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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarter ended June 30, 2012
For the transition period from to
Commission file number 0-19032
1600 Technology Drive, San Jose, California 95110
(Address of principal executive offices)
(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):
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 July 31, 2012, the Registrant had 440,129,593 outstanding shares of Common Stock.
QUARTER ENDED JUNE 30, 2012
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive (Loss) Income
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2012 and the results of operations, comprehensive income and cash flows for the three and six months ended June 30, 2012 and 2011. All intercompany balances have been eliminated. Because all of the annual 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 ("GAAP"). 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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, 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 reserves and allowances, stock-based compensation expense, allowances for doubtful accounts receivable, estimates for useful lives associated with long-lived assets, recoverability of goodwill and intangible assets, restructuring charges, liabilities for uncertain tax positions and deferred tax asset valuation allowances. Actual results could differ materially from those estimates.
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Market is based on estimated net realizable value. Determining market value of inventories involves numerous judgments, including estimating average selling prices and sales volumes for future periods. The Company establishes provisions for lower of cost or market and excess and obsolescence write-downs, which are charged to cost of revenue. The Company makes a determination regarding excess and obsolete inventory on a quarterly basis. This determination requires an estimation of the future demand for the Company’s products and involves an analysis of historical and forecasted sales levels by product, competitiveness of product offerings, market conditions, product lifecycles, as well as other factors. Excess and obsolete inventory write-downs are recorded when the inventory on hand exceeds management’s estimate of future demand for each product and are charged to cost of revenue.
The Company’s inventories include parts that have a potential for rapid technological obsolescence and are sold in a highly competitive industry. The Company writes-down inventory that is considered excess or obsolete. When the Company recognizes 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.
Inventories are comprised of the following:
From time to time, the Company receives economic incentive grants and allowances from European governments, agencies and research organizations targeted at preserving employment at specific locations. The subsidy grant agreements typically contain economic incentive, headcount, capital and research and development expenditures and other conditions that must be met to receive and retain grant benefits. Noncompliance with the conditions of the grants could result in the forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts previously received. In addition, the
Company may need to record charges to reverse grant benefits recorded in prior periods as a result of changes to its plans for headcount, project spending, or capital investment at any of these specific locations. If the Company is unable to comply with any of the conditions in the grant agreements, the Company may face adverse actions from the government agencies providing the grants. If the Company were required to repay grant benefits, its results of operations and financial position could be materially adversely affected by the amount of such repayments.
In March 2012, the Greek government executed a ministerial decision related to an outstanding state grant previously made to a Greek subsidiary of the Company. Based on the execution of the ministerial decision and the subsequent publication of that decision by the Greek government, the Company determined that its Greek subsidiary would not be required to repay the full amount of that grant. As a result, the Company recognized a benefit of $10.7 million in its results for the three-month period ended March 31, 2012 resulting from the reversal of a reserve previously established for that grant.
Note 2 INVESTMENTS
Investments at June 30, 2012 and December 31, 2011 primarily include corporate equity securities, U.S. and foreign corporate debt securities and auction-rate securities.
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 each of the three and six months ended June 30, 2012 and 2011, the Company's gross realized gains and losses on short-term investments were insignificant. The Company’s investments are further detailed in the table below:
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, based on the recent trading prices for shares in INSIDE, the Company recorded an unrealized loss of $1.2 million in accumulated other comprehensive income at June 30, 2012.
For the three months ended June 30, 2012, the Company sold a portion of its auction-rate securities, resulting in an insignificant gain. The Company concluded that its remaining $1.0 million (adjusted cost) of auction-rate 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 June 30, 2012, were as follows:
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 liquidate them within the year, with the exception of the Company’s remaining auction-rate securities, which have been classified as long-term investments and included in other assets on the 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)”. The accounting standard establishes a consistent framework for measuring fair value and expands disclosure requirements regarding fair value measurements. This accounting standard, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The table below presents the balances of investments measured at fair value on a recurring basis at June 30, 2012:
The table below presents the balances of investments measured at fair value on a recurring basis at December 31, 2011:
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 the Company's total assets as of June 30, 2012. The Company redeemed one auction rate security in the open market at book value of $1.2 million in the three months ended June 30, 2012.
There were no changes in Level 3 assets measured at fair value on a recurring basis for the three and six months ended June 30, 2012 and the year ended December 31, 2011.
Note 4 STOCKHOLDERS’ EQUITY
The following table summarizes stock-based compensation included in operating results for the three and six months ended June 30, 2012 and 2011:
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 June 30, 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 4 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:
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, as reflected in the line items for "Plan adjustments", except that 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 or 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 8.4 million shares of restricted stock units from May 18, 2011 to June 30, 2012 (net of cancellations) resulting in a reduction, based on a 1.61 to 1.0 ratio, of 13.5 million shares available for grant under the 2005 Stock Plan from May 18, 2011 to June 30, 2012. As of June 30, 2012, there were 16.1 million shares available for issuance under the 2005 Stock Plan, or 10.0 million after giving effect to the 1.61 to 1.0 ratio applicable under the 2005 Stock Plan for issuances of restricted stock units made on or after May 18, 2011.
Restricted Stock Units
Activity related to restricted stock units is set forth below:
In the three and six months ended June 30, 2012, 2.4 million and 3.6 million restricted stock units vested, respectively, including 0.8 million and 1.2 million units withheld for taxes, respectively. These vested restricted stock units had a weighted-average grant date fair value of $6.31 and $6.54 per share on the vesting dates for the three and six months ended June 30, 2012, respectively. As of June 30, 2012, total unearned stock-based compensation related to unvested restricted stock units previously granted (including performance-based restricted stock units) was approximately $151.5 million, excluding forfeitures, and is expected to be recognized over a weighted-average period of 2.46 years.
In the three and six months ended June 30, 2011, 1.0 million and 1.9 million restricted stock units vested, respectively, including 0.3 million and 0.7 million units withheld for taxes, respectively. These vested restricted stock units had a weighted-average grant date fair value of $14.68 and $15.29 per share on the vesting dates for the three and six months ended June 30, 2011, respectively.
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 restricted stock units granted under the 2011 Plan 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 and consist of three one-year performance periods (calendar years 2011, 2012 and 2013) and a three cumulative performance period. The Company issued 0.1 million and 0.3 million performance-based restricted stock units in the three and six months ended June 30, 2012, respectively. The Company recorded total stock-based compensation expense related to performance-based restricted stock units of $3.4 million and $7.7 million under the 2011 Plan in the three and six months ended June 30, 2012, respectively. The Company issued 3.4 million performance-based restricted stock units in the three months ended June 30, 2011 and recorded stock-based compensation expense related to these performance-based restricted units of $0.6 million in that period.
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 non-GAAP basis as defined in the 2011 Plan, 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.
In the three months ended June 30, 2011, performance-based restricted stock units issued under the Company's 2008 Incentive Plan (the "2008 Plan") vested upon board of director approval on May 23, 2011 as a result of the Company achieving all
of the performance criteria as of March 31, 2011. In the three months ended June 30, 2011, 8.5 million performance-based restricted stock units vested under the 2008 Plan, including 3.3 million units withheld for taxes. These vested performance-based restricted stock units had a weighted average grant date fair value of $3.94 per share on the vesting date. The Company recorded total stock based compensation expense related to performance based restricted stock units of $6.5 million under the 2008 Plan in the six months ended June 30, 2011.
Stock Option Awards
No options were granted in the three and six months ended June 30, 2012 or 2011.
As of June 30, 2012, total unearned compensation expense related to unvested stock options was approximately $3.0 million, excluding forfeitures, and is expected to be recognized over a weighted-average period of 1.42 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 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 no purchases in the three months ended June 30, 2012 and 2011. There were 0.7 million shares purchased under the 2010 ESPP for the six months ended June 30, 2012 at an average price per share of $8.33. There were 0.8 million shares purchased under the 1991 ESPP for the six months ended June 30, 2011 at an average price per share of $4.85. Of the 25.0 million shares authorized for issuance under the 2010 ESPP, 23.6 million shares were available for issuance at June 30, 2012.
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:
The weighted-average fair value of the rights to purchase shares under the Company’s ESPPs for purchase periods beginning in the six months ended June 30, 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 six months ended June 30, 2012 and 2011, respectively.
Common Stock Repurchase Program
Over the past several years, Atmel’s Board of Directors authorized an aggregate of $700.0 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 June 30, 2012, $166.2 million remained available for repurchase under this program.
During the three and six months ended June 30, 2012, Atmel repurchased 6.1 million and 15.6 million shares, respectively, of its common stock on the open market at an average repurchase price of $7.29 and $9.04 per share, respectively, excluding commission, and subsequently retired those shares. Common stock and additional paid-in capital were reduced by $44.4 million and $140.6 million, excluding commission, for the three and six months ended June 30, 2012, 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 (losses) gains on investments. The components of accumulated
other comprehensive income at June 30, 2012 and December 31, 2011, net of tax, are as follows:
Note 6 COMMITMENTS AND CONTINGENCIES
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.
At June 30, 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 $2.7 million, wafer purchase commitments of approximately $8.0 million under a supply agreement with Telefunken Semiconductors GmbH & Co. KG and wafer purchase commitments of approximately $84.5 million under a supply agreement with LFoundry Rousset SAS (“LFoundry Rousset”).
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 June 30, 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 June 30, 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 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.
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.
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 and six months ended June 30, 2012 and 2011.
Product warranty liability is included in accrued and other liabilities on the condensed consolidated balance sheets.
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.
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:
The Company’s effective tax rate for the three months ended June 30, 2012 was higher than the statutory federal income tax rate of 35%, primarily due to a significant decrease in pre-tax income. The Company’s effective tax rate for the six months ended June 30, 2012 was lower than the statutory federal income tax rate of 35%, primarily due to income recognized in lower tax rate jurisdictions. The effective tax rate for the three and six months ended June 30, 2011 was lower than the statutory federal income tax rate of 35%, in each case primarily due to income recognized in lower tax rate jurisdictions.
The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company's 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 June 30, 2012 and December 31, 2011, the Company had $31.5 million and $25.2 million of unrecognized tax benefits, respectively, which, if recognized, would affect the effective tax rate. Also at June 30, 2012 and December 31, 2011, the Company had $44.2 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 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 estimate accurately 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 are based upon various assumptions, updated quarterly, including discount rates, future salary increases, employee turnover, and mortality rates.
The Company’s French pension plan provides for termination benefits paid to covered French employees only at retirement, and consists of approximately one to five months of salary. The Company’s German pension plan provides for defined benefit payouts for covered German employees’ following retirement.
The aggregate net pension expense relating to these two plans are as follows:
Settlement and other related gain of $0.7 million for the six months ended June 30, 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 and six months ended June 30, 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:
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 other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments.
Segments are defined by the products they design and sell. They do not make sales to each other. The Company’s net revenue and segment income from operations for each reportable segment for the three and six months ended June 30, 2012 and 2011 are as follows:
Information about Reportable Segments
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
Geographic sources of revenue were as follows:
Net revenue is attributed to countries based on the locations to where the Company ships.
No single customer accounted for more than 10% of net revenue in the three months ended June 30, 2012. One customer accounted for 11% of net revenue in the six months ended June 30, 2012. No single customer accounted for more than 10% of net revenue in the three and six months ended June 30, 2011. Three distributors accounted for 12%, 12% and 11%, respectively, of accounts receivable at June 30, 2012. Two distributors accounted for 15% and 14%, respectively, of accounts receivable at December 31, 2011.
Locations of long-lived assets as of June 30, 2012 and December 31, 2011 were as follows:
Excluded from the table above are auction-rate securities of $1.1 million and $2.3 million at June 30, 2012 and December 31, 2011, respectively, which are included in other assets on the condensed consolidated balance sheets. Also excluded from the table above as of June 30, 2012 and December 31, 2011 are goodwill of $66.4 million and $67.7 million, respectively, intangible assets, net of $16.1 million and $20.6 million, respectively, and deferred income tax assets of $120.5 million and $121.4 million, respectively.
Note 10 RESTRUCTURING CHARGES
The following table summarizes the activity related to the accrual for restructuring charges detailed by event for the three and six months ended June 30, 2012 and 2011.
2012 Restructuring Charges
During the three months ended June 30, 2012, the Company implemented cost reduction actions, including actions related to labor costs. The Company recorded restructuring charges, including applicable severance costs, of $14.4 million related to those restructuring actions. The Company has $14.9 million accrued at June 30, 2012, and expects to pay this within the next 12 months.
2011 Restructuring Charges
During the six months ended June 30, 2011, the Company implemented cost reduction actions, including actions related to labor costs. The Company incurred restructuring charges of $21.2 million related to those restructuring actions.
Note 11 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 and vesting of restricted stock units for all periods and accrued issuance of shares under employee stock purchase plans.
A reconciliation of the numerator and denominator of basic and diluted net income per share is as follows:
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:
Note 12 INTEREST AND OTHER (EXPENSE) INCOME, NET
Interest and other (expense) income, net, are summarized in the following table:
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 review and consider carefully 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.
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 maXTouch™ products, expectations for our new XSense™ products, 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 expensing 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 or in which our customers may be involved, especially in the mobile device sector) and the effects of exchange rates and our ongoing efforts to manage exposure to exchange rate fluctuation. Our actual results could differ materially from those projected in any forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion and in 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.
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, e-readers 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 ("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, earlier this year we announced our XSense products, 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 wafer manufacturing facility in Colorado Springs, Colorado.
Net revenue was lower in the three and six months ended June 30, 2012, compared to net revenue in the three and six months ended June 30, 2011, as we were adversely affected by a slowdown in the global economy and excess inventories held by our distributors, particularly in Asia. Lower sales resulted in lower utilization rates for our Colorado Springs wafer facility, which increased our wafer costs and, as a consequence, adversely affected our gross margin. In response to lower sales, we implemented cost reductions throughout our business in the second quarter of 2012, including labor cost reductions. As a result of those activities, we recorded restructuring charges, including applicable severance costs, of $14.4 million in the second quarter of 2012. We expect to continue to monitor our cost structure to ensure that it is properly aligned with global economic conditions.
During the three and six months ended June 30, 2012, we repurchased 6.1 million and 15.6 million shares of our common stock, respectively, in the open market and subsequently retired those shares under our existing stock repurchase program. As of June 30, 2012, $166.2 million remained available for repurchase under our existing stock repurchase program.
RESULTS OF OPERATIONS