News Column

IXYS CORP /DE/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 8, 2014

This discussion contains forward-looking statements, which are subject to certain risks and uncertainties, including, without limitation, those described elsewhere in this Form 10-Q and, in particular, in Item 1A of Part II hereof. Actual results may differ materially from the results discussed in the forward-looking statements. For a discussion of risks that could affect future results, see "Item 1A. Risk Factors". All forward-looking statements included in this document are made as of the date hereof, based on the information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement, except as may be required by law.

Overview

We are a multi-market integrated semiconductor company. Our three principal product groups are: power semiconductors; integrated circuits, or ICs; and systems and radio frequency, or RF, power semiconductors.

Our power semiconductors improve system efficiency and reliability by converting electricity at relatively high voltage and current levels into the finely regulated power required by electronic products. We focus on the market for power semiconductors that are capable of processing greater than 200 watts of power.

We also design, manufacture and sell integrated circuits for a variety of applications. Our analog and mixed-signal ICs are principally used in telecommunications applications. Our mixed-signal application-specific ICs, or ASICs, address the requirements of the medical imaging equipment and display markets. Our power management and control ICs are used in conjunction with our power semiconductors. Our microcontrollers provide application-specific, embedded system-on-chip, or SoC, solutions for the industrial and consumer markets.

Our systems include laser diode drivers, high voltage pulse generators and modulators, and high power subsystems, sometimes known as stacks, that are principally based on our high power semiconductor devices. Our RF power semiconductors enable circuitry that amplifies or receives radio frequencies in wireless and other microwave communication applications, medical imaging applications and defense and space applications.

In the quarter ended June 30, 2014, our revenues decreased by approximately $1.8 million as compared to the immediately preceding quarter. Our revenues from sales of power semiconductors, systems and ICs decreased, while our revenues from sales of RF power semiconductors increased. Comparing the same periods, sales to major application markets decreased, except the industrial and commercial market. Geographically, sales to the United States and Asia Pacific areas decreased while sales to Europe increased. Gross profit margin increased slightly due to a shift in product mix. During the quarter ended June 30, 2014, the proportion of our revenues obtained through distribution increased as compared to the quarter ended March 31, 2014, primarily because revenues shifted to applications that are traditionally purchased through distributors, such as industrial and commercial applications.

We expect our selling, general and administrative expenses, or SG&A expenses, and our research, development and engineering expenses, or R&D expenses, to remain relatively flat in the quarter ended September 30, 2014.

Critical Accounting Policies and Significant Management Estimates

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the reasonableness of its estimates. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

We believe the following critical accounting policies require that we make significant judgments and estimates in preparing our consolidated financial statements.

Revenue recognition. Revenue is recognized when there is persuasive evidence that an arrangement exists, when delivery has occurred, when the price to the buyer is fixed or determinable and when collectability of the receivable is reasonably assured. These elements are met when title to the products is passed to the buyer, which is generally when product is shipped to the customer with sale terms ex-works, or EXW, or when product is delivered to the customer with sale terms delivered duty paid, or DDP.

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We sell to distributors and original equipment manufacturers, or OEMs. Approximately 56.9% of our revenues in the three months ended June 30, 2014 and 57.4% of our net revenues in the three months ended June 30, 2013 were from distributors. We provide some of our distributors with the following programs: stock rotation and ship and debit.

Reserves for sales returns and allowances, including allowances for so called "ship and debit" transactions, are recorded at the time of shipment, based on historical levels of returns and current economic trends and changes in customer demand.

Accounts receivable from distributors are recognized and inventory is relieved when title to inventories transfer, typically upon shipment from us, at which point we have a legally enforceable right to collection under normal payment terms. Under certain circumstances, where we are not able to reasonably and reliably estimate the actual returns, revenues and costs relating to distributor sales are deferred until products are sold by the distributors to the distributor's end customers. Deferred amounts are presented net and included under "Accrued expenses and other liabilities."

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

Allowance for sales returns. We maintain an allowance for sales returns for estimated product returns by our customers. We estimate our allowance for sales returns based on our historical return experience, current economic trends, changes in customer demand, known returns we have not received and other assumptions. If we were to make different judgments or utilize different estimates, the amount and timing of our revenue could be materially different. Given that our revenues consist of a high volume of relatively similar products, to date our actual returns and allowances have not fluctuated significantly from period to period, and our returns provisions have historically been reasonably accurate. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations.

Allowance for stock rotation. We also provide "stock rotation" to select distributors. The rotation allows distributors to return a percentage of the previous six months' sales in exchange for orders of an equal or greater amount. In the three months ended June 30, 2014 and 2013, approximately $838,000 and $531,000, respectively, of products were returned to us under the program. We establish the allowance for all sales to distributors except in cases where the revenue recognition is deferred and recognized upon sale by the distributor of products to the end-customer. The allowance, which is management's best estimate of future returns, is based upon the historical experience of returns and inventory levels at the distributors. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations. Should distributors increase stock rotations beyond our estimates, our statements would be adversely affected.

Allowance for ship and debit. Ship and debit is a program designed to assist distributors in meeting competitive prices in the marketplace on sales to their end-customers. Ship and debit requires a request from the distributor for a pricing adjustment for a specific part for a customer sale to be shipped from the distributor's stock. We have no obligation to accept this request. However, it is our historical practice to allow some companies to obtain pricing adjustments for inventory held. We receive periodic statements regarding our products held by our distributors. Ship and debit authorizations may cover current and future distributor activity for a specific part for sale to distributor's customer. At the time we record sales to distributors, we provide an allowance for the estimated future distributor activity related to such sales since it is probable that such sales to distributors will result in ship and debit activity. The sales allowance requirement is based on sales during the period, credits issued to distributors, distributor inventory levels, historical trends, market conditions, pricing trends we see in our direct sales activity with original equipment manufacturers and other customers, and input from sales, marketing and other key management. We believe that the analysis of these inputs enable us to make reliable estimates of future credits under the ship and debit program. This analysis requires the exercise of significant judgments. Our actual results to date have approximated our estimates. At the time the distributor ships the part from stock, the distributor debits us for the authorized pricing adjustment. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations. If competitive pricing were to decrease sharply and unexpectedly, our estimates might be insufficient, which could significantly adversely affect our operating results.

Additions to the ship and debit allowance are estimates of the amount of expected future ship and debit activity related to sales during the period and reduce revenues and gross profit in the period. The following table sets forth the beginning and ending balances of, additions to, and deductions from, our allowance for ship and debit during the three months ended June 30, 2014 (in thousands):

(unaudited) Balance at March 31, 2014 $ 1,071 Additions 1,575 Deductions (1,474 ) Balance at June 30, 2014 $ 1,172 20



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Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments. We evaluate our allowance for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. If we were to make different judgments of the financial condition of our customers or the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. This allowance is reported on the balance sheet as part of the accounts receivable allowance and is included on the statement of operations as part of selling, general and administrative expenses. This allowance is based on historical losses and management's estimates of future losses.

Inventories.Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. Our accounting for inventory costing is based on the applicable expenditure incurred, directly or indirectly, in bringing the inventory to its existing condition. Such expenditures include acquisition costs, production costs and other costs incurred to bring the inventory to its use. As it is impractical to track inventory from the time of purchase to the time of sale for the purpose of specifically identifying inventory cost, our inventory is, therefore, valued based on a standard cost, given that the materials purchased are identical and interchangeable at various production processes. We review our standard costs on an as-needed basis but in any event at least once a year, and update them as appropriate to approximate actual costs. The authoritative guidance provided by FASB requires certain abnormal expenditures to be recognized as expenses in the current period instead of capitalized in inventory. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities.

We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. The value of our inventories is dependent on our estimate of future demand as it relates to historical sales. If our projected demand is overestimated, we may be required to reduce the valuation of our inventories below cost. We regularly review inventory quantities on hand and record an estimated provision for excess inventory based primarily on our historical sales and expectations for future use. We also recognize a reserve based on known technological obsolescence, when appropriate. Actual demand and market conditions may be different from those projected by our management. This could have a material effect on our operating results and financial position. If we were to make different judgments or utilize different estimates, the amount and timing of our write-down of inventories could be materially different. For example, during the fourth quarter of fiscal 2009, we examined our inventory and as a consequence of the dramatic retrenchment in some of our markets, certain of our inventory that normally would not be considered excess was considered as such. Therefore, we booked additional charges of about $14.9 million to recognize this exposure.

Excess inventory frequently remains saleable. When excess inventory is sold, it yields a gross profit margin of up to 100%. Sales of excess inventory have the effect of increasing the gross profit margin beyond that which would otherwise occur, because of previous write-downs. Once we have written down inventory below cost, we do not write it up when it is subsequently utilized, sold or scrapped. We do not physically segregate excess inventory nor do we assign unique tracking numbers to it in our accounting systems. Consequently, we cannot isolate the sales prices of excess inventory from the sales prices of non-excess inventory. Therefore, we are unable to report the amount of gross profit resulting from the sale of excess inventory or quantify the favorable impact of such gross profit on our gross profit margin.

The following table provides information on our excess and obsolete inventory reserve charged against inventory at cost (in thousands):

(unaudited) Balance at March 31, 2014 $ 24,304 Utilization or sale (282 ) Scrap (1,401 ) Additional accrual 1,102 Foreign currency translation adjustments (20 ) Balance at June 30, 2014 $ 23,703



The practical efficiencies of wafer fabrication require the manufacture of semiconductor wafers in minimum lot sizes. Often, when manufactured, we do not know whether or when all the semiconductors resulting from a lot of wafers will sell. With more than 10,000 different part numbers for semiconductors, excess inventory resulting from the manufacture of some of those semiconductors will be continual and ordinary. Because the cost of storage is minimal when compared to potential value and because our products do not quickly become obsolete, we expect to hold excess inventory for potential future sale for years. Consequently, we have no set time line for the utilization, sale or scrapping of excess inventory.

In addition, our inventory is also being written down to the lower of cost or market or net realizable value. We review our inventory listing on a quarterly basis for an indication of losses being sustained for costs that exceed selling prices less direct costs to sell. When it is evident that our selling price is lower than current cost, inventory is marked down accordingly. At June 30, 2014, our lower of cost or market reserve was $498,000.

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Furthermore, we perform an annual inventory count and periodic cycle counts for specific parts that have a high turnover. We also periodically identify any inventory that is no longer usable and write it off.

Valuation of Goodwill and Intangible Assets. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired. The costs of acquired intangible assets are recorded at fair value at acquisition. Intangible assets with finite lives are amortized using the straight-line method or accelerated method over their estimated useful lives and evaluated for impairment in accordance with the authoritative guidance provided by FASB.

Goodwill and intangible assets with indefinite lives are carried at fair value and reviewed at least annually for an impairment charge during the quarter ending March 31, or more frequently if events and circumstances indicate that the asset might be impaired, in accordance with the authoritative guidance provided by FASB. We first assess qualitative factors to determine whether it is necessary to perform the two-step fair value-based impairment test described below. If we believe that, as a result of its qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.

Under the quantitative approach, there are two steps in the determination of the impairment of goodwill. The first step compares the carrying amount of the net assets to the fair value of the reporting unit. The second step, if necessary, recognizes an impairment loss to the extent the carrying value of the reporting unit's net assets exceed the implied fair value of goodwill. An impairment loss would be recognized to the extent that the carrying amount exceeds the fair value of the reporting unit.

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

We assess the recoverability of the finite-lived intangible assets by examining the occurrences of certain events or changes of circumstances that indicate that the carrying amounts may not be recoverable. After our initial assessment, if it is necessary, we perform the impairment test by determining whether the estimated undiscounted cash flows attributable to the assets in question are less than their carrying values. Impairment losses, if any, are measured as the amount by which the carrying values of the assets exceed their fair value and are recognized in operating results. If a useful life is determined to be shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.

See Note 8, "Goodwill and Intangible Assets" for a further discussion of the impairment analysis of goodwill and the related charges recorded.

Income tax. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our unaudited condensed consolidated balance sheets. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. A valuation allowance reduces our deferred tax assets to the amount that management estimates is more likely than not to be realized. In determining the amount of the valuation allowance, we consider income over recent years, estimated future taxable income, feasible tax planning strategies and other factors in each taxing jurisdiction in which we operate. If we determine that it is more likely than not that we will not realize all or a portion of our remaining deferred tax assets, then we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that it is likely that we will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, then the related portion of the valuation allowance will reduce income tax expense. Significant management judgment is required in determining our provision for income taxes and potential tax exposures, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. Our ability to utilize our deferred tax assets and the need for a related valuation allowance are monitored on an ongoing basis.

Furthermore, computation of our tax liabilities involves examining uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process as prescribed by the authoritative guidance provided by FASB. The first step is to evaluate the tax position for recognition by determining if there is sufficient available evidence to indicate if

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it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure and determine the approximate amount of the tax benefit at the largest amount that is more than 50% likely of being realized upon ultimate settlement with the tax authorities. It is inherently difficult and requires significant judgment to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reexamine these uncertain tax positions on a quarterly basis. This reassessment is based on various factors during the period including, but not limited to, changes in worldwide tax laws and treaties, changes in facts or circumstances, effectively settled issues under audit and any new audit activity. A change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our unaudited condensed consolidated financial statements, see Note 2, "Recent Accounting Pronouncements and Accounting Changes" in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

Results of Operations - Three Months Ended June 30, 2014 and 2013

The following table sets forth selected consolidated statements of operations data for the fiscal periods indicated and the percentage change in such data from period to period. These historical operating results may not be indicative of the results for any future period.

Three Months Ended June 30, 2014 % change 2013 (unaudited) (000) (000) Net revenues $ 88,080 23.7 $ 71,186 Cost of goods sold 63,080 26.0 50,049 Gross profit $ 25,000 18.3 $ 21,137 Operating expenses: Research, development and engineering $ 7,250 (5.7 ) $ 7,687 Selling, general and administrative 10,764 7.2 10,043 Amortization of acquired intangible assets 1,707 593.9 246 Total operating expenses $ 19,721 9.7 $ 17,976



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

% of Net Revenues Three Months Ended June 30, 2014 2013 (unaudited) Net revenues 100.0 100.0 Cost of goods sold 71.6 70.3 Gross profit 28.4 29.7 Operating expenses: Research, development and engineering 8.2 10.8 Selling, general and administrative 12.3 14.1 Amortization of acquired intangible assets 1.9 0.4 Total operating expenses 22.4 25.3 Operating income 6.0 4.4 Other expense, net (0.2 ) (0.3 ) Income before income tax 5.8 4.1 Provision for income tax (1.7 ) (1.3 ) Net income 4.1 2.8 23



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Net Revenues.

The following table sets forth the revenues for each of our product groups for the fiscal periods indicated:

Revenues (1) Three Months Ended June 30, 2014 % change 2013 (unaudited) (000) (000) Power semiconductors $ 57,968 12.2 $ 51,666 Integrated circuits 23,882 74.9 13,655 Systems and RF power semiconductors 6,230 6.2 5,865 Total $ 88,080 23.7 $ 71,186



(1) Includes $368,000 and $540,000 of intellectual property revenues in

integrated circuits during the quarters ended June 30, 2014 and 2013,

respectively.

The following tables set forth the average selling prices, or ASPs, and units for the fiscal periods indicated:

Average Selling Prices Three Months Ended June 30, 2014 % change 2013 (unaudited) Power semiconductors $ 2.15 23.6 $ 1.74 Integrated circuits $ 0.48 (37.7 ) $ 0.77 Systems and RF power semiconductors $ 26.51 (15.0 ) $ 31.20 Units Three Months Ended June 30, 2014 % change 2013 (unaudited) (000) (000) Power semiconductors 26,905 (9.6 ) 29,778 Integrated circuits 49,377 190.8 16,981 Systems and RF power semiconductors 235 25.0 188 Total 76,517 63.0 46,947 The following table sets forth the net revenue by geographic region for the fiscal periods indicated: Three Months Ended June 30, 2014 2013 Net % of Net Net % of Net Revenue Revenue Revenue Revenue (unaudited) (000) (000) Europe and Middle East $ 26,225 29.8 $ 23,919 33.6 Asia Pacific 36,589 41.5 23,038 32.3 Rest of world 2,762 3.2 2,671 3.8 International revenues $ 65,576 74.5 $ 49,628 69.7 USA 22,504 25.5 21,558 30.3 Total $ 88,080 100.0 $ 71,186 100.0



The 23.7% increase in net revenues in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 reflected an increase of $6.3 million, or 12.2%, in the sale of power semiconductors, an increase of $10.2 million, or 74.9%, in the sale of ICs and an increase of $365,000, or 6.2%, in the sale of systems and RF power semiconductors. The increase in power semiconductors included a $4.6 million increase in the sale of MOS products, principally to the medical market and the industrial and commercial market, and a $2.0 million increase in the sale of bipolar products, primarily to the industrial and commercial market.

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The increase in revenues from ICs was driven by the Acquired MCU Business. The revenues from the sale of systems and RF power semiconductors increased primarily due to increased revenues from the sale of subassemblies to the industrial and commercial market, offset by a decrease in the revenues from RF power semiconductors.

For the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, the reduction in unit shipments of power semiconductors was broad-based. The unit growth in systems and RF power semiconductors was largely the result of higher shipments of RF power semiconductors. For both product groups, the changes in ASPs were primarily due to shifts in product mix, rather than changes in product prices. In the case of ICs, the addition of the Acquired MCU Business changed the product mix, which increased the unit shipments and decreased the ASP.

For the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, our sales increased in all major geographic areas, including the U.S., Europe and the Middle East, and the Asia Pacific area, and to all of our major application markets, except the telecom market.

For the three months ended June 30, 2014 and 2013, two distributors accounted for over 10% of our net revenues. One distributor accounted for 10.7% and 12.9% of our net revenues, respectively, and another distributor accounted for 10.4% and 11.6% of our net revenues, respectively.

Our net revenues were reduced by allowances for sales returns, stock rotations and ship and debit. See "Critical Accounting Policies and Significant Management Estimates" elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Gross Profit.

Gross profit increased to $25.0 million in the three months ended June 30, 2014 from $21.1 million in the three months ended June 30, 2013. Gross profit margin declined to 28.4% in the quarter ended June 30, 2014 from 29.7% in the quarter ended June 30, 2013. The increase in gross profit dollars was largely because of revenue growth. The lower gross profit margin was primarily due to underutilized capacity, which increased our unabsorbed manufacturing costs as a percentage of net revenues, offset by a shift in product mix to sales of higher margin products.

Our gross profit and gross profit margin were positively affected by the sale of excess inventory, which had previously been written down. See "Critical Accounting Policies and Significant Management Estimates-Inventories" elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Research, Development and Engineering.

R&D expenses typically consist of internal engineering efforts for product design and development. As a percentage of net revenues, our R&D expenses for the three months ended June 30, 2014 were 8.2% as compared to 10.8% for the three months ended June 30, 2013. The decrease in the percentage primarily resulted from higher net revenues and reduced R&D expenses. Expressed in dollars, for the three months ended June 30, 2014 as compared to the same period of the prior year, our R&D expenses decreased by approximately $437,000, or 5.7%, primarily due to reduced development costs and a one-time license fee in the quarter ended June 30, 2013.

Selling, General and Administrative.

As a percentage of net revenues, our SG&A expenses for the three months ended June 30, 2014 were 12.3% as compared to 14.1% for the three months ended June 30, 2013. The decrease in the percentage primarily resulted from higher net revenues. Expressed in dollars, SG&A expenses increased by approximately $721,000, or 7.2%, in the three months ended June 30, 2014 as compared to the same period in the prior fiscal year. The increase was caused by higher selling expenses corresponding to increased revenues, offset by decreased finance and administration expenses related to reduced consulting fees.

Amortization of Acquired Intangible Assets.

During the quarter ended June 30, 2013, we completed the acquisition of the Acquired MCU Business. As a result, we recorded $24.0 million of intangible assets. We also recorded certain intangible assets during fiscal 2010 in connection with the acquisition of Zilog. For the three months ended June 30, 2014, we recorded amortization expenses on acquired intangible assets of $1.7 million as compared to $246,000 for the same period in fiscal 2013.

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Interest Expense.

During the three months ended June 30, 2014, our interest expenses were $410,000 as compared to $212,000 for the three and nine months ended June 30, 2013. The interest expenses during the fiscal 2015 period included the accrual of interest on the installment payments for the Acquired MCU Business.

Other Income (Expense), net.

In the quarter ended June 30, 2014, other income, net, was $208,000 as compared to other expense, net, of $83,000 in the quarter ended June 30, 2013. The difference was primarily related to fluctuations in foreign currency exchange rates. Other income, net, in the three months ended June 30, 2014 principally consisted of $224,000 in gains associated with changes in exchange rates for foreign currency transactions. Other expense, net in the three months ended June 30, 2013 consisted principally of $207,000 in losses associated with changes in exchange rates for foreign currency transactions.

Provision for Income Tax.

For the three months ended June 30, 2014 and 2013, we recorded income tax provisions of $1.5 million and $926,000, reflecting effective tax rates of 30.2% and 31.9%, respectively. For both periods, the effective tax rates reflected estimates of annual income in domestic and foreign jurisdictions, as adjusted by certain tax items.

Liquidity and Capital Resources

At June 30, 2014, cash and cash equivalents were $90.2 million as compared to $98.4 million at March 31, 2014.

Our cash provided by operating activities for the three months ended June 30, 2014 was $14.2 million, an increase of $14.4 million as compared to the $240,000 of cash used in operating activities in the comparable period of the prior year. The change in our operating cash flow was primarily due to an increase of $4.8 million in net income and total adjustments to reconcile net income, and an increase of $9.6 million in net changes in operating assets and liabilities.

The increase in net income and total adjustments to reconcile net income was principally caused by the growth in net revenues. The changes in operating assets and liabilities for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 included the following: prepaid expenses and other current assets decreased due to the timing of a tax refund, inventory purchases increased to meet our production plans, accounts receivable changed in large part because of differences in the timing of recognition of revenues and accrued expenses and other liabilities increased due to an increase in income tax liabilities.

Our net cash used in investing activities for the three months ended June 30, 2014 was $6.3 million, as compared to net cash used in investing activities of $21.2 million during the three months ended June 30, 2013. During the three months ended June 30, 2014, we spent $3.4 million on the purchase of property and equipment and $2.3 million on an acquisition. During the three months ended June 30, 2013, we made a payment of $20.0 million on the acquisition of the Acquired MCU Business and we spent $1.6 million on the purchase of property and equipment.

For the three months ended June 30, 2014, net cash used in financing activities was $16.1 million, as compared to net cash used in financing activities of $441,000 in the three months ended June 30, 2013. During the three months ended June 30, 2014, we paid the first $15.0 million deferred payment for the Acquired MCU Business. In addition, we used $972,000 for principal repayment on capital lease and loan obligations and $943,000 for payments of cash dividends to stockholders, offset by proceeds from employee equity plans of $811,000. During the three months ended June 30, 2013, we used $931,000 for payments of cash dividends to stockholders and $859,000 for principal repayment on capital lease and loan obligations, offset by proceeds from employee equity plans of $1.3 million.

At June 30, 2014, capital lease obligations, loans payable and installment payment liability totalled $39.2 million. This represented 43.4% of our cash and cash equivalents and 14.3% of our stockholders' equity.

We are obligated on a 4.0 million, or $5.5 million, loan. The loan has a term ending in June 2020, and bears a variable interest rate, dependent upon the current Euribor rate and the ratio of indebtedness to cash flow for the German subsidiary. Each fiscal quarter a principal payment of 167,000, or about $228,000, and a payment of accrued interest are required. Financial covenants for a ratio of indebtedness to cash flow, a ratio of equity to total assets and a minimum stockholders' equity for the German subsidiary must be satisfied for the loan to remain in good standing. At June 30, 2014, we complied with all of these financial covenants. The loan may be prepaid in whole or in part at the end of a fiscal quarter without penalty. The loan is collateralized by a security interest in the facility in Lampertheim, Germany, which is owned by our U.S. parent.

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On December 6, 2013, we entered into an Amended and Restated Credit Agreement with BOTW for a revolving line of credit of $50.0 million. All amounts owed under the credit agreement are due and payable on November 30, 2015. Borrowings may be repaid and re-borrowed during the term of the credit agreement. The obligations are guaranteed by two of our subsidiaries. At June 30, 2014, the outstanding principal balance under the credit agreement was $15.0 million. The credit agreement is subject to a set of financial covenants, including minimum total net worth, the ratio of cash, cash equivalents and accounts receivable to current liabilities, profitability, a leverage ratio and a minimum amount of U.S. domestic cash on hand. At June 30, 2014, we complied with all of these financial covenants. See Note 9, "Borrowing and Deferred Payment Arrangements" in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the credit agreement. The credit agreement also includes a $3.0 million letter of credit subfacility. See Note 16, "Commitments and Contingencies" and Note 9, "Borrowing and Deferred Payment Arrangements" in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the terms of our credit arrangements.

During the quarter ended June 30, 2014, we paid $943,000 in dividends, consisting of a quarterly cash dividend of $0.03 per share. The quarterly dividend is at the discretion of the Board of Directors.

On June 27, 2013, we purchased the Acquired MCU Business. The aggregate purchase price for the transferred assets was $50.0 million. The closing payment was $20.0 million and we were obligated to pay $30.0 million in two installment payments of $15.0 million each. The first installment was paid on June 26, 2014 and the second installment is due on December 31, 2014. The remaining installment payment bears simple interest at a variable annual rate equal to six-month LIBOR plus a 3 percentage point margin. We expect to fund the remaining installment payment through cash on hand, future cash flow generated from operations and, to the extent advisable, a bank line of credit facility. See Note 9, "Borrowing and Deferred Payment Arrangements" in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding the terms of the installment payments.

We assumed loans of approximately 459,000, or $632,000, related to an acquisition completed during the quarter ended June 30, 2014. The assumed borrowings were non-interest loans from government agencies to support the research and development activities with maturity dates varying from fiscal 2017 to fiscal 2021, other than a loan of 72,000 from Caixabank, S.A.

Additionally, we maintain three defined benefit pension plans: one in the United Kingdom, one in Germany and one in the Philippines. Benefits are based on years of service and the employees' compensation. We either deposit funds for these plans with financial institutions, consistent with the requirements of local law, or accrue for the unfunded portion of the obligations. The United Kingdom and German plans have been curtailed. As such, the plans are closed to new entrants and no credit is provided for additional periods of service. The total pension liability accrued for the three plans at June 30, 2014 was $15.2 million.

We believe that our cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our anticipated cash requirements for the next 12 months. Our liquidity could be negatively affected by a decline in demand for our products, increases in the cost of materials or labor, investments in new product development or one or more acquisitions. From time to time, we use derivative contracts in the normal course of business to manage our foreign currency exchange and interest rate risks. We did not have any significant open derivative contracts at June 30, 2014. There can be no assurance that additional debt or equity financing will be available when required or, if available, can be secured on terms satisfactory to us.

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