XLON:0JQR Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarter ended March 31, 2012

 

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

(Registrant)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

77-0051991
(I.R.S. Employer
Identification Number)

 

2325 Orchard Parkway San Jose, California 95131

(Address of principal executive offices)

 

(408) 441-0311

(Registrant’s telephone number)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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

 

On April 30, 2012, the Registrant had 443,774,976 outstanding shares of Common Stock.

 

 

 



Table of Contents

 

ATMEL CORPORATION

FORM 10-Q

QUARTER ENDED MARCH 31, 2012

 

 

Page

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

3

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

4

CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2012 AND DECEMBER 31, 2011

5

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

31

ITEM 4. CONTROLS AND PROCEDURES

32

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

32

ITEM 1A. RISK FACTORS

33

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

48

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

49

ITEM 4. MINE SAFETY DISCLOSURES

49

ITEM 5. OTHER INFORMATION

49

ITEM 6. EXHIBITS

49

SIGNATURES

50

EXHIBITS

51

 

2



Table of Contents

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Atmel Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands, except per share data)

 

Net revenue

 

$

357,837

 

$

461,427

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

Cost of revenue

 

205,470

 

226,042

 

Research and development

 

66,289

 

62,383

 

Selling, general and administrative

 

69,855

 

70,786

 

Acquisition-related charges

 

1,956

 

1,031

 

Restructuring charges

 

 

21,210

 

Credit from reserved grant income

 

(10,689

)

 

Gain on sale of assets

 

 

(1,882

)

Total operating expenses

 

332,881

 

379,570

 

Income from operations

 

24,956

 

81,857

 

Interest and other (expense) income, net

 

(224

)

2,491

 

Income before income taxes

 

24,732

 

84,348

 

Provision for income taxes

 

(4,345

)

(9,795

)

Net income

 

$

20,387

 

$

74,553

 

 

 

 

 

 

 

Basic net income per share:

 

 

 

 

 

Net income per share

 

$

0.05

 

$

0.16

 

Weighted-average shares used in basic net income per share calculations

 

440,265

 

456,489

 

Diluted net income per share:

 

 

 

 

 

Net income per share

 

$

0.05

 

$

0.16

 

Weighted-average shares used in diluted net income per share calculations

 

444,927

 

470,022

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

 

Atmel Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

Net income

 

$

20,387

 

$

74,553

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

4,124

 

120

 

Actuarial (loss) gain related to defined benefit pension plans

 

(1,119

)

544

 

Unrealized gains on investments

 

4,799

 

166

 

Other comprehensive income

 

7,804

 

830

 

Total comprehensive income

 

$

28,191

 

$

75,383

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

 

Atmel Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands, except par value)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

288,362

 

$

329,431

 

Short-term investments

 

10,754

 

3,079

 

Accounts receivable, net of allowance for doubtful accounts of $11,916 and $11,833, respectively

 

204,984

 

212,929

 

Inventories

 

357,474

 

377,433

 

Prepaids and other current assets

 

89,294

 

116,929

 

Total current assets

 

950,868

 

1,039,801

 

Fixed assets, net

 

248,585

 

257,070

 

Goodwill

 

67,374

 

67,662

 

Intangible assets, net

 

18,323

 

20,594

 

Other assets

 

143,011

 

141,471

 

Total assets

 

$

1,428,161

 

$

1,526,598

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Trade accounts payable

 

$

82,745

 

$

76,445

 

Accrued and other liabilities

 

156,134

 

207,118

 

Deferred income on shipments to distributors

 

37,619

 

47,620

 

Total current liabilities

 

276,498

 

331,183

 

Other long-term liabilities

 

115,284

 

112,971

 

Total liabilities

 

391,782

 

444,154

 

 

 

 

 

 

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

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: 435,441 at March 31, 2012 and 442,389 at December 31, 2011

 

435

 

442

 

Additional paid-in capital

 

920,898

 

995,147

 

Accumulated other comprehensive income

 

17,252

 

9,448

 

Retained earnings

 

97,794

 

77,407

 

Total stockholders’ equity

 

1,036,379

 

1,082,444

 

Total liabilities and stockholders’ equity

 

$

1,428,161

 

$

1,526,598

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

 

Atmel Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

20,387

 

$

74,553

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

18,610

 

19,744

 

Non-cash losses (gains) on sale of fixed assets, net

 

365

 

(1,882

)

Other non-cash gains, net

 

(764

)

(4,510

)

Provision for doubtful accounts receivable

 

83

 

45

 

Accretion of interest on long-term debt

 

330

 

183

 

Stock-based compensation expense

 

19,327

 

18,889

 

Excess tax benefit on stock-based compensation

 

(971

)

(3,293

)

Non-cash acquisition-related and other charges

 

1,317

 

 

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

Accounts receivable

 

7,863

 

6,546

 

Inventories

 

20,000

 

(42,256

)

Current and other assets

 

21,497

 

(4,890

)

Trade accounts payable

 

13,779

 

7,779

 

Accrued and other liabilities

 

(51,217

)

13,012

 

Deferred income on shipments to distributors

 

(10,001

)

(9,807

)

Net cash provided by operating activities

 

60,605

 

74,113

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisitions of fixed assets

 

(7,386

)

(30,851

)

Proceeds from the sale of business, net of cash

 

 

1,597

 

Acquisition of businesses, net of cash

 

 

(819

)

Acquisitions of intangible assets

 

(1,000

)

(1,000

)

Sales or maturities of marketable securities

 

1,000

 

3,742

 

Net cash used in investing activities

 

(7,386

)

(27,331

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Principal payments on debt

 

 

(79

)

Repurchase of common stock

 

(96,175

)

(85,231

)

Proceeds from issuance of common stock

 

7,747

 

14,951

 

Tax payments related to shares withheld for vested restricted stock units

 

(5,433

)

(5,919

)

Excess tax benefit on stock-based compensation

 

971

 

3,293

 

Net cash used in financing activities

 

(92,890

)

(72,985

)

Effect of exchange rate changes on cash and cash equivalents

 

(1,398

)

5,507

 

Net decrease in cash and cash equivalents

 

(41,069

)

(20,696

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

329,431

 

501,455

 

Cash and cash equivalents at end of the period

 

$

288,362

 

$

480,759

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

 

Atmel Corporation

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

These unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to state fairly, in all material respects, the financial position of Atmel Corporation (the “Company” or “Atmel”) and its subsidiaries as of March 31, 2012 and the results of operations, comprehensive income and cash flows for the three months ended March 31, 2012 and 2011. All intercompany balances have been eliminated. Because all of the disclosures required by U.S. generally accepted accounting principles are not included, as permitted by the rules of the Securities and Exchange Commission (the “SEC”), these interim condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The December 31, 2011 year-end condensed balance sheet data was derived from the Company’s audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and does not include all of the disclosures required by U.S. generally accepted accounting principles. The condensed consolidated statements of operations for the periods presented are not necessarily indicative of results to be expected for any future period, or for the entire year.

 

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 provisions for excess and obsolete inventory, sales return reserves and allowances, stock-based compensation expense, allowances for doubtful accounts receivable, warranty reserves, estimates for useful lives associated with long-lived assets, recoverability of goodwill and intangible assets, restructuring (credits) charges, liabilities for uncertain tax positions and deferred tax asset valuation allowances. Actual results could differ materially from those estimates.

 

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, which determination requires an estimation of the future demand for the Company’s products, which 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 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.

 

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Table of Contents

 

Inventories are comprised of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Raw materials and purchased parts

 

$

25,704

 

$

23,415

 

Work-in-progress

 

239,895

 

251,933

 

Finished goods

 

91,875

 

102,085

 

 

 

$

357,474

 

$

377,433

 

 

Grant Recognition

 

From time to time, the Company receives 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 expenditures and other covenants 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 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 covenants 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, a ministerial decision of the Greek government was executed related to outstanding state grants 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 it would not be required to repay the full amount of the grant made by the Greek government to the Company’s Greek subsidiary. As a result, the Company recognized a benefit of $10.7 million in its results for the three month period ended March 31, 2012 resulting from the reversal of a reserve previously established for that grant.

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (ASC Topic 220) — Presentation of Comprehensive Income. The amendments from this update will result in more converged guidance on how comprehensive income is presented under U.S. GAAP and International Financial Reporting Standards (“IFRS”). With this update to ASC 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either option, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it affect how earnings per share is calculated or presented. Previously, U.S. GAAP allowed reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One such alternative was to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This ASU eliminates that option. The amended guidance also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011 the FASB decided to defer the requirement to present reclassifications of other comprehensive income on the face of the income statement. The Company’s adoption of this guidance as of January 1, 2012 did not have a material impact on its condensed consolidated financial position, results of operations or cash flows.

 

Note 2 INVESTMENTS

 

Investments at March 31, 2012 and December 31, 2011 are primarily comprised of corporate equity securities, U.S. and foreign corporate debt securities, guaranteed variable annuities 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 condensed 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 condensed consolidated statement of operations in the period such determination is made. Gross realized gains or losses are recorded based on the specific identification method. For the three months ended March 31, 2012 and 2011, the Company’s gross realized gains or losses on short-term investments were insignificant. The Company’s investments are further detailed in the table below:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Adjusted Cost

 

Fair Value

 

Adjusted Cost

 

Fair Value

 

 

 

(in thousands)

 

Corporate equity securities

 

$

3,936

 

$

8,716

 

$

 

$

 

Auction-rate securities

 

2,220

 

2,251

 

2,220

 

2,251

 

Corporate debt securities and other obligations

 

2,039

 

2,038

 

3,099

 

3,079

 

 

 

$

8,195

 

$

13,005

 

$

5,319

 

$

5,330

 

Unrealized gains

 

4,811

 

 

 

31

 

 

 

Unrealized losses

 

(1

)

 

 

(20

)

 

 

Net unrealized gains

 

4,810

 

 

 

11

 

 

 

Fair value

 

$

13,005

 

 

 

$

5,330

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount included in short-term investments

 

 

 

$

10,754

 

 

 

$

3,079

 

Amount included in other assets

 

 

 

2,251

 

 

 

2,251

 

 

 

 

 

$

13,005

 

 

 

$

5,330

 

 

In September 2010, in connection with the sale of the Company’s smart card business in France to INSIDE Secure (“INSIDE”), the Company received an equity interest in INSIDE, which was privately-held at the time of the investment.  In February 2012, INSIDE successfully completed an initial public offering on the NYSE Euronext stock exchange in Paris.  As a result of that public offering, the Company reclassified its investment in INSIDE to short-term investments from other assets and now accounts for this investment as available for sale. Accordingly, an unrealized gain of $4.8 million was recorded in accumulated other comprehensive income in the three months ended March 31, 2012.

 

For the three months ended March 31, 2012, auctions for auction-rate securities held by the Company have continued to fail and as a result these securities continued to be illiquid. The Company concluded that $2.2 million (adjusted cost) of these securities are unlikely to be liquidated within the next twelve months and classified these securities as long-term investments, which are included in other assets on the condensed consolidated balance sheets.

 

Contractual maturities (at adjusted cost) of available-for-sale debt securities as of March 31, 2012, were as follows:

 

 

 

(in thousands)

 

Due within one year

 

$

2,039

 

Due in 1-5 years

 

 

Due in 5-10 years

 

 

Due after 10 years

 

2,220

 

Total

 

$

4,259

 

 

Atmel has classified all investments with original maturity dates of 90 days or more as short-term as it has the ability and intent to redeem 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 condensed consolidated balance sheets.

 

Note 3 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).” This accounting standard establishes a consistent framework for measuring fair value and expands disclosure requirements about 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 table below presents the balances of investments measured at fair value on a recurring basis at March 31, 2012:

 

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Table of Contents

 

 

 

March 31, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,246

 

$

1,246

 

$

 

$

 

Short-term investments

 

 

 

 

 

 

 

 

 

Corporate equity securities

 

8,716

 

8,716

 

 

 

Corporate debt securities, including government-backed securities

 

2,038

 

 

2,038

 

 

Other assets

 

 

 

 

 

 

 

 

 

Auction-rate securities

 

2,251

 

 

 

2,251

 

Deferred compensation plan assets

 

5,712

 

5,712

 

 

 

Total

 

$

19,963

 

$

15,674

 

$

2,038

 

$

2,251

 

 

The table below presents the balances of investments measured at fair value on a recurring basis at December 31, 2011:

 

 

 

December 31, 2011

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

Money market funds

 

$

18,164

 

$

18,164

 

$

 

$

 

Short-term investments

 

 

 

 

 

 

 

 

 

Corporate debt securities, including U.S. government-backed securities

 

3,079

 

 

3,079

 

 

Other assets

 

 

 

 

 

 

 

 

 

Auction-rate securities

 

2,251

 

 

 

2,251

 

Deferred compensation plan assets

 

4,899

 

4,899

 

 

 

Total

 

$

28,393

 

$

23,063

 

$

3,079

 

$

2,251

 

 

The Company’s investments, with the exception of auction-rate securities, are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. 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. The types of instruments valued based on other observable inputs include corporate debt securities and other obligations. Such instruments are generally classified within Level 2 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 total assets as of March 31, 2012.

 

There were no changes in Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2012 and the year ended December 31, 2011.

 

Note 4 STOCKHOLDERS’ EQUITY

 

Stock-Based Compensation

 

The following table summarizes the distribution of stock-based compensation expense by function for the three months ended March 31, 2012 and 2011:

 

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Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Cost of revenue

 

$

2,255

 

$

2,293

 

Research and development

 

6,763

 

5,982

 

Selling, general and administrative

 

10,309

 

10,614

 

Total stock-based compensation expense, before income taxes

 

19,327

 

18,889

 

Tax benefit

 

(2,790

)

(2,644

)

Total stock-based compensation expense, net of income taxes

 

$

16,537

 

$

16,245

 

 

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”). As of March 31, 2012, 133.0 million shares were authorized for issuance under the 2005 Stock Plan. 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. 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.

 

Activity under Atmel’s 2005 Stock Plan is set forth below:

 

 

 

 

 

Outstanding Options

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

Available

 

Number of

 

Price

 

Exercise Price

 

 

 

for Grant

 

Options

 

per Share

 

per Share

 

 

 

(in thousands, except per share data)

 

Balances, December 31, 2011

 

16,523

 

8,217

 

$1.68-$10.01

 

$

4.26

 

Restricted stock units issued

 

(210

)

 

 

 

Adjustment for restricted stock units issued

 

(128

)

 

 

 

Performance-based restricted stock units issued

 

(200

)

 

 

 

Adjustment for perfomance-based restricted stock units issued

 

(122

)

 

 

 

Restricted stock units cancelled

 

405

 

 

 

 

Adjustment for restricted stock units cancelled

 

301

 

 

 

 

Performance-based restricted stock units cancelled

 

75

 

 

 

 

Adjustment for perfomance-based restricted stock units cancelled

 

46

 

 

 

 

Options cancelled/expired/forfeited

 

78

 

(78

)

$2.11-$8.89

 

4.36

 

Options exercised

 

 

(495

)

$1.80-$8.89

 

4.58

 

Balances, March 31, 2012

 

16,768

 

7,644

 

$1.68-$10.01

 

$

4.24

 

 

Restricted stock units are granted from the pool of options available for grant. As the result of an amendment and restatement of the 2005 Stock Plan in May 2011, every share underlying restricted stock, restricted stock units (including performance based restricted stock units), and stock purchase rights issued on or after May 18, 2011 (the date on which the amendment and restatement became effective) is counted against the numerical limit for options available for grant as 1.61 shares in the table above, except that restricted stock, restricted stock units (including performance based restricted stock units), and stock purchase rights issued prior to May 18, 2011, continue to be governed by an earlier amendment to the 2005 Stock Plan that 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 granted on or after May 18, 2011 are cancelled, forfeited or repurchased by the Company and would otherwise return to the 2005 Stock Plan, 1.61 times the number of those shares will return to the 2005 Stock Plan and will again become available for issuance. The Company issued 8.0 million shares of restricted stock units from May 18, 2011 to March 31, 2012 (net of cancellations) resulting in a reduction, based on a 1.61 to 1.0 ratio, of 12.8 million shares available for grant under the 2005 Stock Plan from May 18, 2011 to March 31, 2012. As of March 31, 2012, there were 16.8 million shares available for issuance under the 2005 Stock Plan, or 10.4 million after giving effect to the 1.61 to 1.0 ratio applicable under the 2005 Stock Plan for issuances made on after May 18, 2011.

 

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Restricted Stock Units

 

Activity related to restricted stock units is set forth below:

 

 

 

 

 

Weighted-Average

 

 

 

Number of

 

Fair Value

 

 

 

Units

 

Per Share

 

 

 

(in thousands, except per share data)

 

Balance, December 31, 2011

 

23,187

 

$

3.18

 

Restricted stock units issued

 

210

 

10.20

 

Restricted stock units vested

 

(1,225

)

10.27

 

Restricted stock units cancelled

 

(405

)

8.11

 

Performance-based restricted stock units issued

 

200

 

10.73

 

Performance-based restricted stock units cancelled

 

(75

)

14.00

 

Balance, March 31, 2012

 

21,892

 

$

2.79

 

 

In the three months ended March 31, 2012, 1.2 million restricted stock units vested, including 0.5 million units withheld for taxes. These vested restricted stock units had a weighted-average fair value of $10.27 per share on the vesting dates for the three months ended March 31, 2012. As of March 31, 2012, total unearned stock-based compensation related to unvested restricted stock units previously granted (including performance-based restricted stock units) was approximately $163.3 million, excluding forfeitures, and is expected to be recognized over a weighted-average period of 2.65 years.

 

In the three months ended March 31, 2011, 0.9 million restricted stock units vested, including 0.3 million units withheld for taxes. These vested restricted stock units had a weighted-average fair value of $15.92 per share on the vesting dates for the quarter ended March 31, 2011. As of March 31, 2011, total unearned stock- based compensation related to nonvested restricted stock units previously granted (including performance-based restricted stock units) was approximately $119.0 million, excluding forfeitures, and is expected to be recognized over a weighted-average period of 3.11 years.

 

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

 

In May 2011, the Company adopted the 2011 Long-Term Performance Based Incentive Plan (the “2011 Plan”), which provides for the grant of restricted stock units to eligible employees; vesting of these restricted stock units is subject to the satisfaction of performance metrics tied to, revenue growth and operating margin over the designated performance periods. The performance periods for the 2011 Plan run from January 1, 2011 through December 31, 2013, consisting of three one year performance periods (calendar years 2011, 2012 and 2013) and a three year cumulative performance period. The Company issued 0.2 million performance-based restricted stock units in the three months ended March 31, 2012. The Company recorded total stock-based compensation expense related to performance-based restricted stock units of $4.3 million under the 2011 Plan in the three months ended March 31, 2012.

 

The 2011 Plan performance metrics include revenue growth rankings for the Company relative to a semiconductor peer group or a microcontroller peer group, as determined by the Compensation Committee. In addition, in order for a participant to receive credit for a performance period the Company must achieve a minimum operating margin during such performance period, measured on a pro forma basis, subject to adjustment by the Compensation Committee. Management evaluates, on a quarterly basis, the likelihood of the Company meeting its performance metrics in determining stock-based compensation expense for performance share plans.

 

The Company recorded total stock based compensation expense related to performance based restricted stock units of $6.5 million under the Company’s 2008 Incentive Plan (the “2008 Plan”) in the three months ended March 31, 2011.

 

Stock Option Awards

 

No options were granted in the three months ended March 31, 2012 or 2011.

 

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As of March 31, 2012, total unearned compensation expense related to unvested stock options was approximately $4.0 million, excluding forfeitures, and is expected to be recognized over a weighted-average period of 1.48 years.

 

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 six-month offering period or at 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. There were 0.7 million shares purchased under the 2010 ESPP for the three months ended March 31, 2012 at an average price per share of $8.33. Of the 25.0 million shares authorized for issuance under the 2010 ESPP, 23.6 million shares were available for issuance at March 31, 2012. There were 0.8 million shares purchased under the 1991 ESPP for the three months ended March 31, 2011, at an average price per share of $4.85. The remaining 1.9 million shares available under the 1991 plan expired in the three months ended March 31, 2011.

 

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:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

Risk-free interest rate

 

0.15

%

0.17

%

Expected life (years)

 

0.50

 

0.50

 

Expected volatility

 

56

%

41

%

Expected dividend yield

 

 

 

 

The weighted-average fair value of the rights to purchase shares under the Company’s ESPPs for purchase periods beginning in the three months ended March 31, 2012 and 2011 was $2.27 and $3.16, respectively. Cash proceeds from the issuance of shares under the Company’s ESPPs were $5.4 million and $4.1 million for the three months ended March 31, 2012 and 2011, respectively.

 

Common Stock Repurchase Program

 

Over the past several years, Atmel’s Board of Directors authorized $500.0 million of funding for the Company’s stock repurchase program. 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 March 31, 2012, $10.6 million remained available for repurchase under this program.

 

During the three months ended March 31, 2012 and 2011, Atmel repurchased 9.5 million and 5.7 million shares, respectively, of its common stock on the open market at an average repurchase price of $10.18 and $14.93 per share, excluding commission, and subsequently retired those shares. Common stock and additional paid-in capital were reduced by $96.2 million and $85.1 million, excluding commission, for the three months ended March 31, 2012 and 2011, respectively, as a result of the stock repurchases.

 

Note 5 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 gains related to defined benefit pension plans and net unrealized gains on investments. The components of accumulated other comprehensive income at March 31, 2012 and 2011, net of tax, are as follows:

 

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March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Foreign currency translation adjustments

 

$

11,849

 

$

7,725

 

Actuarial gains related to defined benefit pension plans

 

593

 

1,712

 

Net unrealized gain on investments

 

4,810

 

11

 

Total accumulated other comprehensive income

 

$

17,252

 

$

9,448

 

 

Note 6 COMMITMENTS AND CONTINGENCIES

 

Commitments

 

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. In the Company’s experience, the estimated fair value of the liability is not material.

 

Purchase Commitments

 

At March 31, 2012, the Company had certain commitments which were not included on the condensed consolidated balance sheet at that date. These include outstanding capital purchase commitments of approximately $1.4 million, wafer purchase commitments of approximately $19.2 million under the Company’s supply agreement with Telefunken Semiconductors GmbH & Co. KG and wafer purchase commitments of approximately $180.6 million under the Company’s supply agreement with LFoundry Rousset SAS (“LFoundry Rousset”).

 

On April 18, 2012, the Company amended its wafer purchase commitments with LFoundry Rousset, which reduced those commitments to approximately $112.0 million as of April 18, 2012.

 

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 statement of cash flows. If, however, 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 March 31, 2012, 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 the litigation described below 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. As the Company continues to monitor these matters; its determination could change, however, and the Company may decide, at some future date, to establish an appropriate reserve. With respect to each of the matters below, except where noted otherwise, management has determined a potential loss is not probable at this time and, accordingly, no amount has been accrued at March 31, 2012. 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, management does not believe that the amount of loss or a range of possible losses is reasonably estimable.

 

Infineon Litigation.  On April 11, 2011, Infineon Technologies A.G. and Infineon Technologies North America Corporation (collectively, “Infineon”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware. Infineon alleges that the Company is infringing 11 Infineon patents and seeks a declaration that three of the Company’s patents are either invalid or not infringed. On July 5, 2011, the Company answered

 

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Infineon’s complaint, and filed counterclaims seeking a declaration that each of the 11 asserted Infineon patents is invalid and not infringed. The Company also counterclaimed for infringement of six of the Company’s patents and breach of contract related to Infineon’s breach of a confidentiality agreement. On July 29, 2011, Infineon answered these counterclaims and sought a declaration that the Company’s patents were either invalid or not infringed. On March 13, 2012, the Company filed amended counterclaims that alleged Infineon’s infringement of four additional Atmel patents. On March 31, 2012, Infineon answered these counterclaims and sought a declaration that the Company’s newly asserted patents were either invalid or not infringed. Trial of these matters currently is scheduled to commence in early 2014.  The Company intends to prosecute its claims and defend vigorously against Infineon’s claims.

 

From time to time, the Company is notified of claims that its products may infringe patents, or other intellectual property, issued to 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 their 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.

 

Other Contingencies

 

In October 2008, officials of the European Union Commission (the “Commission”) conducted an inspection at the offices of one of the Company’s French subsidiaries. The Company was informed that the Commission was seeking evidence of potential violations by Atmel or its subsidiaries of the European Union’s competition laws in connection with the Commission’s investigation of suppliers of integrated circuits for smart cards. On September 21, 2009 and October 27, 2009, the Commission requested additional information from the Company, and the Company responded to the Commission’s requests. The Company continues to cooperate with the Commission’s investigation and has not received any specific findings, monetary demand or judgment through the date of filing this Form 10-Q. As a result, the Company has not recorded any provision in its financial statements related to this matter.

 

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 two years.

 

The following table summarizes the activity related to the product warranty liability for the three months ended March 31, 2012 and 2011.

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Balance at beginning of period

 

$

5,746

 

$

4,019

 

Accrual for warranties during the period, net of change in estimates

 

1,287

 

2,204

 

Actual costs incurred

 

(1,309

)

(1,315

)

Balance at end of period

 

$

5,724

 

$

4,908

 

 

Product warranty liability is included in accrued and other liabilities on the condensed consolidated balance sheets.

 

Guarantees

 

During the ordinary course of business, the Company provides 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.

 

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Table of Contents

 

Note 7 INCOME TAXES

 

The Company estimates its annual effective tax rate at the end of each quarter. In making these estimates, the Company considers, among other things, annual pre-tax income, the geographic mix of pre-tax income and the application and interpretations of tax laws, treaties and judicial developments, in collaboration with its tax advisors, and possible outcomes of audits.

 

The following table presents the provision for income taxes and the effective tax rates:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands, except for percentages)

 

Income before income taxes

 

$

24,732

 

$

84,348

 

Provision for income taxes

 

(4,345

)

(9,795

)

Effective tax rate

 

17.57

%

11.61

%

 

The Company’s effective tax rate for the three months ended March 31, 2012 was lower than the statutory federal income tax rate of 35%.  The Company’s tax provision was lower than it otherwise would have been due to income recognized in lower tax rate jurisdictions as a result of a reorganization of its subsidiary structure implemented on January 1, 2011 and the recognition of certain refundable R&D credits. The effective tax rate for the three months ended March 31, 2011 was lower than the statutory federal income tax rate of 35% primarily due to tax rate benefits of certain earnings from the Company’s operations in jurisdictions with lower tax rates than the US.  These benefits result primarily from the January 1, 2011 reorganization of its subsidiary structure.

 

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2001 through 2011 tax years generally remain subject to examination by federal and most state tax authorities. For significant foreign jurisdictions, the 2001 through 2011 tax years generally remain subject to examination by their respective tax authorities.

 

Currently, the Company has tax audits in progress in various 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.

 

At March 31, 2012 and December 31, 2011, the Company had $23.9 million and $25.2 million of unrecognized tax benefits, respectively, which, if recognized, would affect the effective tax rate.  Also at March 31, 2012 and December 31, 2011, the Company had $43.5 million and $42.8 million of unrecognized tax benefits, respectively, which, if recognized, would result in adjustments to other tax accounts, primarily deferred tax assets.

 

Increases or decreases in unrecognizable tax benefits could occur over the next 12 months due to tax law changes, unrecognized tax benefits established in the normal course of business, or due to the conclusion of ongoing tax audits in various jurisdictions around the world.  While it is reasonably possible that some or all of these events may occur within the next 12 months, the Company is not able to accurately estimate the range of any potential change in unrecognized tax benefits that would result from the occurrence of such events.  The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. The Company regularly assesses its tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business.

 

Note 8 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 to expense are based upon various assumptions, updated quarterly, including discount rates, future salary increases, employee turnover, and mortality rates.

 

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Table of Contents

 

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:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Service costs

 

$

328

 

$

318

 

Interest cost

 

368

 

325

 

Amortization of actuarial (gain) loss

 

12

 

54

 

Settlement and other related gains

 

 

(726

)

Net pension expense

 

$

708

 

$

(29

)

 

Settlement and other related gain of $0.7 million for the three months ended March 31, 2011 related to restructuring activity in the Company’s Rousset, France operations initiated in the second quarter of 2010.

 

The Company’s net pension cost for 2012 is expected to be approximately $2.8 million. Cash funding for benefits paid was insignificant for the three months ended March 31, 2012. Cash funding for benefits to be paid for 2012 is expected to be approximately $0.3 million.

 

Note 9 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 reportable segments are as follows:

 

·                  Microcontrollers.  This segment includes Atmel’s capacitive touch products, including maXTouch and QTouch, AVR 8-bit and 32-bit products, ARM-based products and Atmel’s 8051 8-bit products.

 

·                  Nonvolatile Memories.  This segment includes serial interface electrically erasable programmable read-only memory (“SEEPROM”), serial and parallel interface Flash memory, and electrically erasable programmable read-only memory (“EEPROM”) and erasable programmable ready-only memory (“EPROM”) devices. This segment also includes products with military and aerospace applications.

 

·                  Radio Frequency (“RF”) and Automotive.  This segment includes automotive electronics, wireless and wired devices for industrial, consumer and automotive applications and foundry services for radio frequency products designed for mobile telecommunications markets.

 

·                  Application Specific Integrated Circuit (“ASIC”).  This segment includes custom application specific integrated circuits designed to meet specialized single-customer requirements for their high performance devices in a broad variety of specific applications, 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 Company evaluates segment performance based on revenue and income or loss from operations excluding acquisition-related charges, restructuring charges, credit from reserved grant income and gain on sale of assets. Interest and other (expenses) income, net, foreign exchange gains and losses and income taxes are not measured by operating segment. 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

 

17



Table of Contents

 

other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments. Recent events may affect the manner in which the Company presents segments in the future.

 

Segments are defined by the products they design and sell. They do not make sales to each other. The Company’s net revenue and segment income from operations for each reportable segment for the three months ended March 31, 2012 and 2011 are as follows:

 

Information about Reportable Segments

 

 

 

Micro-

 

Nonvolatile

 

RF and

 

 

 

 

 

 

 

Controllers

 

Memories

 

Automotive

 

ASIC

 

Total

 

 

 

(in thousands)

 

Three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Net revenue from external customers

 

$

217,802

 

$

47,733

 

$

43,510

 

$

48,792

 

$

357,837

 

Segment income (loss) from operations

 

6,683

 

5,346

 

(1,937

)

6,131

 

16,223

 

Three months ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Net revenue from external customers

 

$

293,826

 

$

63,372

 

$

50,853

 

$

53,376

 

461,427

 

Segment income from operations

 

73,807

 

13,617

 

5,410

 

9,382

 

102,216

 

 

The Company does not allocate assets by segment, as management does not use asset information to measure or evaluate a segment’s performance.

 

Reconciliation of Segment Information to Condensed Consolidated Statements of Operations

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Total segment income from operations

 

$

16,223

 

$

102,216

 

Unallocated amounts:

 

 

 

 

 

Acquisition-related charges

 

(1,956

)

(1,031

)

Restructuring charges

 

 

(21,210

)

Credit from reserved grant income

 

10,689

 

 

Gain on sale of assets

 

 

1,882

 

Consolidated income from operations

 

$

24,956

 

$

81,857

 

 

Geographic sources of revenue were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

United States

 

$

48,190

 

$

69,527

 

Germany

 

50,925

 

60,230

 

France

 

9,717

 

8,995

 

Japan

 

9,673

 

14,856

 

China, including Hong Kong

 

84,099

 

127,142

 

Singapore

 

9,906

 

11,160

 

South Korea

 

62,141

 

51,215

 

Taiwan

 

19,871

 

41,659

 

Rest of Asia-Pacific

 

17,210

 

20,796

 

Rest of Europe

 

38,732

 

50,540

 

Rest of the World

 

7,373

 

5,307

 

Total net revenue

 

$

357,837

 

$

461,427

 

 

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Net revenue is attributed to countries based on the locations to where the Company ships.

 

One customer accounted for 15% of net revenue in the three months ended March 31, 2012. No single customer accounted for more than 10% of net revenue in the three months ended March 31, 2011. Three distributors accounted for 15%, 11% and 11%, respectively, of accounts receivable at March 31, 2012. Two distributors accounted for 15% and 14%, respectively, of accounts receivable at December 31, 2011.

 

Locations of long-lived assets as of March 31, 2012 and December 31, 2011 were as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

United States

 

$

87,093

 

$

81,777

 

Philippines

 

66,193

 

71,332

 

Germany

 

20,311

 

20,681

 

France

 

27,948

 

30,277

 

Asia-Pacific

 

57,015

 

59,906

 

Rest of Europe

 

11,666

 

10,534

 

Total

 

$

270,226

 

$

274,507

 

 

Excluded from the table above are auction-rate securities of $2.3 million as of both March 31, 2012 and December 31, 2011, which are included in other assets on the condensed consolidated balance sheets. Also excluded from the table above as of March 31, 2012 and December 31, 2011 are goodwill of $67.4 million and $67.7 million, respectively, intangible assets, net of $18.3 million and $21.0 million, respectively and deferred income tax assets of $119.1 million and $121.4 million, respectively.

 

Note 10 GAIN ON SALE OF ASSETS

 

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, which is reflected in gain on sale of assets in the condensed consolidated statements of operations.

 

Rousset

 

In connection with the sale of its manufacturing operations in France to LFoundry GmbH, the Company retained a minority equity interest in LFoundry Rousset, the entity that holds those manufacturing operations. This equity interest provides limited protective rights to the Company, but no decision-making rights that are significant to the economic performance of LFoundry Rousset. The Company is shielded from economic losses and does not participate fully in LFoundry Rousset’s residual economics; accordingly, the Company has concluded that its equity interest in LFoundry Rousset is an interest in a variable interest entity (“VIE”). At the time of the sale, the Company identified LFoundry Rousset’s significant activities and the parties that have the power to direct them, determined LFoundry Rousset’s equity, profit and loss participation, and reviewed LFoundry Rousset’s funding and operating agreements. Based on the above analysis, the Company determined that it is not the primary beneficiary of LFoundry Rousset and hence does not consolidate LFoundry Rousset in its financial statements. The Company’s maximum exposure related to LFoundry Rousset is not expected to be significantly in excess of the amounts recorded and it does not intend to provide any support to LFoundry Rousset, financial or otherwise.

 

Note 11 RESTRUCTURING CHARGES

 

The following table summarizes the activity related to the accrual for restructuring charges detailed by event for the three months ended March 31, 2012 and 2011.

 

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January 1,

 

 

 

 

 

 

 

March 31,

 

 

 

2012

 

 

 

 

 

Foreign Exchange

 

2012

 

 

 

Accrual

 

Charges

 

Payments

 

Gain

 

Accrual

 

 

 

(in thousands)

 

Third quarter of 2008

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

$

301

 

$

 

$

 

$

 

$

301

 

Second quarter of 2010

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

1,846

 

 

(741

)

(226

)

879

 

Total 2012 activity

 

$

2,147

 

$

 

$

(741

)

$

(226

)

$

1,180

 

 

 

 

January 1,

 

 

 

 

 

Currency

 

March 31,

 

 

 

2011

 

 

 

 

 

Translation

 

2011

 

 

 

Accrual

 

Charges

 

Payments

 

Adjustment

 

Accrual

 

 

 

(in thousands)

 

Third quarter of 2002

 

 

 

 

 

 

 

 

 

 

 

Termination of contract with supplier

 

$

1,592

 

$

 

$

 

$

 

$

1,592

 

Second quarter of 2008

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

3

 

 

 

 

3

 

Third quarter of 2008

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

460

 

 

 

16

 

476

 

First quarter of 2009

 

 

 

 

 

 

 

 

 

 

 

Other restructuring charges

 

136

 

 

(45

)

 

91

 

Second quarter of 2010

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

1,286

 

21,210

 

(1,972

)

735

 

21,259

 

Total 2011 activity

 

$

3,477

 

$

21,210

 

$

(2,017

)

$

751

 

$

23,421

 

 

2011 Restructuring Charges

 

For the three months ended March 31, 2011, the Company began implementing cost reduction activities, primarily targeting research and development labor costs. The Company incurred restructuring charges of $21.2 million related to severance costs resulting from involuntary termination of employees at the Company’s subsidiary located in Rousset, France. Employee severance costs were recorded in accordance with the accounting standard related to costs associated with exit or disposal activities. The Company paid $0.7 million related to employee termination costs for the three months ended March 31, 2012.

 

Note 12 NET INCOME PER SHARE

 

Basic net income per share is calculated by using the weighted-average number of common shares outstanding during that period. Diluted net income per share is calculated 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, contingent issuable shares for all periods and accrued issuance of shares under employee stock purchase plan.

 

A reconciliation of the numerator and denominator of basic and diluted net income per share is provided as follows:

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands, except per share data)

 

Net income

 

$

20,387

 

$

74,553

 

 

 

 

 

 

 

Weighted-average shares - basic

 

440,265

 

456,489

 

Dilutive effect of incremental shares and share equivalents

 

4,662

 

13,533

 

Weighted-average shares - diluted

 

444,927

 

470,022

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

 

 

 

 

Net income per share - basic

 

$

0.05

 

$

0.16

 

Diluted

 

 

 

 

 

Net income per share - diluted

 

$

0.05

 

$

0.16

 

 

The following table summarizes securities which were not included in the “Weighted-average shares — diluted” used for calculation of diluted net income per share, as their effect would have been anti-dilutive:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Employee stock options and restricted stock units outstanding

 

2,842

 

1,072

 

 

Note 13 INTEREST AND OTHER (EXPENSE) INCOME, NET

 

Interest and other (expense) income, net, are summarized in the following table:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Interest and other income

 

$

182

 

$

390

 

Interest expense

 

(1,170

)

(1,701

)

Foreign exchange transaction gains

 

764

 

3,802

 

Total

 

$

(224

)

$

2,491

 

 

Note 14 SUBSEQUENT EVENT

 

On April 30, 2012, Atmel’s Board of Directors authorized an additional $200 million for its existing stock repurchase program. 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.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report on Form 10-Q and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2011. Atmel’s 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. We make these reports available as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website located at www.sec.gov that contains Atmel’s SEC filings. The information disclosed on our website is not incorporated herein and does not form a part of this Quarterly Report on Form 10-Q.

 

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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 2012, the expansion of the market for microcontrollers, revenue for our maXTouchTM products, expectations for our new XSense product, our gross margin, anticipated revenue by geographic area, operating expenses and capital expenditures, cash flow and liquidity measures, factory utilization, new product introductions, access to independent foundry capacity and the quality issues associated with the use of third party foundries, the effects of our strategic transactions and restructuring efforts, estimates related to the amount and/or timing of the expensing of unearned stock-based compensation expense and similar estimates related to our performance-based restricted stock units, our expectations regarding tax matters, the outcome of litigation (including intellectual property litigation in which we may be involved in which our customers may be involved, especially in the mobile device sector) and the expenses involved 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 Part II Item 1A — Risk Factors, and elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q.

 

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 today in many of the world’s leading smart phones, tablet devices and other consumer and industrial electronics to provide core functionality for touch sensing, security, wireless and communication applications and battery management. We offer an extensive portfolio of capacitive touch products that integrate our microcontrollers with fundamental touch-focused intellectual property, or IP, we have developed and we continue to leverage our market and technology advantages to expand our product portfolio within the touch-related eco-system. Toward that end, and as a natural extension of our touch controller business, we recently announced our “XSense” product, a new type of touch sensor based on proprietary metal mesh technologies. We also design and sell products that are complementary to our microcontroller business, including nonvolatile memory and flash memory products, radio frequency and mixed-signal components and application specific integrated circuits. Our semiconductors also enable applications in many other fields, such as smart-metering for utility monitoring and billing, buttons, sliders and wheels found on the touch panels of appliances, various aerospace, industrial, and military products and systems, and electronic-based automotive components, such as keyless ignition, access, engine control, lighting and entertainment systems, for standard and hybrid vehicles. Over the past several years, we transitioned our business to a “fab-lite” model, lowering our fixed costs and capital investment requirements, and we currently own and operate one manufacturing facility in Colorado Springs, Colorado.

 

During the three months ended March 31, 2012, we repurchased 9.5 million shares of our common stock in the open market and subsequently retired those shares under our existing stock repurchase program.  As of March 31, 2012, $10.6 million remained available for repurchase under this program. On April 30, 2012, our Board of Directors authorized an additional $200 million for this program.

 

RESULTS OF OPERATIONS

 

 

 

Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

 

 

(in thousands, except percentage of net revenue)

 

Net revenue

 

$

357,837

 

100.0

%

$

461,427

 

100.0

%

Gross profit

 

152,367

 

42.6

%

235,385

 

51.0

%

Research and development

 

66,289

 

18.5

%

62,383

 

13.5

%

Selling, general and administrative

 

69,855

 

19.5

%

70,786

 

15.3

%

Acquisition-related charges

 

1,956

 

0.5

%

1,031

 

0.2

%

Restructuring charges

 

 

0.0

%

21,210

 

4.6

%

Credit from reserved grant income

 

(10,689

)

 

 

 

 

 

Gain on sale of assets

 

 

0.0

%

(1,882

)

-0.4

%

Income from operations

 

$

24,956

 

7.0

%

$

81,857

 

17.7

%

 

Net Revenue

 

Our net revenue totaled $357.8 million for the three months ended March 31, 2012, a decrease of 22%, or $103.6 million, from $461.4 million in net revenue for the three months ended March 31, 2011. Revenue decreased primarily

 

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due to reduced sales of our products as a result of difficult global economic conditions that adversely affected the industrial and consumer markets into which our products are sold. In the three months ended March 31, 2012, our distributors, which accounted for approximately 50% of our sales in that period, reduced their aggregate inventories of our products by 19% as compared to the three months ended December 31, 2011.

 

Included in revenue in the three months ended March 31, 2012, is $7.6 million of payments made from an Asian distributor recognized on a cash basis, which had been deferred at December 31, 2011, and not included in our net revenue at year end.

 

Net revenue denominated in Euros was 21% and 23% for the three months ended March 31, 2012 and 2011, respectively. Average exchange rates utilized to translate foreign currency revenue and expenses in Euros were approximately 1.31 and 1.34 Euros to the dollar for the three months ended March 31, 2012 and 2011, respectively.

 

Net Revenue — By Operating Segment

 

Our net revenue by operating segment is summarized as follows:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

2012

 

2011

 

Change

 

% Change

 

 

 

(in thousands, except for percentages)

 

Microcontroller

 

$

217,802

 

$

293,826

 

$

(76,024

)

-26

%

Nonvolatile Memory

 

47,733

 

63,372

 

(15,639

)

-25

%

RF and Automotive

 

43,510

 

50,853

 

(7,343

)

-14

%

ASIC

 

48,792

 

53,376

 

(4,584

)

-9

%

Total net revenue

 

$

357,837

 

$

461,427

 

$

(103,590

)

-22

%

 

Microcontroller

 

Microcontroller segment net revenue decreased 26% to $217.8 million for the three months ended March 31, 2012 from $293.8 million for the three months ended March 31, 2011. Revenue decreased primarily due to decreased sales of our 8-bit and 32-bit microcontrollers as a result of reduced demand in the industrial end markets. Microcontroller net revenue represented 61% and 64% of total net revenue for the three months ended March 31, 2012 and 2011, respectively.

 

Nonvolatile Memory

 

Nonvolatile Memory segment net revenue decreased 25% to $47.7 million for the three months ended March 31, 2012 from $63.4 million for the three months ended March 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 18% and 49%, respectively.

 

RF and Automotive

 

RF and Automotive segment net revenue decreased 14% to $43.5 million for the three months ended March 31, 2012 from $50.9 million for the three months ended March 31, 2011. This decrease was primarily related to continued decline in demand for our non-automotive products within this segment during the first three months of 2012 partially offset by an increase of 11% in net revenue from sales of our high voltage products, which are used primarily for automotive airbag controllers.

 

ASIC

 

ASIC segment net revenue decreased 9% to $48.8 million for the three months ended March 31, 2012 from $53.4 million for the three months ended March 31, 2011. Our military and aerospace business revenue, which is approximately 32% of overall ASIC revenue, decreased approximately 14% during the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

 

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Table of Contents

 

Net Revenue by Geographic Area

 

Our net revenue by geographic area for the three months ended March 31, 2012, compared to the same period in 2011, is summarized as follows. Revenue is attributed to countries based on the location to which we ship. See Note 9 of Notes to Condensed Consolidated Financial Statements for further discussion.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

2012

 

2011

 

Change

 

% Change

 

 

 

(in thousands, except for percentages)

 

Asia

 

$

202,900

 

$

266,828

 

$

(63,928

)

-24

%

Europe

 

99,374

 

119,765

 

(20,391

)

-17

%

United States

 

48,190

 

69,527

 

(21,337

)

-31

%

Other*

 

7,373

 

5,307

 

2,066

 

39

%

Total net revenue

 

$

357,837

 

$

461,427

 

$

(103,590

)

-22

%

 


*                                         Primarily includes South Africa, and Central and South America

 

Net revenue outside the United States accounted for 87% and 85% of our net revenue for the three months ended March 31, 2012 and 2011, respectively.

 

Our net revenue in Asia decreased $63.9 million, or 24%, for the three months ended March 31, 2012, compared to the same period in 2011. The decrease in this region for the three months ended March 31, 2012, compared to the three months ended March 31, 2011 was primarily due to lower shipments of our microcontroller products as a result of difficult global economic conditions that adversely affected the industrial and consumer markets into which these products are sold. In the three months ended March 31, 2012, our distributors in Asia reduced their inventory of our products by 18% as compared to the three months ended December 31, 2011. Net revenue for the Asia region was 57% of total net revenue for the three months ended March 31, 2012 compared to 58% of total net revenue for the three months ended March 31, 2011.

 

Our net revenue in Europe decreased $20.4 million, or 17%, for the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The decrease in this region for the three months ended March 31, 2012, compared to the three months ended March 31, 2011 was primarily a result of the continued decline in industrial markets. Net revenue for the Europe region was 28% of total net revenue for the three months ended March 31, 2012 compared to 26% of total net revenue for the three months ended March 31, 2011.

 

Our net revenue in the United States decreased by $21.3 million, or 31%, for the three months ended March 31, 2012, compared to the three months ended March 31, 2011. This decrease resulted primarily from reduced demand for smart metering and consumer-based products. Net revenue for the United States region was 13% of total net revenue for the three months ended March 31, 2012, compared to 15% of total net revenue for the three months ended March 31, 2011.

 

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% and 23% of our total net revenue for the three months ended March 31, 2012 and 2011, respectively. Costs denominated in foreign currencies were 18% and 20% of our total costs for the three months ended March 31, 2012 and 2011, respectively.

 

Net revenue denominated in Euros was 21% and 23% for the three months ended March 31, 2012 and 2011, respectively. Costs denominated in Euros were 11% and 14% of our total costs for the three months ended March 31, 2012 and 2011, respectively.

 

Average exchange rates utilized to translate foreign currency revenue and expenses in Euros were approximately 1.31 and 1.34 Euros to the dollar for the three months ended March 31, 2012 and 2011, respectively.

 

For the three months ended March 31, 2012, changes in foreign exchange rates had an unfavorable overall effect on our operating results. Our net revenue for the three months ended March 31, 2012 would have been approximately $1.9 million higher had the average exchange rate in the current year remained the same as the average rate in effect for the

 

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Table of Contents

 

three months ended March 31, 2011. In addition, in the three months ended March 31, 2012, our operating expenses would have been approximately $1.2 million higher. The net effect, had average foreign currency rates remained the same during the three months ended March 31, 2012 as in the same period in 2011, would have been that income from operations would have increased approximately $0.7 million in the three months ended March 31, 2012.

 

Cost of Revenue and Gross Margin

 

Gross margin declined to 42.6% for the three months ended March 31, 2012, compared to 51.0% for the three months ended March 31, 2011.  Gross margin in the three months ended March 31, 2012 was negatively affected by lower sales, lower utilization of our remaining wafer fabrication facility in Colorado as a result of decreased business levels and higher inventory write-downs.

 

We experienced an increase in inventory to $357.5 million at March 31, 2012 from $318.5 million at March 31, 2011, although our inventories declined by approximately $20.0 million from $377.4 million at the end of 2011. While we expect inventory levels to continue to decline, as builds are adjusted and as demand recovers, our inventory levels, and related write-downs, may require further adjustments during 2012 to reflect revised demand forecasts or product lifecycles. Inventory adjustments, if undertaken, may affect our results of operations, including gross margin, in a positive or negative manner, 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 three months ended March 31, 2012, we manufactured approximately 56% of our products in our own wafer fabrication facility compared to 49% for the three months ended March 31, 2011.

 

Our cost of revenue includes the costs of wafer fabrication, assembly and test operations, changes in inventory write-downs, royalty expense, freight costs and stock compensation expense. Our gross margin as a percentage of net revenue fluctuates depending on product mix, manufacturing yields, utilization of manufacturing capacity, reserves for our excess and obsolete inventory, and average selling prices, among other factors.

 

Research and Development

 

Research and development (“R&D”) expenses increased 6%, or $3.9 million, to $66.3 million for the three months ended March 31, 2012 from $62.4 million for the three months ended March 31, 2011. R&D expenses increased for the three months ended March 31, 2012, primarily due to increased employee related expenses of $2.7 million related to product development staffing and increased stock-based compensation expense of $0.8 million. R&D expenses, including the items described above, for the three months ended March 31, 2012, were favorably affected by approximately $0.7 million due to foreign exchange rate fluctuations, compared to rates in effect and the related expenses incurred for the three months ended March 31, 2011. As a percentage of net revenue, R&D expenses totaled 19% and 14% for the three months ended March 31, 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, including architectures utilizing advanced processes at the 65 nanometer line width node. 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 1%, or $0.9 million, to $69.9 million for the three months ended March 31, 2012 from $70.8 million for the three months ended March 31, 2011. SG&A expenses were favorably affected by approximately $0.4 million due to foreign exchange rate fluctuations, compared to rates in effect and the related expenses incurred for the three months ended March 31, 2011. As a percentage of net revenue, SG&A expenses totaled 20% and 15% of net revenue for the three months ended March 31, 2012 and 2011, respectively.

 

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Table of Contents

 

Stock-Based Compensation

 

We primarily issue restricted stock units to our employees as equity compensation. Employees may also participate in an Employee Stock Purchase Program that offers the ability to purchase stock through payroll withholdings at a discount to market price.

 

Stock-based compensation cost for stock options 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. Stock-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 stock-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. Stock-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 the timing to achieve the related performance goals. These awards vest once the performance criteria are met.

 

The following table summarizes the distribution of stock-based compensation expense by function for the three months ended March 31, 2012 and 2011:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Cost of revenue

 

$

2,255

 

$

2,293

 

Research and development

 

6,763

 

5,982

 

Selling, general and administrative

 

10,309

 

10,614

 

Total stock-based compensation expense, before income taxes

 

19,327

 

18,889

 

Tax benefit

 

(2,790

)

(2,644

)

Total stock-based compensation expense, net of income taxes

 

$

16,537

 

$

16,245

 

 

In May 2011, we adopted the 2011 Long-Term Performance Based Incentive Plan (the “2011 Plan”), which provides for the grant of restricted stock units to eligible employees; vesting of these restricted stock units is subject to the satisfaction of specified performance metrics tied to relative revenue growth rankings and operating margin over the designated performance periods. The performance periods for the 2011 Plan run from January 1, 2011 through December 31, 2013, consisting of three one year performance periods (calendar years 2011, 2012 and 2013) and a three year cumulative performance period. We issued 0.2 million performance-based restricted stock units in the three months ended March 31, 2012.  We recorded total stock-based compensation expense related to performance-based restricted stock units of $4.3 million under the 2011 Plan in the three months ended March 31, 2012.

 

The 2011 Plan performance metrics include revenue growth rankings for us relative to a semiconductor peer group or a microcontroller peer group, as determined by the Compensation Committee. In addition, in order for a participant to receive credit for a performance period, we must achieve a minimum operating margin during such performance period, measured on a pro forma basis, subject to adjustment by the Compensation Committee. We evaluate, on a quarterly basis, the likelihood of meeting our performance metrics in determining stock-based compensation expense for performance share plans.

 

We recorded total stock based compensation expense related to performance based restricted stock units of $6.5 million under the 2008 Plan in the three months ended March 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.

 

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Table of Contents

 

Acquisition-Related Charges

 

We recorded total acquisition-related charges of $2.0 million for the three months ended March 31, 2012, related to our acquisitions of Advanced Digital Design and Quantum Research Group Ltd.

 

We recorded amortization of intangible assets of $1.4 million and $1.1 million in the three months ended March 31, 2012 and 2011, respectively, associated with customer relationships, developed technology, trade name, non-compete agreements and backlog. We estimate amortization of intangible assets will be approximately $5.5 million for 2012.

 

Restructuring Charges

 

The following table summarizes the activity related to the accrual for restructuring charges detailed by event for the three months ended March 31, 2012 and 2011:

 

 

 

January 1,

 

 

 

 

 

 

 

March 31,

 

 

 

2012

 

 

 

 

 

Foreign Exchange

 

2012

 

 

 

Accrual

 

Charges

 

Payments

 

Gain

 

Accrual

 

 

 

(in thousands)

 

Third quarter of 2008

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

$

301

 

$

 

$

 

$

 

$

301

 

Second quarter of 2010

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

1,846

 

 

(741

)

(226

)

879

 

Total 2012 activity

 

$

2,147

 

$

 

$

(741

)

$

(226

)

$

1,180

 

 

 

 

January 1,

 

 

 

 

 

Currency

 

March 31,

 

 

 

2011

 

 

 

 

 

Translation

 

2011

 

 

 

Accrual

 

Charges

 

Payments

 

Adjustment

 

Accrual

 

 

 

(in thousands)

 

Third quarter of 2002

 

 

 

 

 

 

 

 

 

 

 

Termination of contract with supplier

 

$

1,592

 

$

 

$

 

$

 

$

1,592

 

Second quarter of 2008

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

3

 

 

 

 

3

 

Third quarter of 2008

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

460

 

 

 

16

 

476

 

First quarter of 2009

 

 

 

 

 

 

 

 

 

 

 

Other restructuring charges

 

136

 

 

(45

)

 

91

 

Second quarter of 2010

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

 

1,286

 

21,210

 

(1,972

)

735

 

21,259

 

Total 2011 activity

 

$

3,477