The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, the unaudited interim financial statements reflect all adjustments consisting of normal and recurring entries considered necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The December 25, 2011 condensed consolidated balance sheet data were derived from audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2011 but does not include all disclosures required by U.S. GAAP for annual periods. The Company adopted fresh start accounting (FSA) for financial reporting purposes upon emergence from bankruptcy proceedings on May 10, 2010.
These condensed consolidated financial statements and related notes are unaudited and should be read in conjunction with the Company’s audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2011 as filed with the SEC on February 23, 2012. The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year.
The Company operates on a 52- to 53-week fiscal year ending on the last Sunday in December. The additional week in a 53-week fiscal year is added to the second quarter to realign the Company’s fiscal quarters more closely to calendar quarters. Fiscal 2012 and fiscal 2011 are comprised of 53-week and 52-week periods, respectively.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries, as well as a variable interest entity (VIE) for which the Company was the primary beneficiary through March 31, 2012. The VIE’s financial statements were not significant to the Company’s condensed consolidated financial statements for the periods presented. All significant intercompany accounts and transactions have been eliminated. On April 1, 2012, the Company acquired substantially all assets and assumed certain liabilities of the VIE under an asset purchase agreement and the entity ceased to be a VIE as of the acquisition date.
Use of Estimates
The preparation of the Company’s consolidated financial statements and disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of commitments and contingencies and the reported amounts of revenues and expenses during the reporting periods. Estimates are used to account for the fair value of certain marketable securities, revenue reserves, the allowance for doubtful accounts, inventory reserves, valuation of intangible assets, impairment of long-lived assets, legal contingencies, income taxes, stock-based compensation expenses, the fair value of the debt, and product warranties. Actual results may differ from those estimates, and such differences may be material to the Company’s condensed consolidated financial statements.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
2. Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued an amendment to its guidance regarding the presentation of comprehensive income. The amended guidance gives an entity 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. The amended guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In December 2011, the FASB further modified the guidance by deferring until further notice the requirement of presenting the effects of reclassification adjustments on accumulated other comprehensive income as both components of net income and of other comprehensive income. This guidance is effective on a retrospective basis for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance beginning the first quarter of fiscal 2012 did not have any material impact on the Company’s financial position, results of operations or cash flows as it only impacted the presentation of the financial statements. The Company has opted to present this information in two separate but consecutive statements.
In September 2011, the FASB issued an amendment to the guidance regarding the testing of goodwill for impairment. The amended guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is no longer required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance by the Company beginning the first quarter of fiscal 2012 did not have a material impact on the Company’s financial position, results of operations or cash flows.
3. Balance Sheet Components
The Company’s cash balances are held in numerous locations throughout the world, with the majority in the United States. As of September 30, 2012, the Company had cash, cash equivalents, and short-term investments of $290.8 million held within the United States and $37.3 million held outside of the United States. As of December 25, 2011, the Company had cash, cash equivalents, and short term investments of $252.2 million held within the United States and $10.5 million held outside of the United States.
All securities other than the Federal Deposit Insurance Corporation (FDIC) insured certificates of deposit were designated as available-for-sale. FDIC insured certificates of deposit are held to maturity. Gross unrealized gains and losses on cash equivalents and short term investments were not material as of September 30, 2012 and December 25, 2011. Gross realized gains and losses on cash equivalents and short term investments were not material for the three and nine months ended September 30, 2012 and September 25, 2011.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
| |
|
September 30, 2012
|
|
|
December 25, 2011
|
|
| |
|
(in thousands)
|
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
Cash
|
|
$ |
268,001 |
|
|
$ |
192,802 |
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
9,180 |
|
|
|
1,172 |
|
|
FDIC insured certificates of deposit
|
|
|
2,279 |
|
|
|
876 |
|
|
Cash and cash equivalents
|
|
$ |
279,460 |
|
|
$ |
194,850 |
|
| |
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$ |
14,980 |
|
|
$ |
24,963 |
|
|
FDIC insured certificates of deposit
|
|
|
33,626 |
|
|
|
42,892 |
|
|
Short-term investments
|
|
$ |
48,606 |
|
|
$ |
67,855 |
|
| |
|
|
|
|
|
|
|
|
|
Account receivable, net
|
|
|
|
|
|
|
|
|
|
Accounts receivable, gross
|
|
$ |
117,731 |
|
|
$ |
110,567 |
|
|
Allowance for doubtful accounts
|
|
|
(285 |
) |
|
|
(224 |
) |
|
Account receivable, net
|
|
$ |
117,446 |
|
|
$ |
110,343 |
|
| |
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$ |
9,958 |
|
|
$ |
12,442 |
|
|
Work-in-process
|
|
|
139,909 |
|
|
|
130,671 |
|
|
Finished goods
|
|
|
22,636 |
|
|
|
30,976 |
|
|
Inventories
|
|
$ |
172,503 |
|
|
$ |
174,089 |
|
| |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
45,168 |
|
|
$ |
51,778 |
|
|
Buildings and leasehold improvements
|
|
|
60,027 |
|
|
|
68,177 |
|
|
Equipment
|
|
|
327,214 |
|
|
|
309,288 |
|
|
Construction in progress
|
|
|
11,925 |
|
|
|
10,806 |
|
|
Accumulated depreciation and amortization
|
|
|
(268,878 |
) |
|
|
(230,822 |
) |
|
Property, plant and equipment, net
|
|
$ |
175,456 |
|
|
$ |
209,227 |
|
4. Equity Incentive Plan and Stock-Based Compensation
Equity Incentive Plan
The Company’s 2010 Equity Incentive Award Plan (2010 Plan) provides for the grant of stock options, stock appreciation rights, restricted stock units, restricted stock, performance awards, and deferred stock to its employees, consultants and non-employee members of its Board of Directors.
The annual restricted stock unit (RSU) awards granted in fiscal 2010 and fiscal 2011 to employees vest over four years in four substantially equal annual installments on the anniversary date of the grant. Beginning in the first quarter of fiscal 2012, the Company issued RSU awards which vest over three years in three substantially equal annual installments on the anniversary date of the grant.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
The key executive RSU awards granted in fiscal 2010 and fiscal 2011 have a four-year performance period, with 50 percent of each target award (base shares) subject to performance goals in each of the four fiscal years following the date of grant. The key executive RSU awards granted in fiscal 2012 have a three-year performance period, with 50 percent of each target award (base shares) subject to performance goals in each of the three fiscal years following the date of grant. A minimum of 50 percent and a maximum of 150 percent of base shares may vest over a three-year period, subject to the Company’s financial performance. If the performance goals are not met in a particular year, the unvested shares will be carried forward but will be forfeited if not earned by the last performance year. If performance is above target in a particular year, base shares earned will be accelerated after shares carried forward from prior years are used. However, no more than the number of shares in the initial grant can be earned.
In the first quarter of fiscal 2012, the Company issued additional key executive RSU awards with a two-year performance period, with 100 percent of each target award (base shares) subject to performance goals in each of the two fiscal years following the date of grant. The two-year awards were granted to certain executives in lieu of participation in the Company’s annual cash bonus plan. The annual performance goals for these awards are the same as those for the three and four-year key executive RSU awards. A minimum of 0 percent and maximum of 100 percent of base shares vest each year, subject to performance. Unvested shares will not be carried forward and will be forfeited if not earned in any particular year.
The numbers of shares of common stock available for grant under the 2010 Plan are shown in the following table:
| |
|
Shares Available For Grant
|
|
|
Balance as of December 25, 2011
|
|
|
2,150,354 |
|
|
Additional shares issuable under 2010 Plan (annual increase for 2012)
|
|
|
3,560,245 |
|
|
Stock options granted, net of forfeitures/cancellations
|
|
|
(2,415,102 |
) |
|
RSU awards granted, net of forfeitures/cancellations
|
|
|
(1,005,742 |
) |
|
Key Executive RSU awards granted, net of forfeitures/cancellations
|
|
|
(1,100,222 |
) |
|
Balance as of September 30, 2012
|
|
|
1,189,533 |
|
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
Stock-Based Compensation
The following table presents the total stock-based compensation expense by financial statement caption resulting from the Company’s stock options and RSU awards:
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
September 30, 2012
|
|
|
September 25, 2011
|
|
|
September 30, 2012
|
|
|
September 25, 2011
|
|
| |
|
(in thousands) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$ |
1,713 |
|
|
$ |
838 |
|
|
$ |
4,747 |
|
|
$ |
2,285 |
|
|
Research and development
|
|
|
2,350 |
|
|
|
1,157 |
|
|
|
6,045 |
|
|
|
3,131 |
|
|
Sales, general and administrative
|
|
|
4,698 |
|
|
|
2,629 |
|
|
|
13,384 |
|
|
|
8,804 |
|
|
Stock-based compensation expense before income taxes
|
|
|
8,761 |
|
|
|
4,624 |
|
|
|
24,176 |
|
|
|
14,220 |
|
|
Stock-based compensation expense after income taxes(1)
|
|
$ |
8,761 |
|
|
$ |
4,624 |
|
|
$ |
24,176 |
|
|
$ |
14,220 |
|
(1) There was no income tax benefit related to stock-based compensation because all of the Company's U.S. deferred tax assets, net of U.S. deferred tax liabilities, continue to be subject to a full valuation allowance.
7. Debt
The following table summarizes the Company’s debt at September 30, 2012 and December 25, 2011:
| |
|
September 30, 2012
|
|
|
December 25, 2011
|
|
| |
|
(in thousands)
|
|
|
Debt obligations:
|
|
|
|
|
|
|
|
Term Loan
|
|
$ |
217,300 |
|
|
$ |
247,082 |
|
|
Senior Unsecured Notes
|
|
|
200,000 |
|
|
|
200,000 |
|
|
China Working Capital loan facility
|
|
|
- |
|
|
|
2,317 |
|
|
Total debt
|
|
$ |
417,300 |
|
|
$ |
449,399 |
|
|
Less: current portion
|
|
|
11,468 |
|
|
|
4,222 |
|
|
Long-term debt
|
|
$ |
405,832 |
|
|
$ |
445,177 |
|
The China Working Capital Loan Facility was included in the Company’s condensed consolidated financial statements as of December 25, 2011 as a result of consolidation of a VIE (see Note 1 for further details). On April 1, 2012, the Company acquired substantially all assets and assumed certain liabilities of the VIE under an asset purchase agreement and the entity ceased to be a VIE of the Company as of the acquisition date. The China Working Capital loan facility was not a part of the acquisition and therefore was not included in the Company’s condensed consolidated financial statements as of September 30, 2012.
Under the Company’s existing debt arrangements, the Company is subject to covenants that, among other things, place certain limitations on the Company's ability to incur additional debt, make investments, pay dividends, and sell assets. The Company was in compliance with these covenants as of September 30, 2012. Additionally, as of September 30, 2012, the Company had not drawn on the available credit of $22.9 million under its Revolving Credit Facility.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
8. Fair Value Measurement
The Company measures its cash equivalents, marketable securities, foreign currency forward contracts and interest rate derivative contracts at fair value. Fair value is an exit price, representing the amount that would be received on sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1— Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activities.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The cash equivalents and marketable securities are classified within Level 1 or Level 2. This is because the Company values its cash equivalents and marketable securities using quoted market prices or alternative pricing sources and models utilizing observable market inputs. The foreign currency forward contracts and interest rate derivative contracts are classified as Level 2 because the valuation inputs are based on quoted prices and observable market data of similar instruments. The Company principally executes its foreign currency contracts in the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants and the Company’s counterparties are large money center banks and regional banks. The valuation inputs for the Company’s foreign currency contracts are based on quoted prices and quoted pricing intervals from public data sources (specifically, spot exchange rates, LIBOR rates and credit default rates) and do not involve management judgment. In determining the fair value of the Company’s interest rate swap, the Company uses the present value of expected cash flows based on observable market interest rate yield curves and interest rate volatility commensurate with the term of each instrument.
The fair value measurements of the Company’s financial assets and liabilities consisted of the following types of instruments categorized in the table below based upon the fair value hierarchy:
| |
|
September 30, 2012
|
|
|
|
December 25, 2011
|
|
|
|
|
| |
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
| |
|
(in thousands)
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$ |
9,180 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,180 |
|
(1) |
|
$ |
1,172 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,172 |
(2) |
|
|
|
|
Commercial paper
|
|
|
- |
|
|
|
14,980 |
|
|
|
- |
|
|
|
14,980 |
|
(1) |
|
|
- |
|
|
|
24,963 |
|
|
|
- |
|
|
|
24,963 |
(2) |
|
|
|
|
Foreign currency forward contracts
|
|
|
- |
|
|
|
80 |
|
|
|
- |
|
|
|
80 |
|
|
|
|
- |
|
|
|
20 |
|
|
|
- |
|
|
|
20 |
|
|
|
|
|
Total financial assets
|
|
$ |
9,180 |
|
|
$ |
15,060 |
|
|
$ |
- |
|
|
|
24,240 |
|
|
|
$ |
1,172 |
|
|
$ |
24,983 |
|
|
$ |
- |
|
|
|
26,155 |
|
|
|
|
|
Interest rate swaps
|
|
$ |
- |
|
|
$ |
778 |
|
|
$ |
- |
|
|
$ |
778 |
|
|
|
$ |
- |
|
|
$ |
1,443 |
|
|
$ |
- |
|
|
$ |
1,443 |
|
|
|
|
|
Foreign currency forward contracts
|
|
|
- |
|
|
$ |
1,298 |
|
|
|
- |
|
|
$ |
1,298 |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
Total financial liabilities
|
|
$ |
- |
|
|
$ |
2,076 |
|
|
$ |
- |
|
|
$ |
2,076 |
|
|
|
$ |
- |
|
|
$ |
1,443 |
|
|
$ |
- |
|
|
$ |
1,443 |
|
|
|
|
(1) Total cash and cash equivalents, short-term investments of $328.1 million as of September 30, 2012 includes cash of $303.9 million held in operating accounts, $9.2 million in money market funds and $15.0 million in commercial paper.
(2) Total cash and cash equivalents, short-term investments of $262.7 million as of December 25, 2011 includes cash of $236.5 million held in operating accounts, $1.2 million in money market funds and $25.0 million in commercial paper.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
Fair Value of Other Financial Instruments not carried at Fair Value
Substantially all of the Company’s long-term debt is traded in the market and the fair value in the table below is based on the quoted market price as of September 30, 2012 and December 25, 2011 and is Level 1. The carrying amounts and estimated fair values of the Company’s debt instruments are as follows:
| |
|
September 30, 2012
|
|
|
December 25, 2011
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
(in thousands)
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt traded in the market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
$ |
217,300 |
|
|
$ |
218,658 |
|
|
$ |
249,181 |
|
|
$ |
246,066 |
|
|
Senior Unsecured Notes
|
|
|
200,000 |
|
|
|
196,000 |
|
|
|
200,000 |
|
|
|
179,000 |
|
|
Debt not traded in the market
|
|
|
- |
|
|
|
- |
|
|
|
2,317 |
|
|
|
2,317 |
|
|
Total Debt Obligations
|
|
$ |
417,300 |
|
|
$ |
414,658 |
|
|
$ |
451,498 |
|
|
$ |
427,383 |
|
The fair value of the Company’s long-term debt that is not traded in the market was estimated by considering the interest rates and the terms of the debt and it is Level 3. The fair value of the Company’s cash equivalents, accounts receivable, accounts payable and other current liabilities approximates their carrying value.
9. Derivative Financial Instruments
Beginning the second quarter of fiscal 2012, the Company entered into multiple foreign exchange forward contracts to hedge certain operational exposures resulting from movements in Japanese yen (JPY) exchange rates. The Company’s hedging policy is designed to mitigate the impact of foreign currency exchange rate movements on operating results. Some foreign currency forward contracts were considered to be economic hedges that were not designated as hedging instruments while others were designated as cash flow hedges. Whether designated or undesignated, these forward contracts protect the Company against the variability of forecasted foreign currency cash flows resulting from revenues and net asset or liability positions designated in currencies other than the U.S. dollar and they are not speculative in nature.
Cash Flow Hedges
The Company’s foreign currency forward contracts that were designated as cash flow hedges are carried at fair value and have maturities between three and eight months. The Company entered into the cash flow hedges to protect non-functional currency revenue against variability in cash flows due to foreign currency fluctuations. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions at the inception of the hedge. The maximum original duration of any contract allowable under the Company’s hedging policy is fifteen months. The Company recognizes derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measures them at fair value on a quarterly basis. The Company records changes in the intrinsic value of its cash flow hedges in accumulated other comprehensive income in the accompanying Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. Interest charges or “forward points” on the forward contracts are excluded from the assessment of hedge effectiveness and are recorded in interest and other income (expense) in the accompanying Condensed Consolidated Statements of Operations. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income (expense) in its Condensed Consolidated Statements of Operations at that time. There were no such gains or losses recognized in interest and other income (expense), for the three months and nine months ended September 30, 2012.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
The Company evaluates hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and records any ineffective portion of the hedge in interest and other income (expense) in its Condensed Consolidated Statements of Operations. There was no net gain or loss recognized for cash flow hedges due to hedge ineffectiveness for the three months and nine months ended September 30, 2012.
At September 30, 2012, the Company had outstanding forward contracts to sell JPY 2,579 million in exchange for $32.5 million. Over the next twelve months, the Company expects to reclassify $0.9 million from accumulated other comprehensive loss to earnings as the related forecasted transactions occur.
The following table summarizes the activity related to derivatives in accumulated other comprehensive loss, net of tax:
| |
|
Three Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2012
|
|
| |
|
(in thousands)
|
|
| |
|
|
|
|
|
|
|
Beginning Balance
|
|
$ |
217 |
|
|
$ |
- |
|
|
Net loss reclassified into earnings
|
|
|
538 |
|
|
|
538 |
|
|
Net decrease in fair value of the cash flow hedges
|
|
|
(1,639 |
) |
|
|
(1,422 |
) |
|
Ending Balance
|
|
$ |
(884 |
) |
|
$ |
(884 |
) |
Non-designated hedges
The Company also hedges net receivables and payables denominated in Japanese yen with foreign exchange forward contracts to reduce the risk that its earnings and cash flows will be affected by changes in foreign currency exchange rates. These forward contracts are not designated hedges and are carried at fair value with changes in the fair value recorded to interest and other income (expense) in the accompanying Condensed Consolidated Statements of Income. These forward contracts do not subject the Company to additional material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the monetary assets and liabilities being hedged. Total notional amounts of outstanding contracts were as summarized in the table below:
|
Buy / Sell
|
September 30, 2012
|
December 25, 2011
|
| |
(in millions)
|
| |
|
|
|
Japanese Yen / US dollar
|
JPY 1,115.5 / $14.2
|
-
|
|
US dollar / Japanese Yen
|
$45.7/ JPY 3,618
|
$33.3 / JPY 2,595
|
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
Interest Rate Swap
The Company is exposed to the variability of future quarterly interest payments on its Term Loan due to changes in the LIBOR above the floor rate of 1.25 percent. To mitigate this interest rate risk and comply with the hedging requirement in the initial Term Loan agreement, the Company entered into a series of interest rate swaps to manage the interest rate risk associated with its borrowings in the third quarter of fiscal 2010. The hedging requirement in the Term Loan agreement was removed when the Term Loan was amended in November 2010. However, the interest rate swaps remained in place as of September 30, 2012.
The Company has approximately $217.3 million outstanding under the Term Loan as of September 30, 2012. The swap agreements have an aggregate notional amount of $250 million and expire on May 17, 2013. Under these agreements, the Company pays the independent swap counterparty a fixed rate of 2.42 percent and, in exchange, the swap counterparty pays the Company an interest rate equal to the floor rate of 2 percent or three-month LIBOR, whichever is higher.
As of November 9, 2010, due to the amendment of the Term Loan, the critical terms of the swaps and the Term Loan were no longer matched. Accordingly, the hedge no longer qualified as a cash flow hedge. As a result, the mark-to-market of the swaps has been reported as a component of interest expense since the fourth quarter of fiscal 2010.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and September 25, 2011 was as follows:
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
September 30, 2012
|
|
|
September 25, 2011
|
|
|
September 30, 2012
|
|
|
September 25, 2011
|
|
| |
|
(in thousands)
|
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain recognized in OCI (1)
|
|
$ |
(1,639 |
) |
|
$ |
- |
|
|
$ |
(1,422 |
) |
|
$ |
- |
|
|
Net loss reclassified from accumulated OCI into income (2)
|
|
$ |
538 |
|
|
$ |
- |
|
|
$ |
538 |
|
|
$ |
- |
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain) recognized in income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap interest expense (3)
|
|
$ |
(16 |
) |
|
$ |
(138 |
) |
|
$ |
(134 |
) |
|
$ |
(1,286 |
) |
|
Foreign exchange forward contracts (4)
|
|
$ |
1,221 |
|
|
$ |
(2,636 |
) |
|
$ |
1,464 |
|
|
$ |
(4,541 |
) |
|
(1)
|
Net change in the fair value of the effective portion classified in other comprehensive income (OCI)
|
|
|
|
(2)
|
Effective portion classified as net product revenue
|
|
|
|
|
|
|
|
(3)
|
Classified in interest expense
|
|
|
|
|
|
|
|
(4)
|
Classified in interest income and other
|
|
|
|
|
|
|
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets were as follows:
| |
|
September 30, 2012
|
|
|
December 25, 2011
|
|
|
Balance sheet location
|
|
Derivatives
designated as
hedging
instruments
|
|
|
Derivatives
not designated
as hedging
instruments
|
|
|
Derivatives
designated
as hedging
instruments
|
|
|
Derivatives
not
designated as
hedging
instruments
|
|
| |
|
|
|
|
(in thousands)
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Forward Contracts
|
|
$ |
- |
|
|
$ |
80 |
|
|
$ |
- |
|
|
$ |
20 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Swap
|
|
$ |
- |
|
|
$ |
778 |
|
|
$ |
- |
|
|
$ |
1,011 |
|
|
Foreign Currency Forward Contracts
|
|
$ |
600 |
|
|
$ |
698 |
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate Swap
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
432 |
|
There were no derivatives designated as hedging instruments at December 25, 2011.
10. Income Taxes
The following table presents the Company’s income tax expense:
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
September 30, 2012
|
|
|
September 25, 2011
|
|
|
September 30, 2012
|
|
|
September 25, 2011
|
|
| |
|
(in thousands)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
2,757 |
|
|
$ |
8,560 |
|
|
$ |
9,572 |
|
|
$ |
15,388 |
|
The Company’s tax expense decreased from $8.6 million for the three months ended September 25, 2011 to $2.8 million for the three months ended September 30, 2012. The decrease was primarily related to the amount of withholding taxes on licensing revenue from Samsung. The tax expense decreased from $15.4 million for the nine months ended September 25, 2011 to $9.6 million for the nine months ended September 30, 2012. The decrease was primarily attributable to a release of reserves for uncertain tax positions in foreign locations and the amount of withholding taxes on licensing revenue from Samsung, offset by the impact from the sale of land and building in Kuala Lumpur, Malaysia.
As of September 30, 2012, all of the Company's U.S. deferred tax assets, net of deferred tax liabilities, continue to be subject to a full valuation allowance. The valuation allowance is based on the Company's assessment that it is more likely than not that the deferred tax assets will not be realizable in the foreseeable future.
As of December 25, 2011, the Company had U.S. federal and state net operating loss carry forwards of approximately $1.0 billion and $208.0 million, respectively. Approximately $533.6 million of the federal net operating loss carry forwards are subject to an annual limitation of $27.2 million. The federal and state net operating losses, if not utilized, expire between 2016 and 2031.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
If the Company were to undergo an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, its ability to utilize its federal net operating loss carry forwards could be limited under certain provisions of the Internal Revenue Code. As a result, the Company could incur greater tax liabilities than it would in the absence of such a limitation and any incurred liabilities could materially adversely affect the Company’s results of operations and financial condition.
11. Restructuring and Others
Fiscal 2011 Restructuring Plan
In the fourth quarter of fiscal 2011, the Company initiated a restructuring plan as part of a company-wide cost saving initiative aimed at reducing operating costs in light of global economic challenges and rapid changes in the China wireless and handset market. In the area of reducing costs and improving efficiencies, the Company announced reduction of headcount in several locations and the closure of its assembly, test, mark and pack facility in Kuala Lumpur, Malaysia (the KL facility), which was completed in the first quarter of fiscal 2012.
During the second quarter of fiscal 2012, the Company sold its land and building relating to the KL facility for net proceeds of $38.6 million and realized a gain of $28.4 million. Total costs incurred under the fiscal 2011 restructuring plan through September 30, 2012 were $22.6 million.
Fiscal 2009/10 Restructuring Plan
In fiscal 2009 and 2010, the Company implemented certain restructuring measures, including workforce reductions and the sale of its plant in Suzhou, China. The Company incurred restructuring expenses related to employee termination benefits and fixed asset relocation, depreciation and disposal. During the first quarter of fiscal 2012, there was a restructuring credit of $0.8 million as a result of the Company having prevailed in a labor-related lawsuit in conjunction with the 2009 restructuring activities in Thailand. Total costs incurred through September 30, 2012 under this restructuring plan were $43.2 million.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
Summary of Restructuring Plans
The following tables present a summary of restructuring activities related to all of the Company’s restructuring plans described above:
| |
|
Three Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2012
|
|
| |
|
2011
Restructuring
Plan
|
|
|
2009/2010
Restructuring
Plan
|
|
|
2011
Restructuring
Plan
|
|
|
2009/2010
Restructuring
Plan
|
|
| |
|
(in thousands)
|
|
|
Accrued restructuring balance, beginning of period
|
|
$ |
785 |
|
|
$ |
172 |
|
|
$ |
8,087 |
|
|
$ |
1,200 |
|
|
Provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of equipment
|
|
|
- |
|
|
|
- |
|
|
|
(3,798 |
) |
|
|
- |
|
|
Asset relocation fees
|
|
|
854 |
|
|
|
- |
|
|
|
4,686 |
|
|
|
- |
|
|
Asset impairment charges
|
|
|
- |
|
|
|
- |
|
|
|
2,070 |
|
|
|
- |
|
|
Severance and others
|
|
|
1,009 |
|
|
|
- |
|
|
|
3,550 |
|
|
|
- |
|
|
Restructuring charges
|
|
|
1,863 |
|
|
|
- |
|
|
|
6,508 |
|
|
|
- |
|
|
Non-cash adjustments (1)
|
|
|
(43 |
) |
|
|
(1 |
) |
|
|
1,557 |
|
|
|
(899 |
) |
|
Cash payments
|
|
|
(344 |
) |
|
|
(68 |
) |
|
|
(13,891 |
) |
|
|
(198 |
) |
|
Accrued restructuring balance, end of period
|
|
$ |
2,261 |
|
|
$ |
103 |
|
|
$ |
2,261 |
|
|
$ |
103 |
|
(1) Non-cash adjustments for the three months ended September 30, 2012 relate to foreign currency translations. Non-cash adjustments for the nine months ended September 30, 2012 relate to asset impairment charges, reversal of accrual relating to labor lawsuit in Thailand, gain on sale of equipment and foreign currency translations.
There were no restructuring charges for the three months and nine months ended September 25, 2011. The Company does not expect to incur any further restructuring charges under the 2011 and 2009/2010 Restructuring Plans.
12. Commitments and Contingencies
Purchase Commitments
The Company had $118.4 million of purchase commitments with certain suppliers, primarily for inventory items as of September 30, 2012.
Indemnifications
In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments under these types of agreements have not had a material adverse effect on business, results of operations or financial condition.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
Income Taxes
The Company is subject to audit by the Internal Revenue Service (IRS) and various other tax authorities. The Company has reserved for potential adjustments to the provision for income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities, and the Company believes that the final outcome of these examinations or agreements will not have a material effect on the Company’s results of operations. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of tax benefits in the period the Company determines the liabilities are no longer necessary. If the estimates of the federal, state, and foreign income tax liabilities are less than the ultimate assessment, a further charge to expense would result.
Product Warranties
The Company generally offers a one-year limited warranty for its Flash memory products. Changes in the Company’s liability for product warranty are as follows:
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
September 30, 2012
|
|
|
September 25, 2011
|
|
|
September 30, 2012
|
|
|
September 25, 2011
|
|
| |
|
(in thousands)
|
|
|
Balance at beginning of period
|
|
$ |
3,860 |
|
|
$ |
1,838 |
|
|
$ |
2,537 |
|
|
$ |
3,635 |
|
|
Provision for warranties issued
|
|
|
404 |
|
|
|
395 |
|
|
|
2,991 |
|
|
|
1,735 |
|
|
Settlements made
|
|
|
(1,205 |
) |
|
|
(824 |
) |
|
|
(2,305 |
) |
|
|
(3,289 |
) |
|
Changes in liability for pre-existing warranties during the period
|
|
|
(89 |
) |
|
|
(45 |
) |
|
|
(253 |
) |
|
|
(717 |
) |
|
Balance at end of period
|
|
$ |
2,970 |
|
|
$ |
1,364 |
|
|
$ |
2,970 |
|
|
$ |
1,364 |
|
Legal Matters
The Company is a defendant or plaintiff in various legal actions that arose in the normal course of business. In the opinion of management, the aggregate liability, if any, with respect to these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
In addition to ordinary routine litigation incidental to the business, the Company is party to a material legal proceeding as described below. The outcome of any litigation is uncertain, and, should the proceeding where the Company is a defendant be successful, it may be subject to significant damages awards and injunctive relief, which could have a material adverse effect on its financial condition, results of operations, or cash flows.
Spansion Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(Unaudited)
Fast Memory Erase LLC v. Spansion Inc., et al.
On June 9, 2008, Fast Memory Erase LLC filed a complaint in the U.S. District Court for the Northern District of Texas alleging patent infringement against Spansion Inc., Spansion LLC, Intel Corp., Numonyx B.V., Numonyx, Inc., Nokia Corp., Nokia Inc., Sony Ericsson Mobile Communications AB, Sony Ericsson Mobile Communications (USA), Inc., and Motorola, Inc. The case is styled, Fast Memory Erase, LLC v. Spansion Inc., Spansion LLC, et al., Case No. 3:08-CV-00977-M (N.D. Tex.). Fast Memory Erase’s complaint alleges that Spansion’s NOR Flash memory products using floating gate technology infringe one or more claims of U.S. Patent No. 6,236,608 (the ‘608 patent). Fast Memory Erase has also asserted U.S. Patent No. 6,303,959 (the ‘959 patent) in its complaint against the products of other defendants, namely Intel and Numonyx, but it has not asserted the ‘959 patent against any Spansion products. On December 22, 2008, Fast Memory Erase filed an amended complaint. In its amended complaint, Fast Memory Erase added Apple, Inc. as a defendant. Spansion has answered Fast Memory Erase’s complaint and amended complaint. Spansion’s answers assert that Spansion does not infringe the ’608 patent and that the ‘608 patent is invalid. In its answers, Spansion also asserts counterclaims against Fast Memory Erase for declaratory judgments of non-infringement and invalidity. The case was stayed against Spansion as a result of the Chapter 11 Cases until May 18, 2009. The U.S. Bankruptcy Court preliminarily lifted the stay and set June 23, 2009 as the date for a final determination on the stay. The parties subsequently agreed to lift the stay so that the U.S. District Court could proceed with a Markman hearing solely to determine the meaning of certain claims of the ‘959 patent, which was held on September 16, 2009. At the Markman hearing, the Court did not consider the claims of the ‘608 patent because it was subject to reexamination by the U.S. Patent and Trademark Office. The Court stayed the case with respect to the ‘608 patent on December 9, 2009, in view of a pending reexamination. On March 8, 2010, the ‘959 patent was severed from the case and assigned a separate case number. On September 7, 2012, the Court administratively closed the case and provided that any party may seek to reopen the case as the reexamination of the ’608 patent proceeds. The Company believes that the potential loss or range of loss, if any, in this case cannot be estimated at this time.
13. Ongoing Bankruptcy Related Matters
In connection with the Company’s emergence from Chapter 11 bankruptcy proceedings in May 2010, a claims agent was appointed to analyze and, at its discretion, contest outstanding disputed claims totaling $1.5 billion. As of September 30, 2012, the Company had total outstanding disputed claims of $168.2 million, including reserves, and 6.2 million unregistered shares of Class A Common Stock relating to resolution of outstanding disputed claims.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. These statements relate to future events or our future financial performance. Forward-looking statements may include words such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or other wording indicating future results or expectations. Forward-looking statements are subject to risks and uncertainties, and actual events or results may differ materially. Factors that could cause our actual results to differ materially include, but are not limited to, those discussed under “Risk Factors” in this report. We also face risks and uncertainties associated with substantial indebtedness and its impact on our financial health and operations; fluctuations in foreign currency exchange rates; the sufficiency of workforce and cost reduction initiatives. Other risks and uncertainties relating to our business include our ability to: implement our business strategy focused primarily on the embedded Flash memory market; maintain or increase our average selling price and lower our average costs; accurately forecast customer demand for our products; attract new customers; obtain additional financing in the future; maintain our distribution relationships and channels in the future; successfully enter new markets and manage our international expansion; successfully compete with existing and new competitors, or with new memory or other technologies; successfully develop new applications and markets for our products; maintain manufacturing efficiency; obtain adequate supplies of satisfactory materials essential to manufacture our products; successfully develop and transition to the latest technologies; negotiate patent and other intellectual property licenses and patent cross-licenses and acquire additional patents; protect our intellectual property and defend against infringement or other intellectual property claims; maintain our business operations and demand for our products in the event of natural or man-made catastrophic events; and effectively manage, operate and compete in the current sustained economic downturn. Except as required by law, we undertake no obligation to revise or update any forward-looking statements to reflect any events or circumstances that arise after the date of this report, or to conform such statements to actual results or changes in our expectations.
Overview
We are a leading designer, manufacturer and developer of Flash memory semiconductors. We are focused on a portion of the Flash memory market that relates to high-performance and high-reliability Flash memory solutions for microprocessors, controllers and other programmable semiconductors that run applications in a broad range of electronic systems. Our strategic emphasis centers on the embedded portion of the Flash memory market, which is generally characterized by long design and product life cycles, relatively stable pricing, more predictable supply-demand outlook and lower capital investments. These markets include transportation, industrial, computing, communications, consumer and gaming.
Within this embedded industry, we serve a diversified customer base through a differentiated, non-commodity, service-oriented model that strives to meet our customers’ needs for product performance, quality, reliability and service. Our Flash memory solutions are incorporated in products manufactured by leading original equipment manufacturers (OEMs). Embedded customers require products with a higher level of performance and quality to allow their products to work in extreme and harsh conditions and in many cases require products to span a decade of production, with specific feature sets and wide operating temperatures. We spent many years refining our product and service strategy to address these market requirements and deliver high-quality products that go into electronic applications in cars, airplanes, set top boxes, games, telecommunications equipment, smart meters and medical devices.
The majority of our NOR Flash product designs are based on our proprietary two-bit-per-cell MirrorBit® technology, which has a simpler cell architecture, higher yield and lower cost than competing floating gate NOR Flash memory technology. While we are most known for our NOR product leadership, we are expanding our portfolio in the areas of NAND and programmable system solutions to bring even more value and differentiation to embedded markets. Our products are designed to accommodate various voltage, interface and density requirements for a wide range of applications and customer platforms. Spansion NAND products are engineered specifically for embedded requirements.
In addition to Flash memory products, we generate revenue by licensing our intellectual property to third parties and we assist our customers in developing and prototyping their designs by providing software and hardware development tools, drivers and simulation models for system-level integration.
Critical Accounting Policies
There have been no significant changes in our critical accounting estimates or significant accounting policies during the nine months ended September 30, 2012 as compared to the discussion in Part II, Item 7 and in Note 3 to our financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 25, 2011. We adopted fresh start accounting (FSA) for financial reporting purposes upon emergence from bankruptcy proceedings on May 10, 2010.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued an amendment to its guidance regarding the presentation of comprehensive income. The amended guidance gives an entity 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. The amended guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In December 2011, the FASB further modified the guidance by deferring until further notice the requirement of presenting the effects of reclassification adjustments on accumulated other comprehensive income as both components of net income and of other comprehensive income. This guidance is effective on a retrospective basis for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Our adoption of this guidance beginning the first quarter of fiscal 2012 did not have any material impact on our financial position, results of operations or cash flows as it only impacted the presentation of the financial statements. We opted to present this information in two separate but consecutive statements.
In September 2011, the FASB issued an amendment to the guidance regarding the testing of goodwill for impairment. The amended guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer is required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance beginning the first quarter of fiscal 2012 did not have a material impact on our financial position, results of operations or cash flows.
Results of Operations
Comparison of Net Sales, Gross Margin, Operating Expenses, Interest and Other Income (Expense), Interest Expense and Income Tax Provision
The following is a summary of our operating results:
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 30, 2012
|
|
|
September 25, 2011
|
|
|
Variance
|
|
|
September 30, 2012
|
|
|
September 25, 2011
|
|
|
Variance
|
|
| |
|
(in thousands, except for percentages)
|
|
|
Net sales
|
|
$ |
239,747 |
|
|
$ |
258,163 |
|
|
$ |
(18,416 |
) |
|
$ |
691,945 |
|
|
$ |
849,868 |
|
|
$ |
(157,923 |
) |
|
Cost of sales
|
|
|
161,281 |
|
|
|
184,486 |
|
|
|
(23,205 |
) |
|
|
480,370 |
|
|
|
629,987 |
|
|
|
(149,617 |
) |
|
Gross profit
|
|
|
78,466 |
|
|
|
73,677 |
|
|
|
4,789 |
|
|
|
211,575 |
|
|
|
219,881 |
|
|
|
(8,306 |
) |
|
Gross margin
|
|
|
32.7 |
% |
|
|
28.5 |
% |
|
|
4.2 |
% |
|
|
30.6 |
% |
|
|
25.9 |
% |
|
|
4.7 |
% |
|
Research and development
|
|
|
27,407 |
|
|
|
21,721 |
|
|
|
5,686 |
|
|
|
83,078 |
|
|
|
82,118 |
|
|
|
960 |
|
|
Sales, general and administrative
|
|
|
35,228 |
|
|
|
28,728 |
|
|
|
6,500 |
|
|
|
103,485 |
|
|
|
79,188 |
|
|
|
24,297 |
|
|
Net gain on sale of KL land and building
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(28,434 |
) |
|
|
- |
|
|
|
(28,434 |
) |
|
Restructuring charges
|
|
|
1,862 |
|
|
|
- |
|
|
|
1,862 |
|
|
|
5,650 |
|
|
|
- |
|
|
|
5,650 |
|
|
Operating income
|
|
|
13,969 |
|
|
|
23,228 |
|
|
|
(9,259 |
) |
|
|
47,796 |
|
|
|
58,575 |
|
|
|
(10,779 |
) |
|
Interest and other income (expense)
|
|
|
1,267 |
|
|
|
775 |
|
|
|
492 |
|
|
|
2,216 |
|
|
|
1,233 |
|
|
|
983 |
|
|
Interest expense
|
|
|
(7,339 |
) |
|
|
(7,629 |
) |
|
|
290 |
|
|
|
(22,924 |
) |
|
|
(25,465 |
) |
|
|
2,541 |
|
|
Provision for income taxes
|
|
|
2,757 |
|
|
|
8,560 |
|
|
|
(5,803 |
) |
|
|
9,572 |
|
|
|
15,388 |
|
|
|
(5,816 |
) |
Net Sales
Net sales decreased by $18.4 million from $258.2 million for the three months ended September 25, 2011 to $239.7 million for the three months ended September 30, 2012, primarily due to $23.1 million lower licensing revenue and a $13.4 million reduction in wireless sales. This decrease was partially offset by an $18.1 million increase in sales in the embedded market. In the third quarter of fiscal 2011 we recognized $30.0 million of licensing revenue in connection with a patent litigation settlement with Samsung. As part of the settlement, we agreed to offset the first $30.0 million of the payments due from Samsung against our payment to Samsung for the purchase of its bankruptcy claim. Comparable revenue recognized in the third quarter of fiscal 2012 based on license payments from Samsung was $6.3 million. Wireless sales have continued to decline as a result of the continued impact of wireless customers moving to 1.8-volt mid-and low-density serial NOR products that we presently do not offer.
Net sales decreased by $157.9 million from $849.9 million for the nine months ended September 25, 2011 to $691.9 million for the nine months ended September 30, 2012. The decrease was mainly due to $152.4 million reduction in wireless sales and, to a lesser extent, sales in the Asia Pacific region in general and $11.2 million lower licensing revenue. The decline in sales in the Asia Pacific region was attributable to the general economic slowdown as a result of decreased consumer confidence and spending.
Gross Profit
Our gross profit increased by $4.8 million from $73.7 million for the three months ended September 25, 2011 to $78.5 million for the three months ended September 30, 2012. The increase was mainly due to higher revenues in the embedded market as a result of migration from our 110 nm and 90 nm products to 65nm products, a shift in product mix to higher density products and improved manufacturing efficiencies from higher volume and optimization of internal and external manufacturing. The increase was partially offset by lower licensing revenue.
Our gross margin as a percentage of sales increased by 4 percent from 29 percent in the three months ended September 25, 2011 to 33 percent in the three months ended September 30, 2012 primarily due to the increase in higher margin embedded revenues from 65nm products, a shift in product mix to higher density products and improved manufacturing efficiencies. The increase was partially offset by lower licensing revenue from Samsung.
Our gross profit decreased by $8.3 million from $219.9 million for the nine months ended September 25, 2011 to $211.6 million for the nine months ended September 30, 2012. The decrease was due to lower licensing revenues, higher expense from amortization of intangibles mainly due to projects moving from IPR&D to developed technology, and lower utilization of our manufacturing facilities in the first half of fiscal 2012. Our gross margin as a percentage of sales increased from 26 percent in the nine months ended September 25, 2011 to 31 percent in the nine months ended September 30, 2012 primarily due to a decrease in lower margin wireless revenues and benefits from lower depreciation due to the diminishing impact of fresh start accounting-related adjustments.
Research and Development (R&D)
R&D expenses increased by $5.7 million from $21.7 million for the three months ended September 25, 2011 to $27.4 million for the three months ended September 30, 2012. The increase was mainly due to $5.1 million of higher employee compensation and benefits and $1.3 million higher material costs on R&D projects. The increase in employee compensation and benefits was driven by higher incentive compensation, annual salary adjustments and increased stock based compensation expense.
R&D expenses increased by $1.0 million from $82.1 million for the nine months ended September 25, 2011 to $83.1 million for the nine months ended September 30, 2012. The increase was mainly due to $7.1 million of higher employee compensation and benefits as discussed above and $3.5 million higher development charges relating to NAND development. The increase was partially offset by $7.2 million of asset impairment charges relating to tools and equipment resulting from the closure of our development facility located in Sunnyvale, California in the first half of fiscal 2011 with no comparable charge in 2012, $1.0 million lower depreciation due to the diminishing impact of fresh start accounting-related adjustments and $0.6 million lower material costs for projects.
Sales, General and Administrative (SG&A)
SG&A expenses increased by $6.5 million from $28.7 million for the three months ended September 25, 2011 to $35.2 million for the three months ended September 30, 2012. The increase was mainly due to $7.4 million of higher employee compensation and benefits due to annual salary adjustments, higher incentive compensation and increased stock based compensation. This was partially offset by $0.8 million lower depreciation and building allocation charges due to the diminishing impact of fresh start accounting-related adjustments in fiscal 2012.
SG&A expenses increased by $24.3 million from $79.2 million for the nine months ended September 25, 2011 to $103.5 million for the nine months ended September 30, 2012. SG&A for the nine months ended September 25, 2011 was lower primarily due to a net reduction of $23.7 million in litigation reserves as a result of settlement of the Samsung patent litigation. There was no comparable reduction in 2012. Besides the above, there was an increase of $4.5 million due to higher employee compensation and benefits due to annual salary adjustments, higher incentive compensation and increased stock based compensation. The increase was partially offset by $3.5 million lower depreciation and building allocation charges due to the diminishing impact of fresh start accounting-related adjustments and $1.4 million lower professional fees.
Net Gain on Sale of Land and Building in Kuala Lumpur
The gain of $28.4 million, net of selling expenses for the nine months ended September 30, 2012, was recognized on the sale of the KL facility, in the second quarter of fiscal 2012. There was not a similar transaction in fiscal 2011.
Restructuring Charges
Restructuring charges for the three months ended September 25, 2012 were $1.9 million, which was mainly comprised of $0.9 million severance costs and $0.9 million asset relocation cost. There were no restructuring charges for the three months ended September 25, 2011.
Restructuring charges for the nine months ended September 30, 2012 of $5.7 million, were mainly comprised of $7.9 million asset relocation and impairment charges in our KL facility and $1.9 million severance and employee related costs, offset by $1.9 million gain on the sale of equipment in the KL facility, a $1.9 million gain on sale of equipment in Thailand and a $0.9 million credit as a result of our prevailing in a labor-related lawsuit in conjunction with the 2009 Restructuring Plan in Thailand. There were no restructuring charges for the nine months ended September 25, 2011.
Interest and Other Income (Expense)
Interest and other income (expense), increased by $0.5 million from $0.8 million for the three months ended September 25, 2011 to $1.3 million for the three months ended September 30, 2012. This was primarily due to higher realized and unrealized gain on foreign currency transactions of $1.1 million, which was partially offset by $0.8 million lower recoveries from cash disbursements made prior to bankruptcy.
Interest and other income (expense), increased by $1.0 million from $1.2 million for the nine months ended September 25, 2011 to $2.2 million for the nine months ended September 25, 2012. The increase was mainly due to $1.1 million of proceeds from liquidation of previously impaired auction rate securities and $0.8 million of fees relating to the amendment of the term loan incurred in the second quarter of fiscal 2011 which did not occur in fiscal 2012. The above increase was offset by a $0.8 million increase in realized and unrealized loss on foreign currency transactions in fiscal 2012.
Interest Expense
Interest expense decreased by $0.3 million from $7.6 million for the three months ended September 25, 2011 to $7.3 million for the three months ended September 30, 2012. This was primarily due to lower interest expense as a result of continued repayment of the Term Loan in fiscal 2012.
Interest expense decreased by $2.5 million from $25.5 million for the nine months ended September 25, 2011 to $22.9 million for the nine months ended September 30, 2012. The decrease was mainly due to $1.5 million lower interest expense as a result of continued repayment of the Term Loan and a prepayment in fiscal 2012 and a $1.2 million reduction in loss on interest rate swaps relating to the Term Loan.
Provision for Income Taxes
Our tax expense decreased from $8.6 million for the three months ended September 25, 2011 to $2.8 million for the three months ended September 30, 2012. The decrease was primarily related to withholding taxes on licensing revenue from Samsung. Our tax expense decreased from $15.4 million for the nine months ended September 25, 2011 to $9.6 million for the nine months ended September 30, 2012. The decrease was primarily attributable to a release of reserves for uncertain tax positions in foreign locations and the amount of withholding taxes on licensing revenue from Samsung, offset by the impact from the sale of land and building in Kuala Lumpur, Malaysia.
As of September 30, 2012, all of our U.S. deferred tax assets, net of deferred tax liabilities, continue to be subject to a full valuation allowance. The valuation allowance is based on our assessment that it is more likely than not that the deferred tax assets will not be realizable in the foreseeable future.
As of December 25, 2011, we had U.S. federal and state net operating loss carry forwards of approximately $1.0 billion and $208.0 million, respectively. Approximately $533.6 million of the federal net operating loss carry forwards are subject to an annual limitation of $27.2 million. The federal and state net operating losses, if not utilized, expire from 2016 and 2031.
If we were to undergo an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, our ability to utilize the unlimited federal net operating loss carry forwards could be limited under certain provisions of the Internal Revenue Code. As a result, we could incur greater tax liabilities than we would in the absence of such a limitation and any incurred liabilities could materially adversely affect our results of operations and financial condition.
Contractual Obligations
The following table summarizes our contractual obligations at September 30, 2012:
| |
|
Total
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017 and Beyond
|
|
| |
|
(in thousands)
|
|
|
Senior Secured Term Loan
|
|
$ |
218,789 |
|
|
$ |
- |
|
|
$ |
12,631 |
|
|
$ |
2,244 |
|
|
$ |
203,914 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Senior Notes
|
|
|
200,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
200,000 |
|
|
Interest expense on Debt
|
|
|
111,173 |
|
|
|
8,164 |
|
|
|
26,572 |
|
|
|
25,638 |
|
|
|
19,299 |
|
|
|
15,750 |
|
|
|
15,750 |
|
|
Other long term liabilities (1)
|
|
|
8,957 |
|
|
|
- |
|
|
|
794 |
|
|
|
5,824 |
|
|
|
2,083 |
|
|
|
210 |
|
|
|
46 |
|
|
Operating leases
|
|
|
13,212 |
|
|
|
1,385 |
|
|
|
4,993 |
|
|
|
3,435 |
|
|
|
1,770 |
|
|
|
1,412 |
|
|
|
217 |
|
|
Unconditional purchase commitments (2)
|
|
|
118,436 |
|
|
|
10,823 |
|
|
|
23,143 |
|
|
|
28,190 |
|
|
|
28,140 |
|
|
|
28,140 |
|
|
|
- |
|
|
Total contractual obligations (3)
|
|
$ |
670,567 |
|
|
$ |
20,372 |
|
|
$ |
68,133 |
|
|
$ |
65,331 |
|
|
$ |
255,206 |
|
|
$ |
45,512 |
|
|
$ |
216,013 |
|
|
|
(1)
|
The other long term liabilities comprise payment commitments under long term software license agreements with vendors and asset retirement obligations.
|
|
|
(2)
|
Unconditional purchase commitments (UPC) include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These agreements are principally related to inventory. UPCs exclude agreements that are cancelable without penalty.
|
|
|
(3)
|
As of September 30, 2012, the liability for uncertain tax positions was $17.8 million including interest and penalties. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.
|
Liquidity and Capital Resources
Cash Requirements
As of September 30, 2012 and December 25, 2011, we had the following cash and cash equivalents and short term investments:
| |
|
September 30, 2012
|
|
|
December 25, 2011
|
|
| |
|
(in thousands)
|
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Cash
|
|
$ |
268,001 |
|
|
$ |
192,802 |
|
|
Money market funds
|
|
|
9,180 |
|
|
|
1,172 |
|
|
FDIC insured certificates of deposit
|
|
|
35,905 |
|
|
|
43,768 |
|
|
Commercial paper
|
|
|
14,980 |
|
|
|
24,963 |
|
|
Total cash and cash equivalents and short-term investments
|
|
$ |
328,066 |
|
|
$ |
262,705 |
|
Key components of our cash flow during the nine months ended September 30, 2012 and September 25, 2011 were as follows:
| |
|
Nine Months Ended
|
|
| |
|
September 30, 2012
|
|
|
September 25, 2011
|
|
| |
|
(in thousands)
|
|
| |
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
84,198 |
|
|
$ |
49,591 |
|
|
Net cash provided by (used for ) investing activities
|
|
|
33,909 |
|
|
|
(71,785 |
) |
|
Net cash used for financing activities
|
|
|
(33,855 |
) |
|
|
(73,225 |
) |
| |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
358 |
|
|
|
1,645 |
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$ |
84,610 |
|
|
$ |
(93,774 |
) |
As of September 30, 2012, the availability under our Revolving Credit Facility was $22.9 million after deducting the standby letters of credit of $0.9 million issued to certain vendors. As of September 30, 2012, we had not borrowed any amounts under the Revolving Credit Facility.
Our future uses of cash are expected to be primarily for working capital, debt servicing, capital expenditures and other contractual obligations. We believe our anticipated cash flows from operations, current cash balances and availability under our bank agreements will be sufficient to fund working capital requirements and operations, service our debt, and meet our cash needs for at least the next twelve months.
Operating Activities
Net cash provided by operations was $84.2 million during the nine months ended September 30, 2012, which consisted of net income of $17.5 million, and a net decrease in operating assets and liabilities of $1.0 million offset by net non-cash items of approximately $67.6 million. Net non-cash items primarily consisted of $74.4 million in depreciation and amortization, a $28.4 million gain on the sale of the Kuala Lumpur facility and $24.2 million of stock compensation expense.
Net cash provided by operations was $49.6 million during the nine months ended September 25, 2011, consisted of net income of $19.0 million and net non-cash items of $148.6 million, which were offset by net decrease in operating assets and liabilities of $118.0 million. The net decrease in operating assets and liabilities was primarily due to a decrease in accounts payable and accrued liabilities resulting from payments for bankruptcy related services, release of the Samsung litigation settlement reserve and payment made to Spansion Japan per the settlement agreement entered on January 8, 2010. During the quarter ended September 25, 2011, we agreed with Samsung to offset the first $30.0 million of the payments due from Samsung for the patent related settlement against our payment to Samsung for the purchase of its bankruptcy claim. As a result, we recognized $30.0 million in license revenue and an operating cash inflow, as well as a $30.0 million financing cash outflow related to the purchase of the bankruptcy claim, because we believe that there was constructive receipt and constructive payment of the funds.
Investing Activities
Net cash provided by investing activities was $33.9 million during the nine months ended September 30, 2012, primarily from $44.4 million of proceeds from the sale of property, plant and equipment, and $99.4 million in proceeds from the maturities of marketable securities, which were offset by $80.1 million used to purchase marketable securities and $30.8 million used to purchase property, plant and equipment.
Net cash used by investing activities was $71.8 million during the nine months ended September 25, 2011, primarily due to $39.7 million purchase of property, plant and equipment and $68.5 million purchase of marketable securities, which were offset by $7.6 million proceeds from the sale of property, plant and equipment and $28.2 million proceeds from the maturities of marketable securities.
Financing Activities
Net cash used for financing activities was $33.9 million during the nine months ended September 30, 2012, primarily due to $30.4 million payments on debt and $4.0 million acquisition of a non-controlling interest.
Net cash used for financing activities was $73.2 million during the nine months ended September 25, 2011 consisting of $71.0 million for the purchase of bankruptcy claims, which included the purchase of the Samsung claim for $30.0 million and $6.8 million of payments on debt and capital lease obligations. During the quarter ended September 25, 2011, we agreed with Samsung to offset the first $30.0 million of the payments due from Samsung for the patent related settlement against our payment to Samsung for the purchase of its bankruptcy claim. As a result, we recognized $30.0 million in license revenue and an operating cash inflow, as well as a $30.0 million financing cash outflow related to the purchase of the bankruptcy claim, because we believe that there was constructive receipt and constructive payment of the funds.
Off-Balance Sheet Arrangements
During the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property, indemnities to our customers in connection with the delivery, design, manufacture and sale of our products, indemnities to our directors and officers in connection with legal proceedings, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to other parties to certain acquisition agreements. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. We believe that substantially all of our indemnities and commitments provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liabilities related to our indemnities and commitments because such liabilities are contingent upon the occurrence of events which are not reasonably determinable.
We do not have any other significant off-balance sheet arrangements, as defined in Item 303(a) (4) (ii) of SEC Regulation S-K, as of September 30, 2012.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure primarily arises from the effect of interest rate fluctuations on our cash deposits, investment portfolio and debt. At September 30, 2012, we had approximately $268.0 million held in demand deposit accounts, approximately $9.2 million held in overnight money market funds, approximately $35.9 million invested in certificates of deposit fully insured by the FDIC, and approximately $15.0 million invested in commercial paper. Our cash and short-term investment position is highly liquid. Approximately $277.2 million have maturity terms of 0 to 30 days, approximately $2.3 million have maturity terms of 31 to 90 days, approximately $17.2 million have maturity terms of 91 to 180 days, and the remaining approximately $31.4 million have maturity terms of 181 to 365 days at the time of purchase. Accordingly, our interest income fluctuates with short-term market conditions but our exposure to interest rate risk is minimal due to the short term nature of our cash and investment position.
As of September 30, 2012, approximately 52 percent of the aggregate principal amounts outstanding under our third party debt obligations were fixed rate, and approximately 48 percent of our total debt obligations were variable rate comprised of the Term Loan with an outstanding balance of approximately $217.3 million as of September 30, 2012. The Term Loan has a LIBOR floor of 1.25 percent. While LIBOR is below 1.25 percent, our interest expense will not change along with short-term change in interest rate environment. When LIBOR is above 1.25 percent, changes in interest rates associated with the term loan could then result in a change to our interest expense. For example, a one percent aggregate change in interest rates would increase/decrease our contractual interest expense by approximately $2.1 million annually.
As of September 30, 2012, we have a series of interests rate swaps with a financial institution to partially economically hedge the variability of interest payments attributable to fluctuations in the LIBOR benchmark interest rate. See Note 9 to our Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report.
Default Risk
We intend to actively monitor market conditions and developments specific to the securities and classes of securities in which we invest. We take a conservative approach to investing our funds. Our policy is to invest only in highly-rated securities with relatively short maturities, and we do not invest in securities we believe involve a higher degree of risk.
Foreign Exchange Risk
Our sales, expenses, assets and liabilities denominated in Japanese yen and other foreign currencies are exposed to foreign currency exchange rate fluctuations. For example,
|
|
·
|
some of our manufacturing costs are denominated in Japanese yen, and other foreign currencies such as the Thai baht and Malaysian ringgit;
|
|
|
·
|
sales of our products to Fujitsu are denominated in both U.S. dollars and Japanese yen; and
|
|
|
·
|
some fixed asset purchases and sales are denominated in other foreign currencies.
|
Consequently, movements in exchange rates could cause our net sales and our expenses to fluctuate, affecting our profitability and cash flows. We use foreign currency forward contracts to reduce our foreign exchange exposure on our foreign currency denominated assets and liabilities. We also hedge a percentage of our forecasted revenue denominated in Japanese yen with foreign currency forward contracts. The objective of these contracts is to mitigate impact of foreign currency exchange rate movements to our operating results. We do not use these contracts for speculative or trading purposes.
We recognize derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we will reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive loss to interest and other income (expense) in our Condensed Consolidated Statements of Operations at that time.
We evaluate hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and record any ineffective portion of the hedging instruments in interest and other income (expense) on our Condensed Consolidated Statements of Operations.
We do not anticipate any material adverse effect on our consolidated financial position, results of operations or cash flows resulting from the use of these instruments in the future. However, we cannot assure you that these strategies will be effective or that transaction losses can be minimized or forecasted accurately. In particular, we generally cover only a portion of our foreign currency exchange exposure. We cannot assure you that these activities will eliminate foreign currency exchange rate exposure. Failure to eliminate this exposure could have an adverse effect on our business, financial condition and results of operations.
The following table provides information about our foreign currency forward contracts as of September 30, 2012 and December 25, 2011:
| |
|
September 30, 2012
|
|
|
December 25, 2011
|
|
| |
|
Notional
Amount
|
|
|
Average
Contract Rate
|
|
|
Estimated
Fair Value
|
|
|
Notional
Amount
|
|
|
Average
Contract
Rate
|
|
|
Estimated
Fair Value
|
|
| |
|
(in thousands, except contract rates)
|
|
|
Foreign currency forward contracts
|
|
|