventories are comprised of the following:
December 31, 2013 | December 31, 2012 | ||||||
(in thousands) | |||||||
Raw materials and purchased parts | $ | 9,547 | $ | 19,963 | |||
Work-in-progress | 200,434 | 231,614 | |||||
Finished goods | 64,986 | 96,696 | |||||
$ | 274,967 | $ | 348,273 | ||||
Prepaids and other current assets consist of the following:
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December 31, 2013 | December 31, 2012 | ||||||
(in thousands) | |||||||
Deferred income tax assets | $ | 35,493 | $ | 53,105 | |||
Income tax receivable | 8,668 | 6,346 | |||||
Prepaid income taxes | 2,938 | 13,113 | |||||
Value-added tax receivable | 2,734 | 7,144 | |||||
Other | 42,401 | 45,311 | |||||
$ | 92,234 | $ | 125,019 | ||||
Other assets consist of the following:
December 31, 2013 | December 31, 2012 | ||||||
(in thousands) | |||||||
Deferred income tax assets, net of current portion | $ | 134,365 | $ | 102,315 | |||
Investments in privately-held companies | 8,128 | 8,493 | |||||
Auction-rate securities | 1,066 | 1,066 | |||||
Other | 34,608 | 11,091 | |||||
$ | 178,167 | $ | 122,965 | ||||
Accrued and other liabilities consist of the following:
December 31, 2013 | December 31, 2012 | ||||||
(in thousands) | |||||||
Accrued salaries and benefits and other employee related | $ | 67,486 | $ | 54,993 | |||
Accrued restructuring | 25,441 | 16,222 | |||||
Royalties and licenses | 8,204 | 4,295 | |||||
Advance payments from customer | 4,668 | 10,000 | |||||
Warranty accruals and accrued returns | 4,406 | 10,411 | |||||
Income taxes payable | 3,219 | 7,863 | |||||
Grants to be repaid | 579 | 5,054 | |||||
Deferred income tax liability, current portion | 208 | 304 | |||||
Current portion of market price adjustment to supply agreement | — | 20,953 | |||||
Other | 41,195 | 73,415 | |||||
$ | 155,406 | $ | 203,510 | ||||
Other long-term liabilities consist of the following:
December 31, 2013 | December 31, 2012 | ||||||
(in thousands) | |||||||
Income taxes payable | $ | 50,334 | $ | 26,744 | |||
Accrued pension liability | 38,418 | 40,087 | |||||
Long-term debt and capital lease obligations, less current portion | 7,010 | 5,602 | |||||
Long-term technology license payable | 3,568 | — | |||||
Advance payments from customer | — | 4,668 | |||||
Other | 21,397 | 23,078 | |||||
$ | 120,727 | $ | 100,179 | ||||
Advance payments from customer relate to an agreement that the Company entered into with a specific customer in fiscal 2000. The agreement calls for the Company to supply either a minimum quantity of the Company's products or make minimum repayments. The minimum payment required to be made annually is the greater of 15% of the value of product shipped to the customer or $10.0 million, until such time that the advances have been fully repaid. The Company repaid $10.0 million in each of
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the years ended December 31, 2013, 2012 and 2011 under this agreement. As of December 31, 2013, the Company had remaining$4.7 million which was recorded in accrued and other liabilities.
Included in other long-term liabilities is a note payable to an entity in which the Company has an equity investment to further its strategic objectives. The total outstanding amount due was $3.6 million, of which $2.9 million is included in other long-term liabilities and $0.7 million is included in accounts payable at December 31, 2013, and $7.5 million at December 31, 2012, of which $6.6 million is included in other long-term liabilities and $0.9 million is included in accounts payable. In addition, the Company paid $6.7 million, $6.6 million and $3.7 million to this entity for the years ended December 31, 2013, 2012 and 2011, respectively, relating to a cost sharing arrangement for facility services at its Heilbronn, Germany facility.
Included in accrued and other liabilities as of December 31, 2012 is a liability related to a manufacturing services agreement entered into with LFoundry Rousset S.A.S. (“LFoundry Rousset”). In connection with the sale of the Company’s Rousset manufacturing operations to LFoundry GmbH (“LFoundry GmbH”) in June 2010, subsidiaries of the Company entered into certain other ancillary agreements, including a manufacturing services agreement (“MSA”) in which the subsidiaries agreed to purchase wafers following the closing on a “take-or-pay” basis. The present value of the liability was reduced over the term of the MSA as the wafers were purchased. The MSA liability was reduced by $21.0 million, $34.5 million, $31.9 million for the wafers purchased in the years ended December 31, 2013, 2012 and 2011, respectively. The Company recorded $0.3 million, $2.3 million and $4.5 million in interest expense relating to the MSA liability for the years ended December 31, 2013, 2012 and 2011, respectively.
Note 3 BUSINESS COMBINATIONS
Integrated Device Technology's Smart Metering Business
On March 7, 2013, the Company completed the acquisition from Integrated Device Technology (“IDT”) of its smart metering business for a cash purchase price of $10.3 million. This business is included in the Company's Microcontroller segment. The acquisition was intended to enable the Company to offer complementary products and to enhance the Company's existing smart energy product portfolio. Prior to the acquisition, the assets of IDT's smart metering business consisted primarily of approximately 20 employees, inventory, intellectual property assets, customers and distributors and related revenue streams. The acquisition, therefore, qualified as a business for accounting purposes and was accounted for under the acquisition method of accounting.
The purchase price allocation as of the closing date of the acquisition and estimated useful lives of identifiable intangible assets subject to amortization are as follows:
Purchase Price Allocation | Estimated Useful Lives | ||||
(in thousands) | |||||
Total purchase price | $ | 10,263 | |||
Less: | |||||
Net tangible assets acquired | (1,374 | ) | |||
Intangible assets acquired: | |||||
Customer relationships | (1,200 | ) | 3 years | ||
Developed technologies | (2,100 | ) | 6 years | ||
Backlog | (200 | ) | 1 year or less | ||
Total intangible assets | (3,500 | ) | |||
Goodwill | $ | 5,389 | |||
The total purchase price paid by the Company exceeded the estimated fair value of the intangible assets of the acquired business, which were $3.5 million, and net tangible assets which were $1.4 million. Based on the foregoing, as part of the purchase price allocation, the Company allocated $5.4 million of the purchase price to goodwill.
Ozmo, Inc.
On December 20, 2012, the Company completed the acquisition of Ozmo, Inc ("Ozmo"), a provider of ultra-low Wi-Fi Direct solutions for approximately $64.4 million in cash, of which $15.6 million was paid in the first quarter of 2013. Ozmo's business is included in the Company's Microcontroller segment. The acquisition of Ozmo was intended to enable the Company to offer complementary products, to enhance the Company's existing wireless product portfolio, and potentially to accelerate time-to-market for future wireless microcontroller products that may integrate Ozmo technologies. Prior to the acquisition, Ozmo's assets consisted primarily of approximately 50 employees, patents and other intellectual property assets related to the development of Wi-Fi technologies. The acquisition, therefore, qualified as a business for accounting purposes and was accounted for under the acquisition method of accounting.
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A total of $7.7 million of the purchase consideration was distributed into an escrow account to meet any indemnification claims. The escrow account is legally owned by the shareholder rights representative. As the Company does not have legal title of the account, no asset and corresponding liability will be recorded relating to the amounts held in escrow.
Former Ozmo shareholders are eligible to receive a potential earnout in 2013 and 2014 of up to $22.0 million, subject to the achievement of specified revenue targets and, with respect to a portion of the earnout allocable to certain former Ozmo shareholders now employed by the Company, to their continuing employment. The Company recorded a liability in December 2012 of $1.9 million in respect of this potential earnout contingency, representing the fair value of the earnout potential, as adjusted to reflect a probability-weighted forecast for 2013 and 2014 Ozmo revenue and as further discounted by a 17% expected rate of return. As of December 31, 2013, the Company reversed the liability through a credit to acquisition-related charges line in the consolidated statements of operations as management revised the estimate of 2014 revenue.
The total purchase price of the acquisition was as follows:
December 20, 2012 | |||
(in thousands) | |||
Cash in exchange for shareholders' equity interest | $ | 58,165 | |
Unvested shares in Ozmo | 237 | ||
Transaction expenses incurred by Ozmo | 1,816 | ||
Long-term debt paid on behalf of Ozmo | 1,415 | ||
Fair value of contingent consideration (earn-out provision) | 1,927 | ||
Liabilities assumed | 861 | ||
Total purchase price | $ | 64,421 | |
The purchase price allocation as of the closing date of the acquisition and estimated useful lives of identifiable intangible assets subject to amortization are as follows:
Purchase Price Allocation | Estimated Useful Lives | ||||||
(in thousands) | |||||||
Total purchase price | $ | 64,421 | |||||
Less: | |||||||
Net tangible assets acquired | (2,805 | ) | |||||
Intangible assets acquired: | |||||||
Customer relationships | (2,650 | ) | 3 years | ||||
Developed technologies | (12,020 | ) | 4 | to | 6 years | ||
Non-compete agreements, tradename and backlog | (780 | ) | 1 | to | 3 years | ||
Total intangible assets | (15,450 | ) | |||||
Goodwill | $ | 46,166 | |||||
The goodwill recorded, including workforce, in connection with the acquisition, was assigned to the Company’s Microcontroller segment. The goodwill balance of $46.2 million above was reduced by $12.2 million related to net deferred tax assets created as a result of the net operating losses generated by Ozmo in previous periods. Such goodwill is not expected to be deductible for tax purposes. The Company's determination of fair value of tangible and intangible assets acquired was corroborated by a third-party valuation.
The acquisitions referred to in this Note 3 were not material to the Company at the time of acquisition. As a result, pro forma profit and loss statements for the acquired businesses are not presented.
Note 4 INVESTMENTS
Investments at December 31, 2013 and 2012 primarily include corporate equity securities and auction-rate securities.
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All marketable securities are deemed by management to be available-for-sale and are reported at fair value, with the exception of certain auction-rate securities as described below. Net unrealized gains and losses that are deemed to be temporary are reported within stockholders’ equity on the Company’s consolidated balance sheets as a component of accumulated other comprehensive income. Unrealized losses that are deemed to be other-than-temporary are recorded in the consolidated statements of operations in the period such determination is made. Gross realized gains or losses are recorded based on the specific identification method. For the years ended December 31, 2013 and 2011, the Company's gross realized gains and losses on short-term investments were not significant. For the year ended December 31, 2012, the Company's gross realized gains were not significant and the Company had a $1.2 million loss related to an "other-than-temporary impairment" in connection with an equity investment. The Company’s investments are further detailed in the table below:
December 31, 2013 | December 31, 2012 | ||||||||||||||
Adjusted Cost | Fair Value | Adjusted Cost | Fair Value | ||||||||||||
(in thousands) | |||||||||||||||
Corporate equity securities | $ | 2,687 | $ | 2,181 | $ | 2,687 | $ | 2,687 | |||||||
Auction-rate security | 983 | 1,066 | 983 | 1,066 | |||||||||||
3,670 | 3,247 | 3,670 | 3,753 | ||||||||||||
Unrealized gains | 83 | 83 | |||||||||||||
Unrealized losses | (506 | ) | — | ||||||||||||
Net unrealized (losses) gains | (423 | ) | 83 | ||||||||||||
Fair value | $ | 3,247 | $ | 3,753 | |||||||||||
Amount included in short-term investments | $ | 2,181 | $ | 2,687 | |||||||||||
Amount included in other assets | 1,066 | 1,066 | |||||||||||||
$ | 3,247 | $ | 3,753 | ||||||||||||
The Company's corporate equity securities include an investment in a European publicly-traded company, which was acquired by the Company through the sale of corporate assets. In the fourth quarter of 2012, the Company recorded an impairment charge of $1.2 million on this investment, which it concluded to be other-than-temporary.
The Company's only available-for-sale debt security had a contractual maturity greater than 10 years and totaled $1.0 million (at adjusted cost) as of December 31, 2013.
During the year ended December 31, 2012, the Company redeemed a portion of its auction-rate securities in the open market, resulting in an insignificant gain. During 2013, auctions for the Company's sole auction-rate security continued to fail and as a result this security continues to be illiquid. The Company concluded that its remaining $1.0 million (adjusted cost) of auction-rate security is unlikely to be liquidated within the next twelve months and classified this security as long-term investment, which is included in other assets on the consolidated balance sheets.
The Company has classified all investments with original maturity dates of 90 days or more as short-term as it has the ability and intent to liquidate them within the year, with the exception of the Company’s remaining auction-rate securities, which have been classified as long-term investments and included in other assets on the consolidated balance sheets.
Note 5 FAIR VALUE OF ASSETS AND LIABILITIES
Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price)”. The accounting standard establishes a consistent framework for measuring fair value and expands disclosure requirements regarding fair value measurements. This accounting standard, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The tables below present the balances of investments measured at fair value on a recurring basis:
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December 31, 2013 | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(in thousands) | |||||||||||||||
Assets | |||||||||||||||
Cash | |||||||||||||||
Money market funds | $ | 1,245 | $ | 1,245 | $ | — | $ | — | |||||||
Short-term investments | |||||||||||||||
Corporate equity securities | 2,181 | 2,181 | — | — | |||||||||||
Other assets | |||||||||||||||
Auction-rate security | 1,066 | — | — | 1,066 | |||||||||||
Investment funds - Deferred compensation plan assets | |||||||||||||||
Institutional money market funds | 2,225 | 2,225 | — | — | |||||||||||
Fixed income | 338 | 338 | — | — | |||||||||||
Marketable equity securities | 3,279 | 3,279 | — | — | |||||||||||
Total institutional funds - Deferred compensation plan | 5,842 | 5,842 | — | — | |||||||||||
Total other assets | 6,908 | 5,842 | — | 1,066 | |||||||||||
Total | $ | 10,334 | $ | 9,268 | $ | — | $ | 1,066 | |||||||
December 31, 2012 | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(in thousands) | |||||||||||||||
Assets | |||||||||||||||
Cash | |||||||||||||||
Money market funds | $ | 1,036 | $ | 1,036 | $ | — | $ | — | |||||||
Short-term investments | |||||||||||||||
Corporate equity securities | 2,687 | 2,687 | — | — | |||||||||||
Other assets | |||||||||||||||
Auction-rate security | 1,066 | — | — | 1,066 | |||||||||||
Investment funds - Deferred compensation plan assets | |||||||||||||||
Institutional money market funds | 597 | 597 | — | — | |||||||||||
Fixed income | 902 | 902 | — | — | |||||||||||
Marketable equity securities | 3,479 | 3,479 | — | — | |||||||||||
Total institutional funds - Deferred compensation plan | 4,978 | 4,978 | — | — | |||||||||||
Total other assets | 6,044 | 4,978 | — | 1,066 | |||||||||||
Total | $ | 9,767 | $ | 8,701 | $ | — | $ | 1,066 | |||||||
The Company’s investments, with the exception of auction-rate security, are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, or broker or dealer quotations. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
Auction-rate securities are classified within Level 3 because significant assumptions for such securities are not observable in the market. The total amount of assets measured using Level 3 valuation methodologies represented less than 1% of the Company's total assets as of December 31, 2013. The Company redeemed one auction rate security in the open market at book value of $1.2 million in the year ended December 31, 2012.
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There were no changes in Level 3 assets measured at fair value on a recurring basis for the years ended December 31, 2013 and 2012. There were no transfers between Level 1 and 2 hierarchies for the years ended December 31, 2013 and 2012.
Note 6 FIXED ASSETS, NET
Fixed assets, net consist of the following:
December 31, 2013 | December 31, 2012 | ||||||
(in thousands) | |||||||
Land | $ | 11,464 | $ | 14,489 | |||
Buildings and improvements | 519,114 | 510,468 | |||||
Machinery and equipment | 918,093 | 966,756 | |||||
Furniture and fixtures | 19,794 | 21,636 | |||||
Construction-in-progress | 17,240 | 2,743 | |||||
1,485,705 | 1,516,092 | ||||||
Less: Accumulated depreciation and amortization | (1,300,722 | ) | (1,295,048 | ) | |||
$ | 184,983 | $ | 221,044 | ||||
Depreciation expense on fixed assets for the years ended December 31, 2013, 2012 and 2011 was $66.6 million, $67.6 million and $68.9 million, respectively. Fixed assets acquired under capital leases were not material at December 31, 2013, 2012 and 2011.
Note 7 GOODWILL AND INTANGIBLE ASSETS, NET
The following table summarizes activities related to the carrying value of goodwill:
Micro- Controllers | ASIC | Total | |||||||||
(in thousands) | |||||||||||
Balance at December 31, 2011 | $ | 66,645 | $ | 1,017 | $ | 67,662 | |||||
Goodwill recorded in connection with acquisition | 46,166 | — | 46,166 | ||||||||
Effects of foreign currency translation | (9,414 | ) | 16 | (9,398 | ) | ||||||
Balance at December 31, 2012 | $ | 103,397 | $ | 1,033 | $ | 104,430 | |||||
Goodwill recorded in connection with acquisition | 5,389 | — | 5,389 | ||||||||
Effects of foreign currency translation | (1,625 | ) | 46 | (1,579 | ) | ||||||
Balance at December 31, 2013 | $ | 107,161 | $ | 1,079 | $ | 108,240 | |||||
Intangible assets, net, consist of technology licenses and acquisition-related intangible assets as follows:
December 31, 2013 | December 31, 2012 | ||||||
(in thousands) | |||||||
Licensed technology | $ | 23,814 | $ | 18,123 | |||
Accumulated amortization | (18,470 | ) | (16,171 | ) | |||
Total technology licenses | 5,344 | 1,952 | |||||
Customer relationships | 25,857 | 24,657 | |||||
Developed technologies | 22,398 | 20,298 | |||||
Non-compete agreements, tradename and backlog | 3,794 | 3,595 | |||||
Acquisition-related intangible assets | 52,049 | 48,550 | |||||
Accumulated amortization | (29,277 | ) | (23,245 | ) | |||
Total acquisition-related intangible assets | 22,772 | 25,305 | |||||
Total intangible assets, net | $ | 28,116 | $ | 27,257 | |||
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Amortization expense for technology licenses totaled $2.3 million, $3.7 million and $3.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. Amortization expense for acquisition-related intangible assets totaled $6.0 million, $5.6 million and $4.6 million, of which $1.0 million, $1.5 million and $1.1 million pertained to developed technology, for the years ended December 31, 2013, 2012 and 2011, respectively.
The following table presents the estimated future amortization of the technology licenses and acquisition-related intangible assets:
Years Ending December 31: | Technology Licenses | Acquisition-Related Intangible Assets | Total | ||||||||
(in thousands) | |||||||||||
2014 | $ | 1,563 | $ | 5,152 | $ | 6,715 | |||||
2015 | 1,390 | 4,588 | 5,978 | ||||||||
2016 | 1,147 | 3,381 | 4,528 | ||||||||
2017 | 1,147 | 3,181 | 4,328 | ||||||||
2018 | 97 | 3,005 | 3,102 | ||||||||
Thereafter | — | 3,465 | 3,465 | ||||||||
Total future amortization | $ | 5,344 | $ | 22,772 | $ | 28,116 | |||||
Note 8 BORROWING ARRANGEMENTS
Senior Secured Revolving Credit Facility
On December 6, 2013, the Company entered into a five-year $300.0 million, senior secured revolving credit facility (the “Facility”), the terms of which are set forth in a Credit Agreement (the “Credit Agreement”) among the Company, a group of lenders led by Morgan Stanley Senior Funding, Inc., as administrative agent, and Union Bank N.A., BNP Paribas and SunTrust Bank as co-syndication agents. The Company may increase the aggregate availability under the Facility through a customary “accordion” feature in an amount not to exceed $250.0 million. The Company recorded debt issuance costs of $2.1 million associated with the Facility that will amortize over the expected life of the Facility.
Borrowings under the Facility will be available for general corporate purposes, including working capital, stock repurchases, acquisitions and other purposes. Amounts outstanding under the Facility are due on the earlier of December 6, 2018 or 180 days prior to the maturity date of any Permitted Convertible Notes (as defined in the Credit Agreement) if, in the latter case, the Company does not otherwise have available sufficient unrestricted cash and other investments to redeem the Permitted Convertible Notes.
The Company may prepay loans under the Credit Agreement at any time, in whole or in part, upon payment of accrued interest and break funding payments, if applicable. The Company may terminate or reduce the Facility at any time without penalty. The obligations under the Facility are guaranteed by certain domestic subsidiaries of the Company, are secured by a pledge of substantially all of the assets of the Company and the guarantors, and contains affirmative, negative and financial covenants. Affirmative covenants include, among other things, the delivery of financial statements and other information. Negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, investments and transactions with affiliates. The financial covenants require the Company to maintain compliance with a maximum total leverage ratio, a maximum senior secured leverage ratio and a minimum fixed charge coverage ratio. The Credit Agreement includes customary events of default that include, among other things, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults and a change of control default. The occurrence of an event of default could result in an acceleration of obligations under the Credit Agreement. At December 31, 2013, there were no outstanding borrowings under the Facility and the Company was in compliance with all financial covenants of the Credit Agreement.
Other Long-Term Debt
The Company had long-term debt obligations amounting to $7.0 million and $5.6 million as of December 31, 2013 and 2012, respectively, relating to an amount previously advanced from a foreign government which is repayable in 2015. The balance is increased on a quarterly basis as a result of interest accretion. The repayment amount is expected to be approximately $9.6 million in 2015.
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Note 9 STOCKHOLDERS’ EQUITY
Share-Based Compensation
The components of the Company's share-based compensation expense are summarized below:
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
Employee stock options | $ | 1,644 | $ | 3,470 | $ | 5,685 | |||||
Employee stock purchase plan | 2,858 | 3,107 | 2,511 | ||||||||
Restricted stock units | 37,952 | 65,397 | 60,906 | ||||||||
Net amounts released from (capitalized in) inventory | 670 | 468 | (977 | ) | |||||||
$ | 43,124 | $ | 72,442 | $ | 68,125 | ||||||
The accounting standard on share-based compensation requires the gross benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. The future realizability of tax benefits related to share-based compensation is dependent upon the timing of employee exercises and future taxable income, among other factors. The Company reported gross excess tax benefits of $2.3 million, $1.3 million and $2.7 million in the years ended December 31, 2013, 2012 and 2011, respectively.
There was no significant non-employee share-based compensation expense for the years ended December 31, 2013, 2012 and 2011.
The following table summarizes share-based compensation, net of amount capitalized in (released from) inventory, included in operating results:
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
Cost of revenue | $ | 5,889 | $ | 8,052 | $ | 7,840 | |||||
Research and development | 14,852 | 22,825 | 22,916 | ||||||||
Selling, general and administrative | 22,383 | 41,565 | 37,369 | ||||||||
Total share-based compensation expense, before income taxes | 43,124 | 72,442 | 68,125 | ||||||||
Tax benefit | (7,707 | ) | (12,060 | ) | (10,453 | ) | |||||
Total share-based compensation expense, net of income taxes | $ | 35,417 | $ | 60,382 | $ | 57,672 | |||||
Stock Options, Restricted Stock Units and Employee Stock Purchase Plan
In May 2005, Atmel’s stockholders initially approved Atmel’s 2005 Stock Plan (as amended, the “2005 Stock Plan”). On May 9, 2013, Atmel's stockholders approved an amendment to the 2005 Stock Plan to increase the number of shares allocated to the 2005 Stock Plan by 25.0 million shares. As of December 31, 2013, 158.0 million shares had been authorized for issuance under the 2005 Stock Plan, and 21.2 million shares remained available for issuance without giving effect to any adjustment that may be required by the terms of the 2005 Stock Plan in respect of shares underlying restricted stock or restricted stock units. Under the 2005 Stock Plan, Atmel may issue common stock directly, grant options to purchase common stock or grant restricted stock units payable in common stock to employees, consultants and directors of Atmel. Restricted stock units generally vest on a quarterly basis over a service period of up to four years from the grant date, although restricted stock unit grants to newly-hired employees generally have a one-year cliff vest equal to one-quarter of the total grant. Options, which generally vest over four years, are granted at fair market value on the date of the grant and generally expire ten years from that date.
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Activity under Atmel’s 2005 Stock Plan is set forth below:
Outstanding Options | Weighted- | |||||||||||
Exercise | Average | |||||||||||
Available for Grant | Number of Options | Price per Share | Exercise Price per Share | |||||||||
(in thousands, except for per share data) | ||||||||||||
Balances, December 31, 2010 | 11,463 | 12,660 | $1.68-$14.94 | $ | 4.35 | |||||||
Additional shares approved for issuance | 19,000 | — | — | — | ||||||||
Restricted stock units issued | (6,343 | ) | — | — | — | |||||||
Plan adjustment for restricted stock units issued | (4,017 | ) | — | — | — | |||||||
Performance-based restricted stock units issued | (3,474 | ) | — | — | — | |||||||
Plan adjustment for performance-based restricted stock units issued | (2,124 | ) | — | — | — | |||||||
Restricted stock units cancelled | 1,025 | — | — | — | ||||||||
Plan adjustment for restricted stock units cancelled | 793 | — | — | — | ||||||||
Performance-based restricted stock units cancelled | 25 | — | — | — | ||||||||
Plan adjustment for performance-based restricted stock units cancelled | 17 | — | — | — | ||||||||
Options cancelled/expired/forfeited | 158 | (158 | ) | $2.11-$14.94 | $ | 5.01 | ||||||
Options exercised | — | (4,285 | ) | $1.80-$13.77 | $ | 4.51 | ||||||
Balances, December 31, 2011 | 16,523 | 8,217 | $1.68-$10.01 | $ | 4.26 | |||||||
Restricted stock units issued | (8,507 | ) | — | — | — | |||||||
Plan adjustment for restricted stock units issued | (5,189 | ) | — | — | — | |||||||
Performance-based restricted stock units issued | (338 | ) | — | — | — | |||||||
Plan adjustment for performance-based restricted stock units issued | (206 | ) | — | — | — | |||||||
Restricted stock units cancelled | 1,783 | — | — | — | ||||||||
Plan adjustment for restricted stock units cancelled | 1,248 | — | — | — | ||||||||
Performance-based restricted stock units cancelled | 330 | — | — | — | ||||||||
Plan adjustment for performance-based restricted stock units cancelled | 201 | — | — | — | ||||||||
Options cancelled/expired/forfeited | 303 | (303 | ) | $2.11-$8.83 | $ | 4.05 | ||||||
Options exercised | — | (1,239 | ) | $1.68-$8.89 | $ | 3.76 | ||||||
Balances, December 31, 2012 | 6,148 | 6,675 | $1.68-$10.01 | $ | 4.33 | |||||||
Additional shares approved for issuance | 25,000 | — | — | — | ||||||||
Restricted stock units issued | (7,922 | ) | — | — | — | |||||||
Plan adjustment for restricted stock units issued | (4,563 | ) | — | — | — | |||||||
Restricted stock units cancelled | 2,084 | — | — | — | ||||||||
Plan adjustment for restricted stock units cancelled | 1,388 | — | — | — | ||||||||
2014 Plan - Performance-based restricted stock units issued | (1,048 | ) | — | — | — | |||||||
Plan adjustment for 2014 performance-based restricted stock units issued | (597 | ) | — | — | — | |||||||
2011 Plan - Performance-based restricted stock units cancelled | 422 | — | — | — | ||||||||
Plan adjustment for 2011 performance-based restricted stock units cancelled | 257 | — | — | — | ||||||||
Options cancelled/expired/forfeited | 76 | (76 | ) | $1.77-$7.12 | $ | 4.95 | ||||||
Options exercised | — | (2,964 | ) | $1.68-$7.12 | $ | 4.12 | ||||||
Balances, December 31, 2013 | 21,245 | 3,635 | $2.13-$10.01 | $ | 4.50 | |||||||
In connection with the Company's acquisition of Ozmo in December 2012, the Company assumed Ozmo's equity incentive plan. Excluded from the table above are 0.4 million shares assumed as part of the acquisition of Ozmo. This amount is comprised of 0.3 million restricted stock units, with a weighted average grant date fair value of $6.17 and 0.1 million options, with a weighted
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average grant date fair value of $0.81. These stock options and restricted stock units remain governed by the terms and conditions of the Ozmo plan. No additional equity is expected to be granted under the Ozmo plan.
Restricted stock units are granted from the pool of options available for grant. Every share underlying restricted stock, restricted stock units (including performance-based restricted stock units), or stock purchase rights issued on or after May 9, 2013 is counted against the numerical limit for options available for grant as 1.57 shares, as reflected in the table above in the line items for "Plan adjustments", except that restricted stock units (including performance-based restricted stock units), or stock purchase rights issued prior to May 9, 2013 but on or after May 18, 2011, provide for a numerical limit of 1.61 shares, and restricted stock units (including performance-based restricted stock units), or stock purchase rights issued prior to May 18, 2011 and on or after May 14, 2008, provided for a numerical limit of 1.78 shares. If shares issued pursuant to any restricted stock, restricted stock unit, and stock purchase right agreements are cancelled, forfeited or repurchased by the Company, the number of shares returned to the 2005 Stock Plan is based upon the same ratio as they were issued and will again become available for issuance.
As of December 31, 2013, there were 21.2 million shares available for issuance under the 2005 Stock Plan, or 13.5 million shares after giving effect to the applicable ratios under the 2005 Stock Plan for issuances of restricted stock units, as described above. The shares assumed as part of the Ozmo acquisition were not issued under the 2005 Stock Plan.
Restricted Stock Units
Activity related to restricted stock units is set forth below:
Number of Units | Weighted-Average Grant Date Fair Value | |||||
(in thousands, except for per share data) | ||||||
Balances, December 31, 2010 | 29,250 | $ | 5.74 | |||
Restricted stock units issued | 6,343 | $ | 10.88 | |||
Restricted stock units vested | (6,345 | ) | $ | 5.20 | ||
Restricted stock units cancelled | (1,025 | ) | $ | 6.80 | ||
2011 Plan - Performance-based restricted stock units issued | 3,474 | $ | 13.94 | |||
2011 Plan - Performance-based restricted stock units vested | (8,485 | ) | $ | 4.22 | ||
2011 Plan - Performance-based restricted stock units cancelled | (25 | ) | $ | 9.77 | ||
Balances, December 31, 2011 | 23,187 | $ | 8.99 | |||
Restricted stock units issued | 8,507 | $ | 6.11 | |||
Restricted stock units vested | (7,975 | ) | $ | 6.80 | ||
Restricted stock units cancelled | (1,783 | ) | $ | 7.81 | ||
2011 Plan - Performance-based restricted stock units issued | 338 | $ | 9.19 | |||
2011 Plan - Performance-based restricted stock units cancelled | (330 | ) | $ | 12.31 | ||
Balances, December 31, 2012 | 21,944 | $ | 8.71 | |||
Restricted stock units issued | 7,922 | $ | 7.36 | |||
Restricted stock units vested | (7,271 | ) | $ | 7.30 | ||
Restricted stock units cancelled | (2,084 | ) | $ | 8.25 | ||
2014 Plan - Performance-based restricted stock units issued | 1,048 | $ | 7.33 | |||
2011 Plan - Performance-based restricted stock units cancelled | (422 | ) | $ | 13.50 | ||
Balances, December 31, 2013 | 21,137 | $ | 8.84 | |||
Excluded from the table above are 0.3 million restricted stock units, with a weighted average grant date fair value of $6.17, assumed as part of the acquisition of Ozmo.
For the year ended December 31, 2013, 7.3 million restricted stock units vested, including 3.3 million units withheld for taxes. These vested restricted stock units had a weighted-average grant date fair value of $7.30 per share for the year ended December 31, 2013. The aggregate intrinsic value of vested restricted stock units amounted to $53.5 million, $54.2 million and $193.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, total unearned share-based compensation related to unvested restricted stock units previously granted (including performance-based restricted stock units) was approximately $120.6 million, excluding forfeitures, and is expected to be recognized over a weighted-average period of 2.2 years.
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Until restricted stock units are vested, they do not have the voting rights of common stock and the shares underlying such restricted stock units are not considered issued and outstanding. Upon vesting of restricted stock units, shares withheld by the Company to pay taxes are retired.
Performance-Based Restricted Stock Units
On December 17, 2013, the Company adopted the Atmel 2014 Long-Term Performance-Based Incentive Plan (the “2014 Plan”), which provides for the grant of restricted stock units to Company participants. The Company issued 1.0 million shares under the 2014 Plan for the year ended December 31, 2013. The amount of share-based compensation expense related to the 2014 Plan was not material for the year ended December 31, 2013. The Company records performance-based restricted stock units issued under the 2014 Plan based on achievement of the “target” performance metrics, which will result in a participant being credited with 100% of the performance-based shares awarded to that participant under the 2014 Plan. Achievement at the “maximum” performance metrics will result in a participant being credited with 300% of the performance-based shares awarded to that participant under the 2014 Plan.
Performance metrics for the 2014 Plan are based principally on corporate level and business unit non-GAAP semiconductor gross margin metrics, calculated at the end of each 2014 calendar quarter (other than the Company’s XSense business unit for which the performance metric will be based on 2014 cumulative calendar year revenue). Vesting of restricted stock units under the 2014 Plan is expected to commence, assuming achievement of the underlying performance metrics, in the first calendar quarter of 2015. Performance metrics and awards are not cumulative or duplicative (the final award will be based, subject to adjustment, on the highest non-GAAP semiconductor gross margin achieved during the performance period). Performance-based shares may be credited to participants at the end of any calendar quarter if a non-GAAP semiconductor gross margin performance metric has been achieved at that quarter end. Additional performance-based shares may be credited for performance that falls between “threshold” and “target” or “target” and “maximum” metrics. In the event that a performance metric is achieved and the applicable non-GAAP semiconductor gross margin performance metric, in the next succeeding 2014 calendar quarter, falls more than 2% percent below the previously achieved performance metric, the number of performance-based shares credited to a participant will be adjusted, based on average performance over the affected quarterly periods, to reflect that reduced performance.
For participants who are included within the 2014 Plan at any time after January 1, 2014, awards will be pro-rated to reflect the actual time a participant has been an employee of, or a service provider to, the Company. The amount of share-based compensation expense related to the 2014 Plan was not material for the year ended December 31, 2013.
In May 2011, we adopted the 2011 Long-Term Performance Based Incentive Plan (the “2011 Plan”), which ended on December 31, 2013. We recognized a share-based compensation credit of $14.5 million under the 2011 Plan in the year ended December 31, 2013. The credit recorded in the year ended December 31, 2013 resulted from finalizing our estimates regarding the achievement of certain performance criteria established under the 2011 Plan and increasing our forfeiture rate estimates for those performance-based restricted stock units. We recorded total share-based compensation expense related to performance-based restricted stock units of $12.7 million and $7.5 million under the 2011 Plan in the years ended December 31, 2012 and 2011, respectively.
Stock Option Awards
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Range of Exercise Price ($) | Number Outstanding | Weighted- Average Remaining Contractual Term (years) | Weighted- Average Exercise Price ($) | Aggregate Intrinsic Value | Number Exercisable | Weighted- Average Remaining Contractual Term (years) | Weighted- Average Exercise Price ($) | Aggregate Intrinsic Value | ||||||||||||||||
(in thousands, except for per share prices and life data) | ||||||||||||||||||||||||
2.13-3.18 | 21 | 1.55 | 2.35 | $ | 112 | 21 | 1.55 | 2.35 | $ | 112 | ||||||||||||||
3.24-3.24 | 413 | 4.29 | 3.24 | 1,896 | 413 | 4.29 | 3.24 | 1,896 | ||||||||||||||||
3.26-3.29 | 371 | 1.77 | 3.28 | 1,686 | 371 | 1.77 | 3.28 | 1,686 | ||||||||||||||||
3.32-4.20 | 381 | 4.67 | 3.95 | 1,480 | 381 | 4.67 | 3.95 | 1,480 | ||||||||||||||||
4.23-4.37 | 380 | 3.32 | 4.26 | 1,359 | 340 | 3.36 | 4.26 | 1,215 | ||||||||||||||||
4.43-4.70 | 320 | 5.48 | 4.45 | 1,083 | 320 | 5.48 | 4.45 | 1,083 | ||||||||||||||||
4.74-4.74 | 421 | 3.61 | 4.74 | 1,301 | 421 | 3.62 | 4.74 | 1,301 | ||||||||||||||||
4.77-4.78 | 59 | 6.07 | 4.77 | 182 | 53 | 6.06 | 4.77 | 162 | ||||||||||||||||
4.89-4.89 | 453 | 2.60 | 4.89 | 1,330 | 452 | 2.60 | 4.89 | 1,330 | ||||||||||||||||
4.92-10.01 | 816 | 3.69 | 5.77 | 1,680 | 801 | 3.64 | 5.75 | 1,665 | ||||||||||||||||
3,635 | 3.67 | 4.50 | $ | 12,109 | 3,573 | 3.66 | 4.49 | $ | 11,930 | |||||||||||||||
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Excluded from the table above are 0.1 million options, with a weighted average grant date fair value of $0.81, assumed as part of the acquisition of Ozmo.
The number of options exercisable under Atmel's stock option plans at December 31, 2013, 2012 and 2011 were 3.6 million, 6.2 million and 6.4 million, respectively. For the years ended December 31, 2013, 2012 and 2011, the number of stock options that were forfeited, but were not available for future stock option grants due to the expiration of these shares under the 1986 Stock Plan was not material.
For the years ended December 31, 2013, 2012 and 2011, the number of stock options that were exercised were 3.0 million, 1.2 million and 4.3 million, respectively, which had a total intrinsic value at the date of exercise of $9.4 million, $4.8 million and $42.0 million, respectively, and had an aggregate exercise price of $12.2 million, $4.6 million and $19.3 million, respectively.
As of December 31, 2013, total unearned compensation expense related to unvested stock options was approximately $0.3 million, excluding forfeitures, and is expected to be recognized over a weighted-average period of 0.5 year.
Employee Stock Purchase Plan
Under the 1991 Employee Stock Purchase Plan (“1991 ESPP”) and 2010 Employee Stock Purchase Plan (“2010 ESPP” and, together with the 1991 ESPP, the “Company’s ESPPs”), qualified employees are entitled to purchase shares of Atmel’s common stock at the lower of 85% of the fair market value of the common stock at the date of commencement of the 6-month offering period or 85% of the fair market value on the last day of the offering period. Purchases are limited to 10% of an employee’s eligible compensation subject to a maximum annual employee contribution limit of $25,000 of the market value of the shares (determined at the time the share is granted) per calendar year.
There were 0.8 million shares purchased under the 1991 ESPP for the years ended December 31, 2011 at an average price per share of $4.85. The 1991 ESPP was superseded by the 2010 ESPP in the three months ended March 31, 2011. There were 1.9 million, 1.8 million and 0.7 million shares purchased under the 2010 ESPP for the years ended December 31, 2013, 2012 and 2011 at an average price per share of $5.52, $6.19 and $8.56, respectively. Of the 25.0 million shares authorized for issuance under the 2010 ESPP, 20.6 million shares were available for issuance at December 31, 2013.
The fair value of each purchase under the Company’s ESPPs is estimated on the date of the beginning of the offering period using the Black-Scholes option-pricing model. The following assumptions were utilized to determine the fair value of the Company’s ESPPs shares:
Years Ended | ||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||
Risk-free interest rate | 0.10 | % | 0.15 | % | 0.12 | % | ||
Expected life (years) | 0.50 | 0.50 | 0.50 | |||||
Expected volatility | 44 | % | 51 | % | 46 | % | ||
Expected dividend yield | — | — | — | |||||
The weighted-average fair value per share under the Company’s ESPPs for purchase periods beginning in the years ended December 31, 2013, 2012 and 2011 was $1.49, $1.75 and $2.70, respectively. Cash proceeds from the issuance of shares under the Company’s ESPPs were $10.6 million, $11.0 million and $9.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Common Stock Repurchase Program
Atmel’s Board of Directors has authorized an aggregate of $1,000.0 million of funding for the Company’s common stock repurchase program since 2010. The repurchase program does not have an expiration date, and the number of shares repurchased and the timing of repurchases are based on the level of the Company’s cash balances, general business and market conditions, regulatory requirements, and other factors, including alternative investment opportunities. As of December 31, 2013, $339.5 million remained available for repurchasing common stock under this program.
During the years ended December 31, 2013, 2012 and 2011, Atmel repurchased 12.2 million, 22.7 million and 28.8 million shares, respectively, of its common stock on the open market at an average repurchase price of $7.20, $7.92 and $10.57 per share, respectively, excluding commission, and subsequently retired those shares. Common stock and additional paid-in capital were reduced by $87.8 million, $179.6 million and $304.2 million, excluding commission, for the years ended December 31, 2013, 2012 and 2011, respectively, as a result of the stock repurchases.
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Note 10 ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is defined as a change in equity of a company during a period, from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The primary difference between net income and comprehensive income for the Company arises from foreign currency translation adjustments, actuarial loss related to defined benefit pension plans and net unrealized loss on investments. The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of tax:
Foreign currency translation adjustments | Defined benefit pension plans | Change in unrealized loss on investments | Total | ||||||||||||
(in thousands) | |||||||||||||||
Balance as of December 31, 2011 | $ | 7,725 | $ | 1,712 | $ | 11 | $ | 9,448 | |||||||
Other comprehensive income (loss) before reclassifications | 3,902 | (6,778 | ) | (946 | ) | (3,822 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | 786 | 786 | |||||||||||
Net increase (decrease) in other comprehensive income | 3,902 | (6,778 | ) | (160 | ) | (3,036 | ) | ||||||||
Balance as of December 31, 2012 | $ | 11,627 | $ | (5,066 | ) | $ | (149 | ) | $ | 6,412 | |||||
Other comprehensive income before reclassifications | 3,325 | 2,913 | 147 | 6,385 | |||||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | — | |||||||||||
Net increase in other comprehensive income | 3,325 | 2,913 | 147 | 6,385 | |||||||||||
Balance as of December 31, 2013 | $ | 14,952 | $ | (2,153 | ) | $ | (2 | ) | $ | 12,797 | |||||
All amounts reclassified from accumulated other comprehensive income were related to losses on available-for-sale securities. These reclassifications impacted "interest and other income (expense), net" on the consolidated statements of operations.
Note 11 COMMITMENTS AND CONTINGENCIES
Commitments
Leases
The Company leases its domestic and foreign sales offices under non-cancelable operating leases. These leases contain various expiration dates and renewal options. The Company also leases certain manufacturing equipment and software rights under operating leases. Total rental expense for the years ended December 31, 2013, 2012 and 2011 was $24.4 million, $25.0 million and $20.1 million, respectively.
On August 30, 2011, the Company completed the sale of its former San Jose corporate headquarters and adjacent parcels of land for an aggregate sale price of $48.5 million.
On August 30, 2011, the Company entered into a ten-year lease of approximately $52.6 million for its current headquarters located at 1600 Technology Drive in San Jose, California (the "Technology Drive Lease").
Aggregate non-cancelable future minimum rental payments under operating leases, including manufacturing equipment and software rights, are as follows:
Years Ending December 31: | Operating Leases | ||
(In thousands) | |||
2014 | $ | 9,015 | |
2015 | 7,631 | ||
2016 | 7,367 | ||
2017 | 6,740 | ||
2018 | 6,332 | ||
Thereafter | 22,480 | ||
$ | 59,565 | ||
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Indemnification
As is customary in the Company’s industry, the Company’s standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of the Company’s products. From time to time, the Company will indemnify customers against combinations of loss, expense, or liability arising from various trigger events related to the sale and the use of the Company’s products and services, usually up to a specified maximum amount. In addition, as permitted under state laws in the United States, the Company has entered into indemnification agreements with its officers and directors and certain employees, and the Company’s bylaws permit the indemnification of the Company’s agents. The estimated fair value of the liability is not material.
Purchase Commitments
At December 31, 2013, the Company, or its affiliates, had certain non-cancellable commitments which were not included on the consolidated balance sheets at that date. These include the outstanding capital purchase commitments of approximately $5.3 million and wafer purchase commitments of approximately $36.8 million.
Contingencies
Legal Proceedings
The Company is party to various legal proceedings. Management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on its financial position, results of operations and statements of cash flows. If an unfavorable ruling were to occur in any of the legal proceedings described below or other legal proceedings that were not deemed material as of December 31, 2013, there exists the possibility of a material adverse effect on the Company's financial position, results of operations and cash flows. The Company has accrued for losses related to litigation that it considers probable and for which the loss can be reasonably estimated. In the event that a probable loss cannot be reasonably estimated, it has not accrued for such losses. Management makes a determination as to when a potential loss is reasonably possible based on relevant accounting literature and then includes appropriate disclosure of the contingency. As the Company continues to monitor litigation matters, whether deemed material as of December 31, 2013 or not, its determination could change, however, and the Company may decide, at some future date, to establish an appropriate reserve.
French Insolvency-Related Litigation - LFoundry and Atmel Rousset. In June 2010, our French subsidiary, Atmel Rousset S.A.S. (“Atmel Rousset”), sold its wafer manufacturing facility in Rousset, France to LFoundry GmbH (“LF”). In connection with this transaction, Atmel Rousset also executed, among other agreements, a take-or-pay supply agreement (the “Supply Agreement”) requiring Atmel Rousset or its affiliates to purchase wafers from LF’s subsidiary, LFoundry Rousset S.A.S. (“LFR”), which operates the facility; Atmel Rousset’s commitment under that Supply Agreement was fully satisfied in mid-2013. On June 26, 2013, LFR filed an insolvency declaration with the Commercial Court of Paris (the “Paris Court”). Two months later, on August 22, 2013, Atmel Rousset received a petition through which LFR, by its judicially-appointed receivers and administrator (collectively, “Administrator”), sought to extend the bankruptcy proceedings to include Atmel Rousset. On February 12, 2014, the Paris Court rejected the Administrator’s petition in its entirety.
French Insolvency-Related Litigation - LFoundry and Atmel Corporation, et al. On June 26, 2013, LFR filed an insolvency declaration with the Paris Court, as described above under “Legal Proceedings - French Insolvency-Related Litigation - LFoundry and Atmel Rousset.” On September 6, 2013, LFR’s judicially-appointed receivers submitted a further petition to the Paris Court seeking to hold the Company and its subsidiary Atmel B.V. jointly and severally liable to LFR for damages in the approximate amount of 135.0 million Euros. LFR alleges that the Company and Atmel B.V. defrauded LFR (x) in connection with Atmel Rousset’s 2010 sale of its manufacturing facility to LF, the German parent of LFR, and (y) through their business conduct with LFR after the sale. The Company and Atmel B.V. consider LFR’s claims specious, defamatory and devoid of merit for at least the following reasons: (a) neither was a party to the sale transaction or the supply agreement executed in conjunction with the transaction; (b) the sale transaction, when consummated in 2010, fully complied with all applicable French laws; (c) the assets transferred by Atmel Rousset to LFR had a net value at the time of sale in excess of 80 million Euros, as confirmed, prior to the sale, by an independent auditor appointed by the Paris Court; (d) LFR assumed no debt in connection with the transaction; (e) LF was, at the time of the transaction, a financially stable and experienced foundry operator; (f) Atmel Rousset’s Workers’ Council (representing all Atmel Rousset employees prior to the sale), after receiving detailed information about LF and the transaction, and the analysis of its own independent financial expert, unanimously approved the transaction; (g) Atmel Rousset (or its affiliates) fully satisfied its commitment to purchase wafers from LFR, as acknowledged by LFR, by mid-2013; (h) in the three years after the sale, LFR received from Atmel Rousset (or present and past affiliates) payments for wafers and other services aggregating more than $400.0 million; and (i) any failure by LFR to diversify its revenue stream or reduce its dependence on Atmel Rousset over the course of three years resulted solely from ineffectual LFR management. The Company and Atmel B.V. intend to defend themselves vigorously in this matter, and included in their responsive submission a counterclaim against the receivers for abuse of process. On December 26, 2013, LFR suspended operations and commenced a judicially-supervised liquidation. It is not yet clear what impact, if any, LFR’s liquidation will have on this litigation.
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Other Contingencies
From time to time, the Company is notified of claims that its products may infringe patents, or other intellectual property, issued to or owned by other parties. The Company periodically receives demands for indemnification from its customers with respect to intellectual property matters. The Company also periodically receives claims relating to the quality of its products, including claims for additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting defective products, costs for product recalls or other damages. Receipt of these claims and requests occurs in the ordinary course of the Company's business, and the Company responds based on the specific circumstances of each event. The Company undertakes an accrual for losses relating to those types of claims when it considers those losses “probable” and when a reasonable estimate of loss can be determined.
Product Warranties
The Company accrues for warranty costs based on historical trends of product failure rates and the expected material and labor costs to provide warranty services. The Company’s products are generally covered by a warranty typically ranging from 30 days to three years.
The following table summarizes the activity related to the product warranty liability:
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of period | $ | 4,832 | $ | 5,746 | $ | 4,019 | |||||
Accrual for warranties during the period, net | 2,203 | 3,672 | 7,383 | ||||||||
Actual costs incurred | (3,349 | ) | (4,586 | ) | (5,656 | ) | |||||
Balance at end of period | $ | 3,686 | $ | 4,832 | $ | 5,746 | |||||
Product warranty liability is included in accrued and other liabilities on the consolidated balance sheets.
Guarantees
In the ordinary course of business, the Company may provide standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by either the Company or its subsidiaries. The Company has not recorded any liability in connection with these guarantee arrangements. Based on historical experience and information currently available, the Company believes it will not be required to make any payments under these guarantee arrangements.
Note 12 INCOME TAXES
The components of income (loss) before income taxes were as follows:
Years Ended | ||||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||||||
(in thousands) | ||||||||||||
U.S. | $ | 25,648 | $ | (19,956 | ) | $ | 125,905 | |||||
Foreign | (26,161 | ) | 62,194 | 255,285 | ||||||||
Income (loss) before income taxes | $ | (513 | ) | $ | 42,238 | $ | 381,190 | |||||
The provision for (benefit from) income taxes consists of the following:
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Years Ended | ||||||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||||||||
(in thousands) | ||||||||||||||
Federal | Current | $ | 4,805 | $ | 10,378 | $ | 2,454 | |||||||
Deferred | (10,220 | ) | 4,501 | 5,982 | ||||||||||
State | Current | 35 | (5 | ) | 172 | |||||||||
Deferred | (124 | ) | (494 | ) | (2,064 | ) | ||||||||
Foreign | Current | 25,362 | 3,757 | 18,979 | ||||||||||
Deferred | 1,684 | (6,344 | ) | 40,677 | ||||||||||
Provision for income taxes | $ | 21,542 | $ | 11,793 | $ | 66,200 | ||||||||
The Company's effective tax rate differs from the U.S. Federal statutory income tax rate as follows:
Years Ended | |||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||
U.S. Federal statutory income tax rate | 35.00 | % | 35.00 | % | 35.00 | % | |||
State tax | 3.56 | (0.23 | ) | 0.22 | |||||
Effect of foreign operations | (3,979.63 | ) | (2.55 | ) | (15.52 | ) | |||
Recognition of tax credits | 875.54 | (10.04 | ) | (2.95 | ) | ||||
Change of valuation allowance | (295.93 | ) | 1.04 | (0.09 | ) | ||||
Audit settlements and IRS refunds | (828.85 | ) | — | 0.20 | |||||
Other, net (1) | (4.15 | ) | 4.70 | 0.51 | |||||
Effective tax provision rate | (4,194.46 | )% | 27.92 | % | 17.37 | % | |||
(1) | Other included items such as permanent differences, return to provision true up, withholding taxes, sale of business, and nondeductible stock compensation. |
For the year ended December 31, 2013, the effective tax rate was higher than the 35% U.S. Federal statutory rate, primarily due to a discrete tax reserve of $11.5 million related to an ongoing foreign audit and an income tax provision of $4.2 million as a result of a foreign audit settlement.
For the years ended December 31, 2012 and 2011, the significant components of the tax provision were from operations in jurisdictions with operating profits. The Company's effective tax rate for the years ended December 31, 2012 and 2011 was lower than the US federal statutory income tax rate of 35%, primarily due to income recognized in lower tax rate jurisdictions.
Deferred income taxes
The tax effects of temporary differences that constitute significant portions of the deferred tax assets and deferred tax liabilities are presented below:
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December 31, 2013 | December 31, 2012 | |||||||
(in thousands) | ||||||||
Deferred income tax assets: | ||||||||
Net operating losses | $ | 46,723 | $ | 53,500 | ||||
Research and development, foreign tax and other tax credits | 75,770 | 55,051 | ||||||
Accrued liabilities | 30,599 | 31,519 | ||||||
Fixed assets | 46,109 | 42,711 | ||||||
Intangible assets | 10,555 | 8,331 | ||||||
Deferred income | 5,261 | 5,007 | ||||||
Share-based compensation | 5,889 | 9,084 | ||||||
Unrealized foreign exchange translation | 1,109 | 4,801 | ||||||
Other | 970 | 4,878 | ||||||
Total deferred income tax assets | 222,985 | 214,882 | ||||||
Deferred income tax liabilities: | ||||||||
Fixed assets | — | (55 | ) | |||||
Deferred income | — | (846 | ) | |||||
Unremitted earnings of foreign subsidiaries | — | (2,548 | ) | |||||
Foreign losses subject to recapture | (12,054 | ) | (14,837 | ) | ||||
Other | — | (267 | ) | |||||
Total deferred tax liabilities | (12,054 | ) | (18,553 | ) | ||||
Less valuation allowance | (41,321 | ) | (41,271 | ) | ||||
Net deferred income tax assets | $ | 169,610 | $ | 155,058 | ||||
Reported as: | ||||||||
Current deferred tax assets(1) | $ | 35,493 | $ | 53,105 | ||||
Current deferred tax liabilities(2) | (208 | ) | (304 | ) | ||||
Non-current deferred tax assets(3) | 134,365 | 102,315 | ||||||
Non-current deferred tax liabilities(4) | (40 | ) | (58 | ) | ||||
Net deferred income tax assets | $ | 169,610 | $ | 155,058 | ||||
_________________________________________
(1) | Included within prepaids and other current assets on the consolidated balance sheets. |
(2) | Included within accrued and other liabilities on the consolidated balance sheets. |
(3) | Included within other assets on the consolidated balance sheets. |
(4) | Included within other long-term liabilities on the consolidated balance sheets. |
Similar to the Company's position during the fourth quarter of 2012, it concluded that it was more likely than not that it would be able to realize the benefit of a significant portion of its deferred tax assets in the future, except certain assets related to state and some foreign net operating losses and state tax credits, including R&D credit carryforwards. As a result, the Company continues to provide a full valuation allowance on the deferred tax assets relating to those items for year ended December 31, 2013.
As a result of certain realization requirements of the accounting standard for stock-based compensation, the table of deferred tax assets and liabilities shown above does not include deferred tax assets that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. The Company uses the "with and without" method to determine the order in which tax attributes are utilized. The Company only recognizes excess tax benefits from share-based awards in additional paid-in capital if an incremental tax benefit is realized from a reduction in taxes payable, after all other tax attributes currently available to the Company have been utilized. In addition, the Company accounts for the indirect effects of share-based awards on other tax attributes, such as research tax credits, through the consolidated statements of operations. The tax benefit realized from excess stock options exercised and restricted stock units vested during 2013 were $2.3 million.
As of December 31, 2013, income taxes were provided on the undistributed earnings in Atmel Munich, Atmel Rousset, Atmel Nantes, Atmel BV, Atmel Semiconductor Technology, Ozmo UK, Temic Semiconductor Test, Atmel Switzerland, and Atmel SARL. In determining the tax liability, the Company has accounted for potential gross-up of foreign taxes and expected foreign tax credits determined on the basis of U.S. tax rules governing earnings and profits computations in these jurisdictions. The Company continues to assert indefinite re-investment with respect to the earnings and profits of its other foreign subsidiaries (other than earnings subject to current U.S. tax under subpart F or Section 956 of the Internal Revenue Code) amounting to approximately
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$177.8 million as it is currently the Company's intention to reinvest these earnings indefinitely in operations outside the U.S. The Company estimates that its U.S. cash needs will be met from its prospective business operations and it will not need to repatriate cash (earnings) from its foreign jurisdictions to the U.S.
The Company's tax attribute carry forwards as of December 31, 2013 consist of the following:
Tax Attributes | December 31, 2013 | Nature of Expiration | |||
(in thousands) | |||||
Foreign net operating loss carry forwards | $ | 219,503 | beginning of 2014 | ||
Federal net operating loss carry forwards | $ | 19,336 | beginning of 2025 | ||
State net operating loss carry forwards | $ | 511,749 | 2014-2033 | ||
Federal R&D credits, net of those related to stock option deductions | $ | 9,925 | beginning of 2019 | ||
Federal R&D credits related to stock option deductions | $ | 32,171 | beginning of 2019 | ||
State R&D credits | $ | 18,605 | indefinite | ||
Foreign tax credits | $ | 45,583 | beginning of 2017 | ||
State investment tax credits | $ | 1,925 | beginning of 2014 | ||
Foreign R&D credits | $ | 44,344 | refundable | ||
The Company believes it may not be able to utilize portions of the net operating loss carry forwards in non-U.S. jurisdictions before they expire, starting in 2014.
Unrecognized tax benefits
The Company recognizes uncertain tax positions only to the extent that management believes that it is more-likely-than-not that the position will be sustained. The reconciliation of the beginning and ending amount of unrecognized tax benefits (UTBs) is as follows:
Years Ended | ||||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||||||
(in thousands) | ||||||||||||
Balance at January 1 | $ | 72,692 | $ | 67,967 | $ | 63,593 | ||||||
Tax Positions Related to Current Year: | ||||||||||||
Additions | 13,201 | 10,270 | 8,794 | |||||||||
Tax Positions Related to Prior Years: | ||||||||||||
Additions | 58,253 | 793 | — | |||||||||
Reductions | (13,836 | ) | (1,877 | ) | (568 | ) | ||||||
Lapse of statute of limitation | (7,152 | ) | (4,314 | ) | (1,672 | ) | ||||||
Settlements | (3,652 | ) | (147 | ) | (2,180 | ) | ||||||
Balance at December 31 | $ | 119,506 | $ | 72,692 | $ | 67,967 | ||||||
Included in the UTBs at December 31, 2013, 2012 and 2011, are $43.4 million, $27.2 million and $25.2 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of UTBs at December 31, 2013, 2012 and 2011, are $44.1 million, $45.5 million and $42.8 million, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred tax assets.
The table above includes UTBs associated with the refundable foreign R&D credits, including additions and reductions for income tax audits or expiration of the related statute of limitations.
Increases or decreases in UTBs could occur over the next twelve months due to tax law changes, UTBs established in the normal course of business, or the conclusion of ongoing tax audits in various jurisdictions around the world. The Company believes that before December 31, 2014, it is reasonably possible that either certain audits will conclude or the statutes of limitations relating to certain income tax examination periods will expire, or both. As such, after the Company reaches settlement with the tax authorities, the Company expects to record a corresponding adjustment to its UTBs. Given the uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, the range of estimated potential decreases in underlying uncertain tax positions is between $0 and $29.0 million in the next twelve months. The calculation of UTBs involves dealing with uncertainties in the application of complex global tax regulations. The Company regularly assesses its tax
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positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business.
Income tax audits
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2001 through 2013 tax years generally remain subject to examination by federal and most state tax authorities. For significant foreign jurisdictions, the 2001 through 2013 tax years generally remain subject to examination by their respective tax authorities.
During the fourth quarter of 2013, the Company was able to complete negotiations and to conclude a foreign income tax audit for years 2007 to 2009, primarily related to transfer pricing. As a result of the settlement of this audit, the Company recorded $4.2 million of income tax including interest and penalties.
In the year ended December 31, 2013, a foreign tax authority completed its field examination on tax year 2010 for one of the Company's foreign subsidiaries and issued a preliminary audit assessment report. The Company plans to file a protest with the appeal office of the foreign tax authority. The Company believes that its reserves for UTBs are adequate to cover any potential settlements that may result from this examination. However, given the unpredictable nature of the appeals process, it is reasonably possible that the Company's UTBs related to these tax positions could change within the next twelve months.
As of the date of this Form 10-K, the Company has tax audits in progress in various other foreign jurisdictions. To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the consolidated statements of operations. While the Company believes that the resolution of these audits will not have a material adverse impact on the Company's results of operations, the outcome is subject to uncertainty.
The Company's policy is to recognize interest and/or penalties related to income tax matters in its income tax provision. In the years ended December 31, 2013, 2012 and 2011, the Company recognized expense related to interest and penalties in the consolidated statements of operations of $2.8 million, $0.4 million and $0.5 million, respectively. The total amount of interest and penalties accrued on the consolidated balance sheets as of December 31, 2013 and 2012 was $1.8 million.
Note 13 PENSION PLANS
The Company sponsors defined benefit pension plans that cover substantially all of its French and German employees. Plan benefits are provided in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. The plans are unfunded. Pension liabilities and charges are based upon various assumptions, updated annually, including discount rates, future salary increases, employee turnover, and mortality rates.
The Company’s French pension plan provides for termination benefits paid to covered French employees only at retirement, and consists of approximately one to five months of salary. The Company’s German pension plan provides for defined benefit payouts for covered German employees following retirement.
The aggregate net pension expense relating to these two plans are as follows:
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
Service costs | $ | 1,795 | $ | 1,290 | $ | 1,289 | |||||
Interest costs | 1,430 | 1,447 | 1,326 | ||||||||
Amortization of actuarial loss (gain) | 376 | (55 | ) | 67 | |||||||
Settlement and other related gain | (59 | ) | (12 | ) | (726 | ) | |||||
Curtailment gain | (1,607 | ) | — | — | |||||||
Net pension period cost | $ | 1,935 | $ | 2,670 | $ | 1,956 | |||||
Settlement and other related gains for the years ended December 31, 2013 and 2012 were insignificant. Settlement and other related gains of $0.7 million for the year ended December 31, 2011 related to restructuring activity in the Company’s Rousset, France operations initiated in the second quarter of 2010. Curtailment gain of $1.6 million for the year ended December 31, 2013 related to restructuring activity in the Company’s Rousset and Nantes operations in France and was recorded as a credit to restructuring charges upon termination of the affected employees during the fourth quarter of 2013.
The change in projected benefit obligation and the accumulated benefit obligation, were as follows:
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December 31, 2013 | December 31, 2012 | ||||||
(in thousands) | |||||||
Projected benefit obligation at beginning of the year | $ | 40,621 | $ | 29,751 | |||
Service costs | 1,795 | 1,290 | |||||
Interest costs | 1,430 | 1,447 | |||||
Settlement | (59 | ) | (12 | ) | |||
Curtailment gain | (1,607 | ) | — | ||||
Actuarial (gain) loss | (3,460 | ) | 9,196 | ||||
Benefits paid | (322 | ) | (360 | ) | |||
Foreign currency exchange rate changes | 518 | (691 | ) | ||||
Projected benefit obligation at end of the year | $ | 38,916 | $ | 40,621 | |||
Accumulated benefit obligation at end of the year | $ | 35,761 | $ | 34,216 | |||
As the defined benefit plans are unfunded, the liability recognized on the consolidated balance sheets as of December 31, 2013 was $38.9 million, of which $0.5 million is included in accrued and other liabilities and $38.4 million is included in other long-term liabilities on the consolidated balance sheets. The liability recognized on the consolidated balance sheets as of December 31, 2012 was $40.6 million, of which $0.5 million is included in accrued and other liabilities and $40.1 million is included in other long-term liabilities on the consolidated balance sheets.
Actuarial assumptions used to determine benefit obligations for the plans were as follows:
Years Ended | |||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||
Assumed discount rate | 3.1-4.0% | 2.7-3.9% | 4.6-5.3% | ||
Assumed compensation rate of increase | 2.4-3.0% | 2.4-3.0% | 2.5-3.0% | ||
The discount rate is based on the quarterly average yield for Euros treasuries with a duration of 30 years, plus a supplement for corporate bonds (Euros, AA rating).
Future estimated expected benefit payments over the next 10 years are as follows:
Years Ending December 31: | |||
(in thousands) | |||
2014 | $ | 474 | |
2015 | 625 | ||
2016 | 695 | ||
2017 | 1,053 | ||
2018 | 905 | ||
2019 through 2023 | 9,614 | ||
$ | 13,366 | ||
The Company’s pension liability represents the present value of estimated future benefits to be paid.
With respect to the Company’s unfunded pension plans in Europe, for the year ended December 31, 2013, a change in assumed discount rate and compensation rate used to calculate the present value of pension obligation resulted in a decrease in pension liability of $2.9 million, which was recorded in accumulated other comprehensive income in stockholders’ equity.
The Company’s net pension period cost for 2014 is expected to be approximately $3.2 million. Cash funding for benefits paid was $0.3 million for the year ended December 31, 2013. The Company expects total contribution to these plans to be approximately $0.5 million in 2014.
Amounts recognized in accumulated other comprehensive income consist of net actuarial gain of $2.9 million and loss of $6.8 million at December 31, 2013 and 2012, respectively. Net actuarial gains are expected to be minimal and will be recognized
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as a component of net periodic pension benefit cost during 2014, which is included in accumulated other comprehensive income in the consolidated statements of stockholders’ equity as of December 31, 2013.
Note 14 OPERATING AND GEOGRAPHICAL SEGMENTS
The Company designs, develops, manufactures and sells semiconductor integrated circuit products. The Company’s segments represent management’s view of the Company’s businesses and how it allocates Company resources and measures performance of its major components. Each segment consists of product families with similar requirements for design, development and marketing. Each segment requires different design, development and marketing resources to produce and sell products. Atmel’s four operating and reportable segments are as follows:
• | Microcontrollers. This segment includes AVR 8-bit and 32-bit products, ARM based products, capacitive touch products, including maXTouch and QTouch, 8051 based products, XSense products and designated wireless products, including low power radio and SOC products that meet Zigbee and Wi-Fi specifications. |
• | Nonvolatile Memories. This segment includes electrically erasable programmable read-only ("EEPROM") and erasable programmable read-only memory (“EPROM”) devices. In the third quarter of 2012, the Company sold its Serial Flash product line. |
• | Radio Frequency (“RF”) and Automotive. This segment includes mixed signal, high voltage and connectivity products for automotive applications, RF identification products and foundry services. |
• | Application Specific Integrated Circuit (“ASIC”). This segment includes custom application specific integrated circuits designed to meet specialized single-customer requirements, including products that provide hardware security for embedded digital systems, application specific and standard products for aerospace applications, power management and secure cryptographic memory products. |
The Company evaluates segment performance based on revenue and income or loss from operations excluding non-recurring items. Because the Company’s segments reflect the manner in which management reviews its business, they necessarily involve subjective judgments that management believes are reasonable in light of the circumstances under which they are made. These judgments may change over time or may be modified to reflect new facts or circumstances. Segments may also be changed or modified to reflect products, technologies or applications that are newly created, or that change over time, or other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments.
Segments are defined by the products they design and sell. They do not sell to each other. The Company’s net revenue and segment (loss) income from operations for each reportable segment is as follows:
Information about Reportable Segments
Micro- Controllers | Nonvolatile Memories | RF and Automotive | ASIC | Total | |||||||||||||||
(in thousands) | |||||||||||||||||||
Year ended December 31, 2013 | |||||||||||||||||||
Net revenue from external customers | $ | 896,916 | $ | 114,264 | $ | 182,857 | $ | 192,410 | $ | 1,386,447 | |||||||||
Segment income (loss) from operations | (23,427 | ) | 16,005 | 21,837 | 55,243 | 69,658 | |||||||||||||
Year ended December 31, 2012 | |||||||||||||||||||
Net revenue from external customers | $ | 892,839 | $ | 170,736 | $ | 174,237 | $ | 194,298 | $ | 1,432,110 | |||||||||
Segment income (loss) from operations | 22,994 | 21,057 | (12,004 | ) | 42,496 | 74,543 | |||||||||||||
Year ended December 31, 2011 | |||||||||||||||||||
Net revenue from external customers | $ | 1,113,579 | $ | 255,683 | $ | 202,013 | $ | 231,778 | $ | 1,803,053 | |||||||||
Segment income from operations | 235,478 | 55,721 | 16,962 | 64,009 | 372,170 | ||||||||||||||
The Company's primary products are semiconductor integrated circuits, which it has concluded constitutes a group of similar products. Therefore, it is impracticable to differentiate the revenues from external customers for each product sold. The Company does not allocate assets by segment, as management does not use asset information to measure or evaluate a segment’s performance.
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Reconciliation of Segment Information to Consolidated Statements of Operations
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
Total segment income from operations | $ | 69,658 | $ | 74,543 | $ | 372,170 | |||||
Unallocated amounts: | |||||||||||
Acquisition-related charges | (5,534 | ) | (7,388 | ) | (5,408 | ) | |||||
Restructuring charges | (50,026 | ) | (23,986 | ) | (20,064 | ) | |||||
Recovery (impairment) of receivables due from foundry supplier | 600 | (6,495 | ) | — | |||||||
Settlement charges | (21,600 | ) | — | — | |||||||
Credit from reserved grant income | — | 10,689 | — | ||||||||
Gain on sale of assets | 4,430 | — | 35,310 | ||||||||
Consolidated income (loss) from operations | $ | (2,472 | ) | $ | 47,363 | $ | 382,008 | ||||
Geographic sources of revenue were as follows:
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
United States | $ | 192,878 | $ | 189,699 | $ | 249,887 | |||||
Germany | 199,298 | 175,930 | 237,777 | ||||||||
France | 26,270 | 28,343 | 31,231 | ||||||||
Japan | 41,533 | 51,141 | 57,376 | ||||||||
China, including Hong Kong | 417,617 | 451,642 | 531,561 | ||||||||
Singapore | 44,957 | 41,637 | 42,982 | ||||||||
South Korea | 142,476 | 178,547 | 223,967 | ||||||||
Taiwan | 51,830 | 67,806 | 135,650 | ||||||||
Rest of Asia-Pacific | 120,290 | 72,128 | 71,048 | ||||||||
Rest of Europe | 128,841 | 149,104 | 193,558 | ||||||||
Rest of the World | 20,457 | 26,133 | 28,016 | ||||||||
Total net revenue | $ | 1,386,447 | $ | 1,432,110 | $ | 1,803,053 | |||||
Net revenue is attributed to regions based on ship-to locations.
The Company had one distributor and one customer that accounted for 14% and 12%, respectively, of net revenue in the year ended December 31, 2013. The Company had one distributor and one customer that accounted for 12% and 10%, respectively, of net revenue in the year ended December 31, 2012. No single customer accounted for 10% or more of net revenue in the year ended December 31, 2011. One distributor accounted for 20% of accounts receivable at December 31, 2013 and no customer accounted for 10% or more of accounts receivable at December 31, 2013. Two distributors accounted for 14% and 12%, respectively, of accounts receivable at December 31, 2012 and one customer accounted for 10% of accounts receivable at December 31, 2012.
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Physical locations of tangible long-lived assets were as follows:
December 31, 2013 | December 31, 2012 | ||||||
(in thousands) | |||||||
United States | $ | 104,912 | $ | 85,044 | |||
Philippines | 50,472 | 61,594 | |||||
Germany | 24,244 | 17,602 | |||||
France | 17,249 | 28,000 | |||||
Rest of Asia-Pacific | 23,815 | 38,842 | |||||
Rest of Europe | 7,026 | 9,547 | |||||
Total | $ | 227,718 | $ | 240,629 | |||
Excluded from the table above are auction-rate securities of $1.1 million at December 31, 2013 and 2012, which are included in other assets on the consolidated balance sheets. Also excluded from the table above as of December 31, 2013 and 2012 are goodwill of $108.2 million and $104.4 million, respectively, intangible assets, net of $28.1 million and $27.3 million, respectively, and deferred income tax assets of $134.4 million and $102.3 million, respectively.
Note 15 SALE OF ASSETS
Gain on Sale of Assets
Years Ended | |||||||
December 31, 2013 | December 31, 2011 | ||||||
(in thousands) | |||||||
Serial Flash Product Line | $ | (4,430 | ) | $ | — | ||
Former San Jose Corporate Headquarters | — | (33,428 | ) | ||||
DREAM, France | — | (1,882 | ) | ||||
Total gain on sale of assets | $ | (4,430 | ) | $ | (35,310 | ) | |
Serial Flash Product Line
On September 28, 2012, the Company completed the sale of its Serial Flash product line. Under the terms of the sale agreement, the Company transferred assets to the buyer, who assumed certain liabilities, in return for cash consideration of $25.0 million. As part of the sale transactions, the Company has also granted the buyer an exclusive option to purchase the Company's remaining $7.0 million of Serial Flash inventory, of which the buyer fully exercised during the first quarter of 2013. As a result of the sale of that $7.0 million of remaining inventory, the Company recorded a gain of $4.4 million in 2013 to reflect receipt of payment upon exercise of the related purchase option and the completion of the sale of the Serial Flash product line.
Former San Jose Corporate Headquarters
On August 30, 2011, the Company completed the sale of its former San Jose corporate headquarters and adjacent parcels of land for an aggregate sale price of $48.5 million. The net book value of the properties sold was approximately $12.3 million on the closing date and the Company recorded a gain of $33.4 million in the year ended December 31, 2011, which is summarized below:
(in thousands) | |||
Sales price | $ | (48,500 | ) |
Net book value of assets transferred | 12,262 | ||
Transaction related costs | 2,810 | ||
Gain on sale of assets | $ | (33,428 | ) |
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DREAM
On February 15, 2011, the Company sold its DREAM business, including its French subsidiary, Digital Research in Electronics, Acoustics and Music SAS (DREAM), which sold custom-designed ASIC chips for karaoke and other entertainment machines, for $2.3 million. The Company recorded a gain of $1.9 million in 2011.
Note 16 RESTRUCTURING CHARGES
The following table summarizes the activity related to the accrual for restructuring charges detailed by event:
Q2'10 | Q2'12 | Q4'12 | Q1'13 | Q3'13 | Total 2013 Activity | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance at January 1, 2013 - Restructuring Accrual | $ | 439 | $ | 7,418 | $ | 8,365 | $ | — | $ | — | $ | 16,222 | |||||||||||
Charges (credits) - Employee termination costs, net of change in estimate | — | (13 | ) | (1,720 | ) | 44,084 | 2,043 | 44,394 | |||||||||||||||
Charges - Other | — | — | — | 453 | — | 453 | |||||||||||||||||
Payments - Employee termination costs | (158 | ) | (6,508 | ) | (6,400 | ) | (21,873 | ) | (723 | ) | (35,662 | ) | |||||||||||
Payments - Other | — | — | (229 | ) | (453 | ) | — | (682 | ) | ||||||||||||||
Foreign exchange (gain) loss | — | — | (16 | ) | 738 | (6 | ) | 716 | |||||||||||||||
Balance at December 31, 2013 - Restructuring Accrual | $ | 281 | $ | 897 | $ | — | $ | 22,949 | $ | 1,314 | $ | 25,441 | |||||||||||
Non-cash charges (see discussion below) | $ | — | $ | — | $ | 68 | $ | 5,111 | $ | — | $ | 5,179 | |||||||||||
Q3'08 | Q2'10 | Q2'12 | Q4'12 | Total 2012 Activity | |||||||||||||||
(in thousands) | |||||||||||||||||||
Balance at January 1, 2012 - Restructuring Accrual | $ | 301 | $ | 1,846 | $ | — | $ | — | $ | 2,147 | |||||||||
Charges - Employee termination costs, net of change in estimate | — | 924 | 11,724 | 10,843 | 23,491 | ||||||||||||||
Charges - Other | — | — | — | 495 | 495 | ||||||||||||||
Payments - Employee termination costs | (301 | ) | (1,902 | ) | (4,486 | ) | (2,973 | ) | (9,662 | ) | |||||||||
Foreign exchange (gain) loss | — | (429 | ) | 180 | — | (249 | ) | ||||||||||||
Balance at December 31, 2012 - Restructuring Accrual | $ | — | $ | 439 | $ | 7,418 | $ | 8,365 | $ | 16,222 | |||||||||
Q3'02 | Q2'08 | Q3'08 | Q1'09 | Q2'10 | Total 2011 Activity | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Balance at January 1, 2011 - Restructuring Accrual | $ | 1,592 | $ | 3 | $ | 460 | $ | 136 | $ | 1,286 | $ | 3,477 | |||||||||||
Charges (credits) - Employee termination costs, net of change in estimate | — | (3 | ) | — | — | 21,659 | 21,656 | ||||||||||||||||
Credits - Other | (1,592 | ) | — | — | — | — | (1,592 | ) | |||||||||||||||
Payments - Employee termination costs | — | — | — | — | (21,461 | ) | (21,461 | ) | |||||||||||||||
Payments - Other | — | — | — | (136 | ) | — | (136 | ) | |||||||||||||||
Currency translation adjustment | — | — | 15 | — | 1,165 | 1,180 | |||||||||||||||||
Foreign exchange gain | — | — | (174 | ) | — | (803 | ) | (977 | ) | ||||||||||||||
Balance at December 31, 2011 - Restructuring Accrual | $ | — | $ | — | $ | 301 | $ | — | $ | 1,846 | $ | 2,147 | |||||||||||
The Company records restructuring liabilities related to workforce reductions when the accounting recognition criteria are met and consistent with management's approval and commitment to the restructuring plans in each particular quarter. The
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restructuring plans identify the number of employees to be terminated, job classifications and functions, location and the date the plan is expected to be completed.
2013 Restructuring Charges
Restructuring charges were recorded in the first and third quarters of 2013. The charge in the first quarter of 2013 was primarily related to workforce reductions at our subsidiaries in Rousset, France ("Rousset"), Nantes, France (“Nantes”), and Heilbronn, Germany ("Heilbronn"). The charge in the third quarter of 2013 related primarily to workforce reduction in the U.S. and Norway.
Rousset and Nantes
In 2013, each of Rousset and Nantes restructured operations to further align operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. In connection with formulating this restructuring plan, during the first quarter of 2013, Rousset and Nantes each confidentially negotiated and developed “social plans” in coordination and consultation with their respective local Works Councils, subject to French law; these social plans set forth general parameters, terms and benefits for employee dismissals, both voluntary and involuntary. The restructuring charges related to Rousset and Nantes were $32.9 million, including net non-cash charges of $5.1 million. Total net non-cash charges comprised impairment charges of $6.7 million, which was partially offset by pension curtailment gain of $1.6 million, as discussed further below.
Substantially all of the affected employees ceased active service as of December 31, 2013. There were no significant changes to the plan and no material modifications or changes were made after implementation began.
The Company vacated a building in Rousset, France in September 2013. Due to ongoing restructuring activities, the Company evaluated the carrying value of this building and a building located in Greece which is also no longer used in operations. Based on this evaluation, the Company determined that the Rousset and Greece buildings with carrying amounts of $10.1 million and $2.7 million, respectively, were impaired and wrote them down to their estimated fair value of $5.0 million and $1.1 million, respectively. Total impairment charges of $6.7 million were recorded as restructuring expense. Fair value was based on independent third-party appraisal or estimated selling price.
As a result of these workforce reductions, the Company recognized pension curtailment gain of $1.6 million in the fourth quarter of 2013 upon termination of the affected employees. Such amount was recorded as a credit to the total restructuring expense in 2013.
Heilbronn
In 2013, Heilbronn, and a related site in Ulm, Germany, restructured operations to further align operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. In connection with formulating this restructuring plan, initial discussions with local Works Councils in Heilbronn and Ulm began in the first quarter of 2013. The restructuring charges related to Heilbronn were $15.8 million.
The Company anticipates all affected employees will cease active service on or before the end of the fourth quarter of 2014. The Company is not expecting significant changes to the plan or material modifications or changes after implementation.
The restructuring charges recorded in the first quarter of 2013 also included $0.9 million relating to U.S. and other countries.
U.S. and Norway
Restructuring charges recorded in 2013 were primarily related to workforce reductions in the U.S. and Norway amounting to $2.0 million. The workforce reductions were designed to further align operating expenses with macroeconomic conditions and revenue outlook, and to improve operational efficiency, competitiveness and business profitability. Restructuring charges related to these workforce reductions either were paid to affected employees after their dismissal dates in 2013 or, to the extent affected employees' dismissal dates are expected to occur in 2014, the Company anticipates payments in respect of these restructuring charges will be made after the actual scheduled dismissal date for those employees.
There have been no significant changes to the plan, and no material modifications or changes have been made after the implementation began.
2012 Restructuring Charges
Restructuring charges were recorded in the second and fourth quarters of 2012. The charge in the second quarter of 2012 related primarily to workforce reductions at the Company's subsidiaries in Heilbronn and in the U.S. The charge in the fourth quarter of 2012 related primarily to workforce reductions in the U.S. and at certain European and Asian subsidiaries.
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Heilbronn
In connection with formulating a workforce-reduction plan in Heilbronn, initial discussions with the local Works Council began in the first quarter of 2012. The workforce reduction was intended to improve Heilbronn's operating efficiency, competitiveness and business profitability. The restructuring charges recorded in 2012 related to Heilbronn were $8.5 million.
Substantially all of the affected employees ceased active service as of December 31, 2013. There were no significant changes to the plan and no material modifications or changes were made after implementation began.
U.S. and other locations
With respect to the restructuring charge recorded in the second quarter of 2012, the Company started formulating the underlying restructuring plan during the second quarter. With respect to the restructuring charge recorded in the fourth quarter of 2012, the Company started formulating the underlying restructuring plan during the third quarter. These workforce reductions were designed to further align the Company's global operating expenses with macroeconomic conditions and revenue outlooks, and to improve operational efficiency, competitiveness and business profitability. The restructuring charges recorded in 2012 related to U.S. and other locations were $14.6 million, including $0.5 million related to a building lease termination.
All affected employees have ceased active service. There were no significant changes to the plans and no material modifications or changes were made after implementation began.
2011 Restructuring Charges
Restructuring charges recorded in 2011 totaling $21.7 million were related to workforce reductions at the Company's subsidiary in Rousset. The reductions were part of an operational restructuring intended to reflect changes to, and significant deterioration in, Rousset's ASICs business and to improve competitiveness. Also, the Company recorded a restructuring credit of $1.6 million in 2011 in connection with the resolution of a litigation matter related to the Company's earlier sale of a manufacturing facility in Irving, Texas.
In connection with formulating the workforce-reduction plan, during the first quarter of 2011, Rousset confidentially negotiated and developed a “social plan” in coordination and consultation with the local Works Council, subject to French law. The social plan set forth general parameters, terms and benefits for employee dismissals, both voluntary and involuntary.
All affected employees have ceased active service. There were no significant changes to the plan and no material modifications or changes to the plan after implementation began.
Note 17 LOSS FROM EUROPEAN FOUNDRY ARRANGEMENTS
In December 2008, Atmel and a subsidiary entered into a take-or-pay agreement to purchase wafers from a European foundry that had acquired one of its former European manufacturing operations. In connection with the anticipated expiration of this agreement, the Company notified customers, in the fourth quarter of 2012, of its end-of-life process and requested that customers provide to the Company last-time-buy orders. To the extent that the Company believes it has excess wafers that remain after satisfying anticipated customer demand, the Company estimated a probable loss for those excess wafers, which was approximately $10.6 million. The Company, therefore, recorded a charge in that amount to cost of revenue in the consolidated statements of operations for the year ended December 31, 2012. During 2013, the Company recognized a charge to cost of revenue of $7.4 million, which comprised a write-off of excess wafers in the amount of $10.4 million and a write-off of wafer prepayment in the amount of $1.9 million, which were partially offset by a reduction of a previously recorded liability from a take-or-pay arrangement for $4.9 million. These transactions resulted from the insolvencies of two of the Company's foundry suppliers.
In June 2010, in connection with the sale of one of the Company's former European manufacturing operations, the Company leased facilities to the acquirer of those operations and has charged that acquirer rent and other occupancy costs. In the fourth quarter of 2012, the Company recorded a loss of $6.5 million on receivables from that tenant based on financial and other circumstances affecting the collectibility of those receivables, which is reflected under the caption of "impairment of receivables from foundry supplier" in the consolidated statements of operations for the year ended December 31, 2012.
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Note 18 NET INCOME (LOSS) PER SHARE
A reconciliation of the numerator and denominator of basic and diluted net income (loss) per share is as follows:
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands, except per share data) | |||||||||||
Net income (loss) | $ | (22,055 | ) | $ | 30,445 | $ | 314,990 | ||||
Weighted-average shares - basic | 427,460 | 433,017 | 455,629 | ||||||||
Dilutive effect of incremental shares and share equivalents | — | 4,565 | 7,044 | ||||||||
Weighted-average shares - diluted | 427,460 | 437,582 | 462,673 | ||||||||
Net income (loss) per share: | |||||||||||
Basic | |||||||||||
Net income (loss) per share - basic | $ | (0.05 | ) | $ | 0.07 | $ | 0.69 | ||||
Diluted | |||||||||||
Net income (loss) per share - diluted | $ | (0.05 | ) | $ | 0.07 | $ | 0.68 | ||||
The following table summarizes securities that were not included in the “Weighted-average shares - diluted” used for calculation of diluted net income (loss) per share, as their effect would have been anti-dilutive:
Years Ended | ||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||
(in thousands) | ||||||||
Employee stock options and restricted stock units outstanding | 11,860 | 4,718 | 1,977 | |||||
Note 19 INTEREST AND OTHER (EXPENSE) INCOME, NET
Interest and other (expense) income, net, are summarized in the following table:
Years Ended | |||||||||||
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
(in thousands) | |||||||||||
Interest and other income (expense) | $ | 1,911 | $ | (1,358 | ) | $ | 177 | ||||
Interest expense | (2,208 | ) | (4,130 | ) | (7,028 | ) | |||||
Foreign exchange transaction gains | 2,256 | 363 | 6,033 | ||||||||
Total | $ | 1,959 | $ | (5,125 | ) | $ | (818 | ) | |||
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Atmel Corporation:
We have audited the accompanying consolidated balance sheets of Atmel Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts as set forth under Item 15(a)(2). We also have audited the Company's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements, financial statement schedule, and an opinion on the Company's internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Atmel Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Atmel Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Santa Clara, California
February 28, 2014
89
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Atmel Corporation:
In our opinion, the consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2011 present fairly, in all material respects, the results of operations and cash flows of Atmel Corporation and its subsidiaries (the “Company") for the year ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) for the year ended December 31, 2011 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements 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, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 28, 2012
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Schedule II
ATMEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2013, 2012 and 2011
Balance at Beginning of Year | Charges (Credits) to Expense | Deductions- Write-offs | Balance at End of Year | ||||||||||||
(in thousands) | |||||||||||||||
Allowance for doubtful accounts receivable: | |||||||||||||||
Year ended December 31, 2013 | $ | 11,005 | $ | (22 | ) | $ | (9,057 | ) | $ | 1,926 | |||||
Year ended December 31, 2012 | $ | 11,833 | $ | (18 | ) | $ | (810 | ) | $ | 11,005 | |||||
Year ended December 31, 2011 | $ | 11,847 | $ | (14 | ) | $ | — | $ | 11,833 | ||||||
Valuation/Allowance for deferred tax assets: | |||||||||||||||
Year ended December 31, 2013 | $ | 41,271 | $ | 3,402 | $ | (3,352 | ) | $ | 41,321 | ||||||
Year ended December 31, 2012 | $ | 38,742 | $ | 2,935 | $ | (406 | ) | $ | 41,271 | ||||||
Year ended December 31, 2011 | $ | 85,755 | $ | (47,013 | ) | $ | — | $ | 38,742 | ||||||
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UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following tables set forth a summary of the Company’s quarterly financial information for each of the four quarters for the years ended December 31, 2013 and 2012:
Year Ended December 31, 2013(1) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
(in thousands, except for per share data) | ||||||||||||||||
Net revenue | $ | 329,143 | $ | 347,816 | $ | 356,268 | $ | 353,220 | ||||||||
Gross profit | $ | 131,305 | $ | 147,925 | $ | 143,467 | $ | 150,928 | ||||||||
Net income (loss) | $ | (47,667 | ) | $ | 12,976 | $ | 5,426 | $ | 7,210 | |||||||
Basic net income (loss) per share: | ||||||||||||||||
Net income (loss) per share | $ | (0.11 | ) | $ | 0.03 | $ | 0.01 | $ | 0.02 | |||||||
Weighted-average shares used in basic net income (loss) per share calculations | 428,999 | 428,239 | 426,621 | 426,021 | ||||||||||||
Diluted net income (loss) per share: | ||||||||||||||||
Net income (loss) per share | $ | (0.11 | ) | $ | 0.03 | $ | 0.01 | $ | 0.02 | |||||||
Weighted-average shares used in diluted net income (loss) per share calculations | 428,999 | 430,536 | 429,639 | 428,008 | ||||||||||||
Year Ended December 31, 2012(2) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
(in thousands, except for per share data) | ||||||||||||||||
Net revenue | $ | 357,837 | $ | 368,200 | $ | 360,990 | $ | 345,083 | ||||||||
Gross profit | $ | 152,367 | $ | 161,887 | $ | 155,526 | $ | 131,539 | ||||||||
Net income (loss) | $ | 20,387 | $ | 754 | $ | 21,636 | $ | (12,332 | ) | |||||||
Basic net income (loss) per share: | ||||||||||||||||
Net income (loss) per share | $ | 0.05 | $ | 0.00 | $ | 0.05 | $ | (0.03 | ) | |||||||
Weighted-average shares used in basic net income (loss) per share calculations | 440,265 | 433,616 | 430,845 | 429,312 | ||||||||||||
Diluted net income (loss) per share: | ||||||||||||||||
Net income (loss) per share | $ | 0.05 | $ | 0.00 | $ | 0.05 | $ | (0.03 | ) | |||||||
Weighted-average shares used in diluted net income (loss) per share calculations | 444,927 | 436,851 | 433,295 | 429,312 | ||||||||||||
(1) | The Company recorded restructuring charges (credits) of $(1.5) million, $8.1 million, $0.6 million and $42.8 million in the quarters ended December 31, 2013, September 30, 2013, June 30, 2013 and March 31, 2013, respectively. The Company recorded acquisition-related charges (credits) of $(0.2) million, $1.7 million, $1.8 million and $2.3 million in the quarters ended December 31, 2013, September 30, 2013, June 30, 2013 and March 31, 2013, respectively. The Company recorded a settlement charge of $21.6 million and a gain of $4.4 million from sale of its Serial Flash product line in the quarter ended March 31, 2013. The Company recorded a (gain) loss related to a foundry arrangement of $(1.5) million and $8.9 million in the quarters ended June 30, 2013 and September 30, 2013, respectively. The Company recorded a loss from manufacturing facility damage and shutdown of $2.2 million in the quarter ended December 31, 2013. |
(2) | The Company recorded restructuring charges (credits) of $11.0 million, $(1.4) million and $14.4 million in the quarters ended December 31, 2012, September 30, 2012 and June 30, 2012, respectively. The Company recorded acquisition-related charges of $1.9 million, $1.5 million, $2.0 million and $2.0 million in the quarters ended December 31, 2012, September 30, 2012, June 30, 2012 and March 31, 2012, respectively. The Company recorded a loss related to a foundry arrangement of $10.6 million and an impairment of receivables from a foundry supplier of $6.5 million in the quarter ended December 31, 2012. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
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Evaluation of Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-K, under the supervision of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934 (“Disclosure Controls”). Based on this evaluation our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-K to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013. This evaluation was based on the framework in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using the criteria in Internal Control - Integrated Framework (1992), we concluded that our internal control over financial reporting was effective as of December 31, 2013.
The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by KPMG LLP, our independent registered public accounting firm, as stated in their report which appears in Item 8 of this Form 10-K.
Limitations on the Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Atmel have been detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE MATTERS
Executive Officers of the Registrant
The corporate executive officers of Atmel, who are elected by and serve at the discretion of the Board of Directors, and their ages (as of January 31, 2014), are as follows:
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Name | Age | Position |
Steven Laub | 55 | President, Chief Executive Officer |
Tsung-Ching Wu | 63 | Executive Vice President, Office of the President and Director |
Steve Skaggs | 51 | Senior Vice President, Chief Financial Officer |
Scott Wornow | 51 | Senior Vice President, Chief Legal Officer and Secretary |
Robert Valiton | 50 | Senior Vice President, RF and Automotive and Nonvolatile Memory Segments |
Hugo De La Torre | 53 | Vice President, Chief Accounting Officer |
Steven Laub has served as a director of Atmel since February 2006 and as President and Chief Executive Officer since August 2006. From 2005 to August 2006, Mr. Laub was a technology partner at Golden Gate Capital Corporation, a private equity buyout firm, and the Executive Chairman of Teridian Semiconductor Corporation, a fabless semiconductor company. From 2004 to 2005, Mr. Laub was President and Chief Executive Officer of Silicon Image, Inc., a provider of semiconductor solutions. Prior to that time, Mr. Laub spent 13 years in executive positions (including President, Chief Operating Officer and member of the Board of Directors) at Lattice Semiconductor Corporation, a supplier of programmable logic devices and related software. Prior to joining Lattice Semiconductor, Mr. Laub was a vice president and partner at Bain and Company, a global strategic consulting firm. Mr. Laub holds a degree in economics from the University of California, Los Angeles (BA) and a degree from Harvard Law School (J.D.).
Tsung-Ching Wu has served as a director of Atmel since 1985, as Executive Vice President, Office of the President since 2001, and served as Executive Vice President and General Manager from January 1996 to January 2001 and as Vice President, Technology from January 1986 to January 1996. Mr. Wu holds degrees in electrical engineering from the National Taiwan University (B.S.), the State University of New York at Stony Brook (M.S.) and the University of Pennsylvania (Ph.D.).
Steve Skaggs joined Atmel in 2010 and served as Senior Vice President, Corporate Strategy and Development until his appointment as Interim Chief Financial Officer in April 2013. In May 2013, Mr. Skaggs was permanent Senior Vice President & Chief Financial Officer. Prior to joining Atmel, Mr. Skaggs worked at Lattice Semiconductor, where he served as President and CEO and also as CFO. Prior to Lattice, Mr. Skaggs was employed by Bain & Company, an international strategic consulting firm, where he specialized in high technology product strategy, mergers and acquisitions and corporate restructurings. He holds an MBA degree from the Harvard Business School and a BS degree in Chemical Engineering from the University of California, Berkeley.
Scott Wornow has served as Atmel’s Senior Vice President, Chief Legal Officer and Corporate Secretary since November 2010. Prior to joining Atmel, Mr. Wornow served as a Partner at Baker Botts, LLP from March 2009 to November 2010, and as a Partner at Goodwin Procter LLP from January 2008 to February 2009. Prior to Goodwin Procter, Mr. Wornow was the Executive Vice President, Legal and Business Affairs at OpenTV Corp from 2003 to 2007. Mr. Wornow holds degrees from the University of Virginia (B.A.), Cambridge University (B.A. and M.A.) and Harvard Law School (J.D.).
Robert Valiton has served as Atmel’s Senior Vice President, General Manager since March 2011. Prior to that, Mr. Valiton served as Vice President of Sales for Americas, EMEA and Global Sales Operations from December 2008 to March 2011 and as Vice President of Americas Sales and Global Sales Operations from April 2007 to December 2008. Prior to joining Atmel, Mr. Valiton spent 15 years with other semiconductor manufacturing companies in a variety of sales management positions. Mr. Valiton holds a degree from the University of Massachusetts at Lowell (B.S).
Hugo De La Torre joined Atmel in August 2013. Prior to joining Atmel, Mr. De La Torre served as Vice President of Finance and Corporate Controller of Cypress Semiconductor Corporation from August 2008 to August 2013. From May 2006 until August 2008, Mr. De La Torre served as Senior Director and Corporate Controller of Cypress Semiconductor. Prior to joining Cypress Semiconductor in 2006, Mr. De La Torre served as Senior Manager, External Reporting at Sun Microsystems, Inc. Prior to joining Sun Microsystems in 2003, Mr. De La Torre worked as a Certified Public Accountant at PricewaterhouseCoopers and, before that, at Arthur Andersen. Mr. De La Torre earned a B.S. degree in business administration from the California State University at Los Angeles. Mr. De La Torre is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the California State Society of Certified Public Accountants.
There is no family relationship between any of our executive officers or directors.
The other information required by this Item regarding directors, Section 16 filings, the Registrant’s Audit Committee and our Code of Ethics/Standards of Business Conduct is set forth under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance — Board Meetings and Committees — Audit Committee” and “Corporate Governance — Code of Ethics/Standards of Business Conduct” in the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders (the “2014 Proxy Statement”), and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item regarding compensation of the Registrant’s directors and executive officers is set forth under the captions “Executive Compensation,” “Executive Compensation - Compensation Committee Report” and “Corporate
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Governance - Compensation Committee Interlocks and Insider Participation” in the 2014 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this Item regarding beneficial ownership of the Registrant’s Common Stock by certain beneficial owners and management of Registrant, as well as equity compensation plans, is set forth under the captions “Security Ownership” and “Executive Compensation - Equity Compensation Plan Information” in the 2014 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this Item regarding certain relationships and related transactions with management and director independence is set forth under the caption “Certain Relationships and Related Transactions” and “Corporate Governance — Independence of Directors” in the 2014 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item regarding principal accounting fees and services is set forth under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm - Fees of Company Auditors, KPMG LLP Incurred by Atmel” in the 2014 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of, or incorporated by reference into, this Form 10-K:
1. Financial Statements. See Index to Consolidated Financial Statements under Item 8 of this Form 10-K.
2. Financial Statement Schedules. See Index to Consolidated Financial Statements under Item 8 of this Form 10-K.
3. Exhibits. We have filed, or incorporated into this Form 10-K by reference, the exhibits listed on the accompanying Exhibit Index immediately following the signature page of this Form 10-K.
(b) Exhibits. See Item 15(a)(3) above.
(c) Financial Statement Schedules. See Item 15(a)(2) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ATMEL CORPORATION | ||
February 28, 2014 | By: | /s/ STEVEN LAUB |
Steven Laub President & Chief Executive Officer | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven Laub and Steve Skaggs, and each of them, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on February 28, 2014 on behalf of the Registrant and in the capacities indicated:
Signature | Title | ||||
s/ STEVEN LAUB | President & Chief Executive Officer (principal executive officer) | ||||
Steven Laub | |||||
/s/ STEVE SKAGGS | Senior Vice President & Chief Financial Officer (principal financial officer) | ||||
Steve Skaggs | |||||
/s/ HUGO DE LA TORRE | Vice President & Chief Accounting Officer (principal accounting officer) | ||||
Hugo De La Torre | |||||
Director | |||||
Tsung-Ching Wu | |||||
/s/ DR. EDWARD ROSS | Director | ||||
Dr. Edward Ross | |||||
/s/ DAVID SUGISHITA | Director | ||||
David Sugishita | |||||
/s/ PAPKEN DER TOROSSIAN | Director | ||||
Papken Der Torossian | |||||
/s/ JACK L. SALTICH | Director | ||||
Jack L. Saltich | |||||
/s/ CHARLES CARINALLI | Director | ||||
Charles Carinalli | |||||
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EXHIBITS INDEX
The following Exhibits have been filed with, or incorporated by reference into, this Report:
3.1 | Restated Certificate of Incorporation of Registrant (which is incorporated herein by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on February 8, 2010). |
3.2 | Amended and Restated Bylaws of Registrant (which is incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on April 14, 2009). |
3.3 | Certificate of Elimination of Series A Preferred Stock (which is incorporated herein by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on February 8, 2010). |
10.1+ | Form of Indemnification Agreement between Registrant and its officers and directors (which is incorporated herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Commission File No. 0-19032). |
10.2+ | Atmel Corporation 2010 Employee Stock Purchase Plan (which is incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on May 25, 2010). |
10.3+ | 2005 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on May 20, 2011), as amended by Amendment No.1 (which is incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on May 15, 2013. |
10.4+ | 2005 Stock Plan forms of option agreement (which is incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Commission File No. 0-19032). |
10.5+ | 2005 Stock Plan forms of restricted stock unit agreement (which is incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Commission File No. 0-19032). |
10.6+ | 2005 Stock Plan forms of performance restricted stock unit agreement (which is incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Commission File No. 0-19032). |
10.7+ | Stock Option Fixed Exercise Date Forms (which are incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on January 8, 2007 and Exhibit 10.1 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on April 15, 2008). |
10.8+ | Amendment and Restatement of Employment Agreement, effective as of May 31, 2009 and dated as of June 3, 2009, between Registrant and Steven Laub (which is incorporated herein by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Commission File No. 0-19032). |
10.9+ | Amendment No. 1 to Amended Employment Agreement between Registrant and Steven Laub dated as of October 25, 2011 (which is incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, Commission File No. 0-19032). |
10.10+ | Change of Control and Severance Plan (which is incorporated herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, Commission File No. 0-19032) |
10.11+ | Description of Fiscal 2013 Executive Bonus Plan (which is incorporated herein by reference to Item 5.02 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on May 16, 2013. |
10.12 | Office Lease between Registrant and CA-Skyport III Limited Partnership dated as of August 30, 2011 (which is incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, Commission File No. 0-19032). |
10.13+ | 2011 Long-Term Performance-Based Incentive Plan (which is incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, Commission File No. 0-19032). |
10.14+ | Description of 2014 Long-Term Performance Incentive Plan (which is incorporated by reference to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on December 23, 2013. |
10.15 | Credit Agreement dated as of December 6, 2013, among Atmel Corporation, the Lenders party thereto, Morgan Stanley Senior Funding, Inc. as Administrative Agent and Union Bank N.A., BNP Paribas and SunTrust Bank as co-syndication agents (which is incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (Commission File No. 0-19032) filed on December 12, 2013. |
21.1 | Subsidiaries of Registrant |
23.1 | Consent of KPMG LLP, Independent Registered Public Accounting Firm |
23.2 | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm |
24.1 | Power of Attorney (included on the signature pages hereof) |
31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a). |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | XBRL Taxonomy Definition Linkbase |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
_________________________________________
+ Indicates management compensatory plan, contract or arrangement
* Portions of this exhibit have been omitted pursuant to a request for confidential treatment granted by the Commission.
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