Quarterly Report


Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
(Mark One)
/x/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 3, 2016 OR
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                             to                              .
Commission File No. 0-12695
INTEGRATED DEVICE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
94-2669985
(I.R.S. Employer Identification No.)
6024 SILVER CREEK VALLEY ROAD, SAN JOSE, CALIFORNIA
(Address of Principal Executive Offices)
95138
(Zip Code)
Registrant's Telephone Number, Including Area Code: (408) 284-8200

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý No  ¨  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
  ý   Large accelerated filer                            ¨    Accelerated filer                             ¨   Non-accelerated filer                ¨ Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  o No  ý  
The number of outstanding shares of the registrant's Common Stock, $.001 par value, as of February 5, 2016 was approximately 135,373,226 .



Table of Contents

INTEGRATED DEVICE TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

PART I-FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II-OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited, in thousands )
January 3, 2016
 
March 29, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
152,992

 
$
116,945

Short-term investments
199,328

 
438,115

Accounts receivable, net of allowances of $3,378 and $4,664
65,916

 
63,618

Inventories
54,785

 
45,410

Prepayments and other current assets
12,568

 
16,041

Total current assets
485,589

 
680,129

Property, plant and equipment, net
73,769

 
65,508

Goodwill
305,733

 
135,644

Other intangible assets, net
137,489

 
5,535

Other assets
29,081

 
26,843

Total assets
$
1,031,661

 
$
913,659

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
30,654

 
28,006

Accrued compensation and related expenses
53,154

 
43,649

Deferred income on shipments to distributors
8,523

 
15,694

Deferred tax liabilities

 
1,401

Other accrued liabilities
16,365

 
17,582

Total current liabilities
108,696

 
106,332

Deferred tax liabilities
21,106

 
1,121

Long-term income tax payable
959

 
347

Convertible notes
269,031

 

Other long-term liabilities
22,093

 
17,605

Total liabilities
421,885

 
125,405

Commitments and contingencies (Note 14)


 


Stockholders' equity:
 

 
 

Preferred stock: $0.001 par value: 10,000 shares authorized; no shares issued

 

Common stock: $0.001 par value: 350,000 shares authorized; 136,900 and 148,414 shares outstanding at January 3, 2016 and March 29, 2015, respectively
137

 
148

Additional paid-in capital
2,567,558

 
2,510,868

Treasury stock at cost: 114,344 shares at January 3, 2016 and 99,849 shares at March 29, 2015, respectively
(1,444,763
)
 
(1,100,546
)
Accumulated deficit
(506,909
)
 
(620,035
)
Accumulated other comprehensive loss
(6,247
)
 
(2,181
)
Total stockholders' equity
609,776

 
788,254

Total liabilities and stockholders' equity
$
1,031,661

 
$
913,659


The accompanying notes are an integral part of these condensed consolidated financial statements.

3



INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Nine Months Ended
 
(Unaudited, in thousands, except per share data)
January 3,
2016
 
December 28,
2014
 
January 3,
2016
 
December 28,
2014
Revenues
$
177,610

 
$
151,160

 
$
508,015

 
$
414,555

Cost of revenues
69,699

 
59,796

 
194,324

 
167,306

Gross profit
107,911

 
91,364

 
313,691

 
247,249

Operating expenses:
 

 
 

 
 
 
 
Research and development
38,429

 
32,825

 
107,484

 
95,617

Selling, general and administrative
38,851

 
27,165

 
96,221

 
79,419

Total operating expenses
77,280

 
59,990

 
203,705

 
175,036

Operating income
30,631

 
31,374

 
109,986

 
72,213

Interest income (expense) and other, net
(2,008
)
 
1,558

 
826

 
2,825

Income before income taxes from continuing operations
28,623

 
32,932

 
110,812

 
75,038

Income tax provision (benefit)
(3,922
)
 
91

 
(2,876
)
 
840

Net income from continuing operations
32,545

 
32,841

 
113,688

 
74,198

 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
   Gain from divestiture before income taxes

 

 

 
16,840

Loss from discontinued operations before income taxes

 
(14,538
)
 
(547
)
 
(36,438
)
   Income tax provision (benefit)

 
(55
)
 
15

 
(43
)
Net loss from discontinued operations

 
(14,483
)
 
(562
)
 
(19,555
)
 
 
 
 
 
 
 
 
Net income
$
32,545

 
$
18,358

 
$
113,126

 
$
54,643

 
 
 
 
 
 
 
 
Basic net income per share - continuing operations
$
0.23

 
$
0.22

 
$
0.78

 
$
0.50

Basic net income (loss) per share - discontinued operations

 
(0.10
)
 
$

 
$
(0.13
)
Basic net income per share
$
0.23

 
$
0.12

 
$
0.78

 
$
0.37

 
 
 
 
 
 
 
 
Diluted net income per share - continuing operations
$
0.22

 
$
0.21

 
$
0.75

 
$
0.48

Diluted net loss per share - discontinued operations

 
(0.09
)
 
$

 
$
(0.12
)
Diluted net income per share
$
0.22

 
$
0.12

 
$
0.75

 
$
0.36

 
 
 
 
 
 
 
 
Weighted average shares:
 

 
 

 
 

 
 

Basic
140,411

 
148,552

 
145,382

 
148,844

Diluted
145,705

 
153,973

 
150,614

 
153,904


The accompanying notes are an integral part of these condensed consolidated financial statements.

4



INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
Nine Months Ended
 
(Unaudited, in thousands)
January 3,
2016
 
December 28,
2014
 
January 3,
2016
 
December 28,
2014
 
 
 
 
 
 
 
 
Net income
$
32,545

 
$
18,358

 
$
113,126

 
$
54,643

Other comprehensive loss, net of taxes:
 
 
 
 
 
 
 
Currency translation adjustments, net of tax
(1,040
)
 
(1,562
)
 
(2,044
)
 
(2,817
)
Change in net unrealized loss on investments, net of tax
(731
)
 
(576
)
 
(1,409
)
 
(592
)
Actuarial loss on post-employment and post-retirement benefit plans, net of tax
(2
)
 
(2
)
 
(613
)
 
(7
)
Total other comprehensive loss
(1,773
)
 
(2,140
)
 
(4,066
)
 
(3,416
)
Comprehensive income
$
30,772

 
$
16,218

 
$
109,060

 
$
51,227


The accompanying notes are an integral part of these condensed consolidated financial statements.


5


INTEGRATED DEVICE TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
(Unaudited, in thousands)
January 3,
2016
 
December 28,
2014
Cash flows from operating activities:
 
 
 
Net income
$
113,126

 
$
54,643

Adjustments:
 

 
 

Depreciation
13,056

 
14,557

Amortization of intangible assets
5,628

 
5,572

Amortization of debt issuance cost and debt discount
2,164

 

Impairment of assets held for sale

 
8,471

Gain from divestiture

 
(16,840
)
Gain on sale of property, plant and equipment
(325
)
 

Stock-based compensation expense, net of amounts capitalized in inventory
25,878

 
16,562

Deferred tax provision (benefit)
(4,147
)
 
50

Tax benefit from share-based payment arrangements
(115
)
 

Changes in assets and liabilities:
 

 
 

   Accounts receivable, net
8,319

 
(7,390
)
   Inventories
10,446

 
8,836

   Prepayments and other assets
4,532

 
(854
)
   Accounts payable
(2,832
)
 
718

   Accrued compensation and related expenses
(5,427
)
 
13,606

   Deferred income on shipments to distributors
(7,171
)
 
1,238

   Income taxes payable and receivable
(70
)
 
(352
)
   Other accrued liabilities and long-term liabilities
(4,079
)
 
12,282

   Net cash provided by operating activities
158,983

 
111,099

Cash flows from investing activities:
 

 
 

Acquisitions, net of cash acquired
(279,138
)
 

Cash in escrow related to acquisitions
2,700

 
1,026

Proceeds from divestitures

 
15,300

    Investment in convertible note
(2,020
)
 

Purchases of property, plant and equipment, net
(12,541
)
 
(12,418
)
Purchases of intangible assets
(10,800
)
 

Purchase of cost-method investment

 
(4,000
)
Purchases of short-term investments
(313,246
)
 
(163,292
)
Proceeds from sales of short-term investments
466,890

 
76,848

Proceeds from maturities of short-term investments
80,695

 
64,298

 Net cash used in investing activities
(67,460
)
 
(22,238
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
16,516

 
14,822

Prepayments for purchase of treasury stock
(45,000
)
 

Proceeds from issuance of senior convertible notes, net of issuance costs
363,445

 

Purchase of convertible note hedge
(94,185
)
 

Proceeds from issuance of warrants
56,847

 

Repurchase of common stock
(344,216
)
 
(62,684
)
 
Nine Months Ended

6


 
(Unaudited, in thousands)
January 3,
2016
 
December 28,
2014
Payment of acquisition related contingent consideration

 
(1,600
)
Repayment of loans
(9,195
)
 

Excess tax benefit from share-based payment arrangements
115

 

 Net cash used in financing activities
(55,673
)
 
(49,462
)
Effect of exchange rates on cash and cash equivalents 
197

 
(2,823
)
Net increase in cash and cash equivalents
36,047

 
36,576

Cash and cash equivalents at beginning of period
116,945

 
91,211

Cash and cash equivalents at end of period
$
152,992

 
$
127,787


Noncash investing activity:
Conversion of a cost method investment in convertible note to ordinary shares of stock
$
(2,020
)
 
$


The accompanying notes are an integral part of these condensed consolidated financial statements.

7



INTEGRATED DEVICE TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Business .   Integrated Device Technology, Inc. (IDT or the Company) designs, develops, manufactures and markets a broad range of integrated circuits for the advanced communications, computing, consumer and automotive industries.
Basis of Presentation .   The Company's fiscal year is the 52 or 53 week period ending on the Sunday closest to March 31. In a 52 week year, each fiscal quarter consists of 13 weeks. In a 53 week year, the additional week is usually added to the third quarter, making such quarter consist of 14 weeks. The first and second quarters of fiscal 2016 and fiscal 2015 were 13 week periods, the third quarter of fiscal 2016 was 14 weeks, and the third quarter of fiscal 2015 was 13 weeks.
On December 7, 2015, the Company completed its acquisition of Zentrum Mikroelektronik Dresden AG (ZMDI), a privately-held company mainly operating in Germany, for a purchase price of Euro-equivalent of $307.0 million . The unaudited condensed consolidated financial statements include the results of operations of ZMDI, commencing on the closing date of the acquisition.
Principles of Consolidation .  The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Use of Estimates . The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Significant Accounting Policies . For a description of significant accounting policies, see Note 1, Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's annual report on Form 10-K for the fiscal year ended March 29, 2015. There have been no material changes to the Company's significant accounting policies since the filing of the annual report on Form 10-K, with the exception of recently adopted accounting policies listed below.
In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the condensed consolidated financial statements for the interim period.
Accounting for Business Combinations. The Company uses the acquisition method of accounting, which is in accordance with ASC 805, Business Combinations, for business combinations and recognizes assets acquired and liabilities assumed measured at their fair values on the date acquired. This requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While management uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company adjusts the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the Company's Consolidated Statements of Operations.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although the Company believes the assumptions and estimates made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets that the Company have acquired include, but are not limited to future expected cash flows from product sales, customer contracts and acquired technologies, and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Trade Receivables Factoring Facility. The Company assumed an agreement with a financial institution to sell certain of its trade receivables from customers with limited, non-credit-related recourse provisions as part of the acquisition during the quarter ended January 3, 2016. Total receivables sold under the factoring facility during the quarter ended January 3, 2016 was $3.1 million . Total collections from the sale of receivables and from deferred purchase payments during the quarter ended January 3, 2016 were $4.2 million and $0.4 million , respectively. Under the terms of the factoring agreement, the total available amount of the factoring facility as of January 3, 2016 was $2.9 million . The sales of accounts receivable in accordance with the factoring agreement are reflected as a reduction of Accounts Receivable, net in the Condensed Consolidated Balance Sheets as they meet the applicable criteria of ASC 860, Transfers and Servicing. Collections of deferred purchase payments are included in the change in accounts receivable under the operating activities section of the Condensed Consolidated Statements of Cash Flows. The amount due from the factoring institution was $0.5 million at January 3, 2016, and is shown in Prepayments and Other Current Assets in the Condensed

8


Consolidated Balance Sheets. The Company pays factoring fees associated with the sale of receivables based on the dollar value of the receivables sold. Such fees are not material for the quarter ended January 3, 2016.
Recent Accounting Pronouncements
Accounting Pronouncements Adopted in Fiscal 2016
In November 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, amending the current accounting guidance and requiring an entity to classify all deferred tax assets and liabilities as non-current in a classified statement of financial position. The standard is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted and the standard may be adopted either prospectively or retrospectively. The Company has early adopted the standard prospectively in the quarter ended January 3, 2016. The adoption resulted in a reclassification from current deferred tax liabilities of $1.4 million , net of deferred non-current tax assets of $0.7 million , to non-current deferred tax liabilities.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, that requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue to be reported as interest expense. The update is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued, and the new guidance would be applied retrospectively to all prior periods presented. The Company has early adopted the standard in the quarter ended January 3, 2016. There was no impact to prior periods.
Accounting Pronouncements Not Yet Effective for Fiscal 2016
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. The guidance eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, and require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The guidance also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements is required under this guidance. The guidance further clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance is applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and is effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted only if certain criteria is met. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements and related disclosures.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying Accounting for Measurement-period Adjustment, which provides that an acquirer should recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Under this guidance, the acquirer is required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. It is also required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Early adoption is permitted. The guidance is applied prospectively and is effective for the Company in its first quarter of fiscal years 2017.
In July 2015, the FASB issued guidance applying to inventory measured using any other method other than last-in, last-out method. Under this guidance, inventory is measured at the lower of cost and net realizable value. The net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is applied prospectively and is effective for the Company in its first quarter of fiscal 2018. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements and related disclosures.

9


On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. On July 9, 2015, the FASB decided to delay the effective date by one year to December 15, 2017 for annual periods beginning after that date. The FASB also decided to allow early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

Note 2. Net Income Per Share
Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive potential common shares outstanding during the period. Potential common shares include employee stock options and restricted stock units. For purposes of computing diluted net income per share, weighted average potential common shares do not include potential common shares that are anti-dilutive under the treasury stock method.
The following table sets forth the computation of basic and diluted net income per share from continuing operations: 
 
Three Months Ended
 
Nine Months Ended
 
(in thousands, except per share amounts)
January 3,
2016
 
December 28,
2014
 
January 3,
2016
 
December 28,
2014
Numerator (basic and diluted):
 
 
 
 
 
 
 
Net income from continuing operations
$
32,545

 
$
32,841

 
$
113,688

 
$
74,198

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
140,411

 
148,552

 
145,382

 
148,844

Dilutive effect of employee stock options and restricted stock units
5,294

 
5,421

 
5,232

 
5,060

Weighted average common shares outstanding, diluted
145,705

 
153,973

 
150,614

 
153,904

 
 
 
 
 
 
 
 
Basic net income per share from continuing operations
$
0.23

 
$
0.22

 
$
0.78

 
$
0.50

Diluted net income per share from continuing operations
$
0.22

 
$
0.21

 
$
0.75

 
$
0.48


Potential dilutive common shares of 0.4 million and 22 thousand pertaining to employee stock options and restricted stock units were excluded from the calculation of diluted earnings per share for the three months ended January 3, 2016 and December 28, 2014 , respectively, because the effect would have been anti-dilutive. Potential dilutive common shares of 0.4 million and 0.3 million pertaining to employee stock options and restricted stock units were excluded from the calculation of diluted earnings per share for the nine months ended January 3, 2016 and December 28, 2014 , respectively, because the effect would have been anti-dilutive.

The denominator for diluted net income per share for three months and nine months ended January 3, 2016 does not include any effect from the 0.875% Convertible Senior Notes due 2022, or the Convertible Notes. In accordance with ASC 260, Earnings per Share, the Convertible Notes will not impact the denominator for diluted net income per share unless the average price of our common stock, as calculated under the terms of the Notes, exceeds the conversion price of $33.45 per share. Likewise, the denominator for diluted net income per share will not include any effect from the warrants unless the average price of our common stock, as calculated under the terms of the warrants, exceeds $48.66 per share.

The denominator for diluted net income per share for three months and nine months ended January 3, 2016 also does not include any effect from the convertible note hedge transaction, or the Note Hedges. In future periods, the denominator for diluted net income per share will exclude any effect of the Note Hedges, as their effect would be anti-dilutive. In the event an actual conversion of any or all of the Convertible Notes occurs, the shares that will be delivered to us under the Note Hedges are designed to neutralize the dilutive effect of the shares that the Company will issue under the Convertible Notes. Refer to Note 16 for further discussion regarding the Convertible Notes.


10


Note 3. Business Combination
Acquisition of Zentrum Mikroelektronik Dresden AG
On December 7, 2015, the Company completed its purchase all of the outstanding no-par-value shares of Zentrum Mikroelektronik Dresden AG (ZMDI), a privately-held company mainly operating in Germany, in an all-cash transaction for approximately $307.0 million . ZMDI is a global supplier of sensing products for mobile, automotive and industrial solutions. The acquisition provides the Company a significant new growth opportunity in the automotive and industrial business.
Total consideration consisted of the following:
(in thousands)
 
Cash paid to ZMDI shareholders
$
307,030

Less: cash acquired
(27,892
)
Total purchase price, net of cash acquired
$
279,138

The total cash consideration paid includes a Euro-equivalent of $20.0 million which is maintained in an escrow account and will be released to the selling shareholders upon meeting of certain conditions in accordance with the escrow agreement.
The Company allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over those fair values was recorded as goodwill. Because the Acquisition was structured as a stock acquisition for income tax purposes, none of the asset step-up or asset recognition required by purchase accounting, including the goodwill described below, is deductible for tax purposes.
The fair value of cash, accounts receivable, other current assets, accounts payable, and other accrued liabilities were generally determined using historical carrying values given the short-term nature of these assets and liabilities. The fair values for acquired inventory, property, plant and equipment and intangible assets were determined with the input from third-party valuation specialist. The fair values of certain other liabilities were determined internally using historical carrying values and estimates made by management. As additional information becomes available, the Company  may revise the preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material.
The financial results of the ZMDI have been included in the Company’s Condensed Consolidated Statements of Operations from December 7, 2015, the closing date of the acquisition. The Company's results of continuing operations for the quarter ended January 3, 2016 include $3.4 million of net revenue attributable to ZMDI. The Company incurred approximately $2.1 million of acquisition related costs for the three months ended January 3, 2016 and these costs were included in Selling, General and Administrative Expenses in the Condensed Consolidated Statements of Operations. Goodwill is primarily attributable to the assembled workforce of ZMDI, anticipated synergies and economies of scale expected from the operations of the combined company.
The Company's preliminary allocation of the purchase price as of December 7, 2015 is as follows:
(in thousands)
Estimated Fair Value
Cash
$
27,892

Accounts receivable
10,618

Inventories
19,892

Other current assets
1,551

Property, plant and equipment
9,287

Other non-current assets
2,003

Intangible assets
126,200

Goodwill
170,089

Accounts payable
(5,633
)
Accrued and other current liabilities
(19,141
)
Loans payable
(9,437
)
Deferred tax liability
(23,467
)
Other long term liabilities
(2,824
)
Total purchase price
$
307,030


A summary of the preliminary allocation of intangible assets is as follows:

11


(in thousands)
Estimated Fair Value
Estimated Useful Life (in years)
Developed technology
$
75,600

7
Customer relationships
44,000

7
Backlog
5,800

1
Trademarks
800

1
Total
$
126,200

 

Identifiable Tangible Assets and Liabilities:
Assets and liabilities were reviewed and adjusted, if required, to their estimated fair value.
Inventory:
The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected sales price of the inventory, less reasonable selling margin.
Bank Loans:
The Company assumed liabilities of ZMDI which include outstanding bank loans of approximately $9.4 million as of December 7, 2015. The Company subsequently paid $9.2 million of the assumed amount which reduced the outstanding balance to $0.2 million as of January 3, 2016.
I ntangible Assets:
The allocation of the purchase price to tangible and identified intangible assets acquired was based on our best estimate of the fair value of such assets as of the acquisition date. The fair value of acquired tangible and identified intangible assets was determined based on inputs that are unobservable and significant to the overall fair value measurement.
Developed technology consists of ZMDI's products that have reached technological feasibility. The Company valued the developed technology utilizing a multi-period excess earnings (MPEE) method , which uses the discounted future earnings specifically attributed to this intangible asset that is in excess of returns for other assets that contributed to those earnings. The economic useful life was determined based on the technology cycle related to the products and its expected contribution to forecasted revenue. The Company utilized a discount rate of 13.5% in estimating the fair value of the developed technology.
Customer relationships represent the fair value of future projected revenue that is expected to be derived from sales of products to existing customers of the acquired company. Customer contracts and related relationships value has been estimated utilizing a with-and-without method, which uses projected cash flows with and without the intangible asset in place. Cash flow differentials are then discounted to present value to arrive at an estimate of fair value for the asset. The economic useful life was determined based on the life of the developed technology, assuming that the existing customers will remain with the Company until the developed technology becomes obsolete. The Company utilized a discount rate of 13.5% in estimating the fair value of the customer relationships.
Order backlog represents business under existing contractual obligations as of the acquisition date. The fair value of backlog was determined using the MPEE method under the income approach based on expected operating cash flows from future contractual revenue. The economic useful life was determined based on the expected life of the backlog and the cash flows over the forecast period. The Company utilized a discount rate of 5.4% in estimating the fair value of the order backlog.
Trademark relates to ZMDI’s product brand and its fair value was determined by applying the relief-from-royalty method under the income approach. This valuation method is based on the application of a royalty rate to forecasted revenue under the respective trade name and involves discounting net cash flows resulting from the forecast of avoided royalties over a transition period, giving consideration to the cost of capital estimate as well as the risk and timing of the cash flows associated with this asset relative to the other asset classes. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecasted periods. The Company utilized a discount rate of 13.5% in estimating the fair value of the trade name and trademark.
Pro Forma Financial Information (unaudited):
The following unaudited pro forma financial information present combined results of operations for each of the periods presented, as if ZMDI had been acquired as of the beginning of fiscal year 2015. The pro forma financial information include the business combination effect of the amortization charges from acquired intangible assets, the amortization of fair market value inventory write-up and acquisition-related costs. The pro forma data is for informational purposes only and is not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal

12


year 2015 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below:
 
Three Months Ended
 
Nine Months Ended
 
(Unaudited in thousands, except per share data)
January 3, 2016
December 28, 2014
 
January 3, 2016
December 28, 2014
Revenues
$
190,408

$
170,425

 
$
561,646

$
476,862

Net income
$
29,948

$
26,147

 
$
114,179

$
54,898

Basic net income per share - continuing operations
$
0.21

$
0.18

 
$
0.79

$
0.37

Diluted net income per share - continuing operations
$
0.21

$
0.17

 
$
0.76

$
0.36



Note 4. Discontinued Operations
High-Speed Converter (“HSC”) Business
In fiscal 2014, the Company initiated a project to divest its HSC business and has classified the related assets, as held for sale. The HSC business included the assets of NXP B.V.’s Data Converter Business and Alvand Technologies, Inc., which were acquired in fiscal 2013.
On May 30, 2014, the Company completed the sale of certain assets related to the Alvand portion of the HSC business to a buyer pursuant to an Asset Purchase Agreement. Upon the closing of the transaction, the buyer paid the Company $18.0 million in cash consideration, of which $2.7 million was initially held in an escrow account and was paid to the Company in December 2015. The Company recorded a gain of $16.8 million in discontinued operations related to this divestiture during the first quarter of fiscal 2015. The following table summarizes the components of the gain (in thousands):
 
Amount
Cash proceeds from sale (including amounts held in escrow)
$
18,000

Less book value of assets sold and direct costs related to the sale:
 
Intangible assets
(990
)
Transaction and other costs
(170
)
Gain on divestiture
$
16,840


Following the sale of assets related to the Alvand portion of the HSC business, the business had remaining long-lived assets classified as held for sale amounting to $8.5 million , which consisted of $2.9 million in fixed assets and $5.6 million in intangible assets. The Company evaluated the carrying value of the disposal group and determined that it exceeded its estimated fair value based on estimated selling price less cost to sell. Accordingly, total impairment charge of $8.5 million was recorded as loss from discontinued operations in the Condensed Consolidated Statement of Operations in the first quarter of fiscal 2015.
As of March 29, 2015, all long-lived assets related to the HSC business were fully impaired.
On April 27, 2015, the Company completed the sale of the remaining HSC business to eSilicon, for $1.5 million which will be paid on or before April 27, 2017. In connection with the sale, the Company entered into an Exclusive Intellectual Property License Agreement with eSilicon, whereby the Company provided an exclusive license to eSilicon to develop, manufacture, sell and maintain HSC products. In connection with the sale, the Company and eSilicon also entered into a Transition Services Agreement, whereby the Company will provide certain transition services over a specific period from the effective date of the sale. The transition services do not represent significant continuing involvement of the Company in the HSC business.
As of January 3, 2016 , the Company had a receivable of $1.5 million representing uncollected proceeds from the sale that was included under Other Assets on the Condensed Consolidated Balance Sheet. Given the term of the sale, the Company deferred the gain from this divestiture and will recognize it into discontinued operations when collectibility becomes certain. The following table summarizes the components of the deferred gain which was included under Other Long-term Liabilities on the Condensed Consolidated Balance Sheet as of January 3, 2016 :

13


(in thousands)
Amount
Sale price
$
1,500

Less book value of assets sold
(115
)
Deferred gain on divestiture
$
1,385


The HSC business was included in the Company’s Communications reportable segment. For financial statements purposes, the results of operations for the HSC business have been segregated from those of the continuing operations and are presented in the Company's condensed consolidated financial statements as discontinued operations.
As a result of the sale of HSC business in April 2015, there are no results presented for the three months ended January 3, 2016. The results of the HSC business for the three months ended December 28, 2014 and nine months ended January 3, 2016 and December 28, 2014 were as follows (in thousands):



 
Three Months Ended
 
Nine Months Ended
 
December 28, 2014
 
January 3, 2016
 
December 28, 2014
Revenues
$
701

 
$
176

 
$
3,039

Cost of revenues
(441
)
 
(477
)
 
(1,459
)
Long-lived assets impairment

 

 
(8,471
)
Restructuring costs (see Note 13)
(11,930
)
 

 
(18,705
)
Operating expenses
(2,868
)
 
(246
)
 
(10,842
)
Gain on divestiture

 

 
16,840

Income tax provision (benefit)
(55
)
 
15

 
(43
)
Net loss from discontinued operations
$
(14,483
)
 
$
(562
)
 
$
(19,555
)



14


Note 5. Fair Value Measurement
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of January 3, 2016 :
 
Fair Value at Reporting Date Using
(in thousands)
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets
 
 
 
 
 
 
 
Cash Equivalents and Short-Term Investments:
 
 
 
 
 
 
 
US government treasuries and agencies securities
$
62,434

 
$

 
$

 
$
62,434

Money market funds
70,960

 

 

 
70,960

Asset-backed securities

 
14,501

 

 
14,501

Corporate bonds

 
108,314

 

 
108,314

Corporate commercial paper

 
3,483

 

 
3,483

Bank deposits

 
13,595

 

 
13,595

Repurchase agreement

 
129

 

 
129

Municipal bonds

 
900

 

 
900

Total assets measured at fair value
$
133,394

 
$
140,922

 
$

 
$
274,316

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Convertible Notes (1)
$

 
$
(284,280
)
 
$

 
$
(284,280
)
(1) The convertible notes are carried on the Condensed Consolidated Balance Sheets at their original issuance value including accreted interest, net of unamortized debt discount and issuance cost. The Convertible Notes are not marked to fair value at the end of each reporting period. As of January 3, 2016, the fair value of Convertible Notes was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. See Note 16 for additional information on the Convertible Notes.


15


The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 29, 2015 :
 
Fair Value at Reporting Date Using
 
 
 
(in thousands)
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Cash Equivalents and Short-Term Investments:
 
 
 
 
 
 
 
US government treasuries and agencies securities
$
135,945

 
$

 
$

 
$
135,945

Money market funds
55,578

 

 

 
55,578

Asset-backed securities

 
31,830

 

 
31,830

Corporate bonds

 
245,675

 

 
245,675

International government bonds

 
1,006

 

 
1,006

Corporate commercial paper

 
4,999

 

 
4,999

Bank deposits

 
16,915

 

 
16,915

Repurchase agreements

 
191

 

 
191

Municipal bonds

 
6,044

 

 
6,044

Total assets measured at fair value
$
191,523

 
$
306,660

 
$

 
$
498,183


U.S. government treasuries and U.S. government agency securities as of January 3, 2016 and March 29, 2015 do not include any U.S. government guaranteed bank issued paper.
The securities in Level 1 are highly liquid and actively traded in exchange markets or over-the-counter markets. Level 2 fixed income securities are priced using quoted market prices for similar instruments, non-binding market prices that are corroborated by observable market data.
All of the Company’s available-for-sale investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The Company did not record any impairment charges related to its available-for-sale investments in the three and nine months ended January 3, 2016 and December 28, 2014 .

Note 6. Investments
Available-for-Sale Securities
Available-for-sale investments at January 3, 2016 were as follows:
 
(in thousands)
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Estimated Fair
 Value
U.S. government treasuries and agencies securities
$
62,583

 
$

 
$
(149
)
 
$
62,434

Money market funds
70,960

 

 

 
70,960

Asset-backed securities
14,533

 

 
(32
)
 
14,501

Corporate bonds
108,682

 
18

 
(386
)
 
108,314

International government bonds

 

 

 

Corporate commercial paper
3,483

 

 

 
3,483

Bank deposits
13,595

 

 

 
13,595

Repurchase agreements
129

 

 

 
129

Municipal bonds
900

 

 

 
900

Total available-for-sale investments
274,865

 
18

 
(567
)
 
274,316

Less amounts classified as cash equivalents
(74,996
)
 

 

 
(74,996
)
Short-term investments
$
199,869

 
$
18

 
$
(567
)
 
$
199,320


16



Available-for-sale investments at March 29, 2015 were as follows:
 
(in thousands)
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Estimated Fair
 Value
U.S. government treasuries and agencies securities
$
135,570

 
$
398

 
$
(23
)
 
$
135,945

Money market funds
55,578

 

 

 
55,578

Asset-backed securities
31,830

 
9

 
(9
)
 
31,830

Corporate bonds
245,229

 
567

 
(121
)
 
245,675

International government bonds
1,010

 

 
(4
)
 
1,006

Corporate commercial paper
4,999

 

 

 
4,999

Bank deposits
16,915

 

 

 
16,915

Repurchase agreements
191

 

 

 
191

Municipal bonds
6,001

 
45

 
(2
)
 
6,044

Total available-for-sale investments
497,323

 
1,019

 
(159
)
 
498,183

Less amounts classified as cash equivalents
(60,068
)
 

 

 
(60,068
)
Short-term investments
$
437,255

 
$
1,019

 
$
(159
)
 
$
438,115


The cost and estimated fair value of available-for-sale securities at January 3, 2016 , by contractual maturity, were as follows:
( in thousands )
Amortized
Cost
 
Estimated Fair
Value
Due in 1 year or less
$
103,575

 
$
103,569

Due in 1-2 years
64,896

 
64,740

Due in 2-5 years
107,386

 
106,007

Total investments in available-for-sale securities
$
275,857

 
$
274,316


The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of January 3, 2016 , aggregated by investment category and length of time that individual securities have been in a continuous loss position.
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in thousands)
Fair
Value
 
Unrealized
 Loss
 
Fair
 Value
 
Unrealized
 Loss
 
Fair
Value
 
Unrealized
 Loss
Corporate bonds
$
90,142

 
$
(386
)
 
$

 
$

 
$
90,142

 
$
(386
)
Asset-backed securities
14,501

 
(32
)
 

 

 
14,501

 
(32
)
U.S. government treasuries and agencies securities
56,969

 
(149
)
 

 

 
56,969

 
(149
)
Municipal bonds
900

 

 

 

 
900

 

International government bonds

 

 

 

 

 

Total
$
162,512

 
$
(567
)
 
$

 
$

 
$
162,512

 
$
(567
)


17


The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, as of March 29, 2015 , aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
(in thousands)
Fair
 Value
 
Unrealized
 Loss
 
Fair
 Value
 
Unrealized
 Loss
 
Fair
 Value
 
Unrealized
 Loss
Corporate bonds
$
67,367

 
$
(121
)
 
$

 
$

 
$
67,367

 
$
(121
)
Asset-backed securities
17,736

 
(9
)
 

 

 
17,736

 
(9
)
U.S. government treasuries and agencies securities
18,478

 
(23
)
 

 

 
18,478

 
(23
)
Municipal bonds
1,001

 
(2
)
 

 

 
1,001

 
(2
)
International government bonds
1,006

 
(4
)
 

 

 
1,006

 
(4
)
Total
$
105,588

 
$
(159
)
 
$

 
$

 
$
105,588

 
$
(159
)

Currently, a significant portion of the Company’s available-for-sale investments that it holds are high grade instruments.  As of January 3, 2016 , the unrealized losses on the Company’s available-for-sale investments represented an insignificant amount in relation to its total available-for-sale portfolio. Substantially all of the Company’s unrealized losses on its available-for-sale marketable debt instruments can be attributed to fair value fluctuations in an unstable credit environment that resulted in a decrease in the market liquidity for debt instruments.  Because the Company has the ability to hold these investments until a recovery of fair value, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at January 3, 2016 and March 29, 2015 .
Non-marketable Equity Securities
As of January 3, 2016 and March 29, 2015 , the Company holds capital stock of privately-held companies with total amount of $6.0 million and $4.0 million , respectively. During the three months ended January 3, 2016 , the Company purchased $2.0 million of convertible notes in a privately-held company which were automatically converted into ordinary shares of stock in accordance with the terms of the instrument at December 31, 2015. This and other investment in stocks (included under Other Assets on the Condensed Consolidated Balance Sheets) are accounted for as cost-method investment, as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of each entity. The Company did not record any impairment charge for these investments during the three and nine months ended January 3, 2016

Note 7. Stock-Based Employee Compensation
Equity Incentive Programs
The Company currently issues awards under two equity-based plans in order to provide additional incentive and retention to directors and employees who are considered to be essential to the long-range success of the Company. These plans are further described below.
2004 Equity Plan (2004 Plan)
Options granted by the Company under the 2004 Plan generally expire seven years from the date of grant and generally vest over a four -year period from the date of grant, with one-quarter of the shares of common stock vesting on the 1 year anniversary of the grant date and the remaining shares vesting monthly for the 36 months thereafter. The exercise price of the options granted by the Company under the 2004 Plan shall not be less than 100% of the fair market value for a common share subject to such option on the date the option is granted. Full value awards made under the 2004 Plan shall become vested over a period of not less than 3 years (or, if vesting is performance-based, over a period of not less than one year) following the date such award is made; provided, however, that full value awards that result in the issuance of an aggregate of up to 5% of common stock available under the 2004 Plan may be granted to any one or more participants without respect to such minimum vesting provisions. As of January 3, 2016 , there were 8.2 million shares available for future grant under the 2004 Plan.

18


Compensation Expense
The following table summarizes stock-based compensation expense by line items appearing in the Company’s Condensed Consolidated Statement of Operations:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
January 3,
2016

December 28,
2014
 
January 3,
2016
 
December 28,
2014
Cost of revenue
$
666

 
$
592

 
$
1,993

 
$
1,347

Research and development
4,433

 
2,562

 
11,608

 
7,547

Selling, general and administrative
4,363

 
2,724

 
12,309

 
7,875

Discontinued operations

 
20

 
(32
)
 
(207
)
Total stock-based compensation expense
$
9,462

 
$
5,898

 
$
25,878

 
$
16,562

The amount of stock-based compensation expense that was capitalized during the periods presented above was not material.
Stock Options
The following is a summary of the Company's stock option activity and related weighted average exercise prices for each category:
 
Nine Months Ended January 3, 2016
(shares in thousands)
Shares
 
Price
Beginning stock options outstanding
3,680

 
$
7.71

Granted
428

 
21.96

Exercised (1)
(1,222
)
 
6.82

Canceled
(40
)
 
6.94

Ending stock options outstanding
2,846

 
$
10.25

Ending stock options exercisable
1,733

 
$
7.50

(1)
Upon exercise, the Company issues new shares of common stock.
As of January 3, 2016 , the unrecognized compensation cost related to nonvested stock options, net of estimated forfeitures, was $2.1 million and will be recognized over a weighted-average period of 1.13 years.
As of January 3, 2016 , stock options vested and expected to vest totaled approximately 2.7 million with a weighted-average exercise price of $9.82 and a weighted-average remaining contractual life of 3.57 years. The aggregate intrinsic value was approximately $44.0 million .
As of January 3, 2016 , fully vested stock options totaled approximately 1.7 million with a weighted-average exercise price of $7.50 and a weighted-average remaining contractual life of 2.87 years. The aggregate intrinsic value was approximately $32.7 million .
Restricted Stock Units
Restricted stock units granted by the Company under the 2004 Plan generally vest over at least a three year period from the grant date with one-third of restricted stock units vesting on each one-year anniversary. As of January 3, 2016 , 3.7 million restricted stock unit awards were outstanding under the 2004 Plan.

19


The following table summarizes the Company's restricted stock unit activity and related weighted-average exercise prices for each category for the nine months ended January 3, 2016 :
 
Nine Months Ended January 3, 2016
(shares in thousands)
Shares
 
Weighted-average grant date fair value per share
Beginning RSUs outstanding
3,457

 
$
10.58

Granted
1,640

 
21.95

Released
(1,091
)
 
9.76

Forfeited
(311
)
 
12.59

Ending RSUs outstanding
3,695

 
$
15.70

As of January 3, 2016 , restricted stock units expected to vest totaled approximately 3.1 million with a weighted-average remaining contract life of 1.36 years. The aggregate intrinsic value was approximately $81.1 million .
As of January 3, 2016 , the unrecognized compensation cost related to restricted stock units granted under the Company’s equity incentive plan was approximately $25.9 million , net of estimated forfeitures, and is expected to be recognized over a weighted-average period of 1.49 years.
Performance-Based Stock Units
Under the 2004 Plan, the Company has granted performance-based stock units which vest and convert into shares of the Company's common stock based on the level of achievement of pre-established performance goals relating to Company's performance relative to a group of peer companies and to cumulative revenue targets for a specific product group, during a specified performance period. The performance period for the Company's performance-based stock units is generally 1 to 3 years. Management evaluates, on a quarterly basis, the likelihood of the Company meeting its performance metrics in determining stock-based compensation expense.
The following table summarizes the Company's performance stock unit activity and related weighted-average exercise prices for each category for the nine months ended January 3, 2016 :
 
Nine Months Ended January 3, 2016
(shares in thousands)
Shares

Weighted-average grant date fair value per share
Beginning PSUs outstanding
517


$
8.06

Granted
73


8.51

Released
(182
)

8.17

Forfeited
(178
)

8.47

Ending PSUs outstanding
230


$
7.80

As of January 3, 2016 , performance stock units vested and expected to vest totaled approximately 0.2 million with a weighted-average remaining contract life of 0.44 year. The aggregate intrinsic value was approximately $4.8 million .
As of January 3, 2016 , the unrecognized compensation cost related to performance stock units granted under the Company’s equity incentive plan was approximately $4.5 million , net of estimated forfeitures, and is expected to be recognized over a weighted-average period of 0.44 year.
Market-Based Stock Units
In June 2015, under the 2004 Plan, the Company granted approximately 0.2 million shares of restricted stock units with a market-based condition to a group of executive-level employees. These equity awards vest and convert into shares of the Company’s common stock based on the achievement of the Company’s relative total shareholder return over the performance period of 2 years. The earned market-based stock units will vest in two equal installments, with the first installment of vesting to occur on June 15, 2017, and the second on June 15, 2018.
In June 2014, under the 2004 Plan, the Company granted approximately 0.5 million shares of restricted stock units with a market-based condition to a group of executive-level employees. These equity awards vest and convert into shares of the Company’s common stock based on the achievement of the Company’s relative total shareholder return over the performance period of 2

20


years. The earned market-based stock units will vest in two equal installments, with the first installment of vesting to occur on June 15, 2016, and the second on June 15, 2017.
The fair value of each market-based stock unit award was estimated on the date of grant using a Monte Carlo simulation model that uses the assumptions noted in the table below. The Company uses historical data to estimate employee termination within the valuation model. The expected term of 1.80 years was derived from the output of the valuation model and represents the period of time that restricted stock units granted are expected to be outstanding.
The following weighted average assumptions were used to calculate the fair value of the market-based equity award using a Monte Carlo simulation model:
 
June 15, 2015
June 15, 2014
Estimated fair value
$
33.08

$
21.00

Expected volatility
41.22
%
34.60
%
Expected term (in years)
1.80

1.80

Risk-free interest rate
0.65
%
0.38
%
Dividend yield
%
%
As of January 3, 2016 , the total market-based stock units outstanding were approximately 0.8 million .
As of January 3, 2016 , market-based stock units vested and expected to vest totaled approximately 0.6 million with a weighted-average remaining contract life of 1.18 years. The aggregate intrinsic value was approximately $17.1 million .
As of January 3, 2016 , the unrecognized compensation cost related to market-based stock units granted under the Company’s equity incentive plans was approximately $7.9 million , net of estimated forfeitures, and is expected to be recognized over a weighted-average period of 1.24 years.
2009 Employee Stock Purchase Plan (2009 ESPP)
On June 18, 2009, the Board approved implementation of the 2009 Employee Stock Purchase Plan (2009 ESPP) and authorized the reservation and issuance of up to 9.0 million shares of the Company's common stock, subject to stockholder approval. On September 17, 2009, the Company's stockholders approved the plan at the 2009 Annual Meeting of Stockholders. The 2009 ESPP is intended to be implemented in successive quarterly purchase periods commencing on the first day of each fiscal quarter of the Company. In order to maintain its qualified status under Section 423 of the Internal Revenue Code, the 2009 ESPP imposes certain restrictions, including the limitation that no employee is permitted to participate in the 2009 ESPP if the rights of such employee to purchase common stock of the Company under the 2009 ESPP and all similar purchase plans of the Company or its subsidiaries would accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time the right is granted) for each calendar year. At the 2012 annual meeting of stockholders on September 13, 2012, the Company's stockholders approved an additional 5.0 million . The number of shares of common stock reserved for issuance thereunder increased from 9.0 million shares to 14.0 million shares.
Activity under the Company's ESPP for the nine months ended January 3, 2016 is summarized in the following table:
(in thousands, except per share amounts)
 
Number of shares issued
486

Average issuance price
$
16.85

Number of shares available at January 3, 2016
3,893


Note 8. Stockholders' Equity
Stock Repurchase Program. In April 2015, the Company's Board of Directors approved a new share repurchase program authorization for $300 million . In October 2015, the Company's Board of Directors approved an increase in the share repurchase authorization by another $300 million . In the three and nine months ended January 3, 2016 , the Company repurchased 10.7 million shares for $267.2 million and 14.5 million shares for $344.2 million , respectively. Of the total repurchases for the nine months ended January 3, 2016, $7.9 million was from the old authorization. As of January 3, 2016 , approximately $263.7 million was available for future purchase under the new share repurchase program.

Accelerated Share Repurchase. On November 2, 2015, the Company separately entered into an accelerated share repurchase agreement (the ASR Agreements) with JPMorgan Chase Bank and Bank of America (the Dealers) to repurchase a total of $225 million of its common stock. Pursuant to the terms of the ASR agreements, approximately 7.0 million shares of its common stock

21


were received by the Company on November 5, 2015. At settlement of the ASR Agreements, which is expected to occur during the fourth quarter of fiscal 2016, the Dealers may be required to deliver additional shares of common stock to the Company, or under certain circumstances, the Company may be required to deliver shares of its common stock or may elect to make a cash payment to the Dealers, with the number of shares to be delivered or the amount of such payment based on the differences between the volume-weighted average price, less a discount, of the Company’s common stock during the term of the transaction and the initial $225 million paid. The ASR Agreements were entered into pursuant to the Company’s increase in share repurchase authorization effective October 2015. Of the total initial amount paid to the Dealers, $45 million represents prepayment for subsequent settlement of the ASR Agreements, as of January 3, 2016. In accordance with ASC 815-40, Derivatives and Hedging - Contracts in an Entity’s Own Equity, the payments made under the ASR Agreements were classified as equity in the Company's Condensed Consolidated Balance Sheets.
In January 2016, the ASR Agreements settled resulting in the repurchase of 1.6 million of the Company’s common stock at an average price per share of $28.32 .

Note 9. Balance Sheet Detail
(in thousands)
January 3,
2016
 
March 29,
2015
Inventories, net
 
 
 
Raw materials
$
3,663

 
$
4,709

Work-in-process
29,228

 
18,377

Finished goods
21,894

 
22,324

Total inventories, net
$
54,785

 
$
45,410

 
 
 
 
Property, plant and equipment, net
 

 
 

Land
$
11,469

 
$
11,578

Machinery and equipment
260,313

 
292,180

Building and leasehold improvements
48,195

 
48,031

  Total property, plant and equipment, gross
319,977

 
351,789

Less: accumulated depreciation
(246,208
)
 
(286,281
)
Total property, plant and equipment, net
$
73,769

 
$
65,508

Other accrued liabilities
 
 
 
Accrued restructuring costs (1)
$
8,568

 
$
10,512

Other (2)
7,797

 
7,070

Total other accrued liabilities
$
16,365

 
$
17,582

Other long-term obligations
 
 
 
Deferred compensation related liabilities
$
13,822

 
$
13,143

Other (3)
8,271

 
4,462

Total other long-term liabilities
$
22,093

 
$
17,605


(1) Includes accrued severance costs related to ZMDI acquisition and the disposed HSC business of $4.5 million and $1.7 million , respectively, as of January 3, 2016 and accrued severance costs related to the sale of HSC business of $10.2 million as of March 29, 2015 .
(2) Other current liabilities consist primarily of accrued royalties and outside commissions, current portion of supplier obligations, current portion of capital lease payable, and other accrued unbilled expenses.
(3) Other long-term obligations consist primarily of non-current portion of capital lease payable, non-current deferred gain and other long-term accrued liabilities.


22


Note 10. Deferred Income on Shipments to Distributors
Included in the caption “Deferred income on shipments to distributors” on the Consolidated Condensed Balance Sheets are amounts related to shipments to certain distributors for which revenue is not recognized until the Company's product has been sold by the distributor to an end customer . The components of deferred income on shipments to distributors as of January 3, 2016 and March 29, 2015 are as follows:
(in thousands)
January 3,
2016
 
March 29,
2015
Gross deferred revenue
$
11,410

 
$
19,299

Gross deferred costs
(2,887
)
 
(3,605
)
Deferred income on shipments to distributors
$
8,523

 
$
15,694


The gross deferred revenue represents the gross value of shipments to distributors at the list price billed to the distributor less any price protection credits provided to them in connection with reductions in list price while the products remain in their inventory.  The amount ultimately recognized as revenue will be lower than this amount as a result of ship from stock pricing credits which are issued in connection with the sell through of the Company's products to end customers. Based on the last four quarters, this amount has ranged from an average of approximately 31% to 39% of the list price billed to the customer.  The gross deferred costs represent the standard costs (which approximate actual costs) of products the Company sells to the distributors.  Although the Company monitors the levels and quality of inventory in the distribution channel, the Company's experience is that products returned from these distributors may be sold to a different distributor or in a different region of the world.  As such, inventory write-downs for products in the distribution channel have not been significant.

Note 11. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component, net of tax, for the nine months ended January 3, 2016 consisted of the following:
(in thousands)
Cumulative translation adjustments
 
Unrealized gain on available-for-sale investments
 
Pension adjustments
 
Total
Balance, March 29, 2015
$
(3,721
)
 
$
860

 
$
680

 
$
(2,181
)
Other comprehensive loss before reclassifications
(2,044
)
 
(1,740
)
 

 
(3,784
)
Amounts reclassified out of accumulated other comprehensive income (loss)

 
331

 
(613
)
 
(282
)
Net current-period other comprehensive loss
(2,044
)
 
(1,409
)
 
(613
)
 
(4,066
)
Balance as of January 3, 2016
$
(5,765
)
 
$
(549
)
 
$
67

 
$
(6,247
)

Comprehensive income components consisted of:
(in thousands)
Nine Months Ended January 3, 2016
 
Location
Unrealized holding gains on available-for-sale investments
$
331

 
interest and other, net
Amortization of pension benefits prior service costs
(613
)
 
operating expense
Total amounts reclassified out of accumulated other comprehensive loss
$
(282
)
 
 


23


12. Goodwill and Intangible Assets, Net
Goodwill balances by reportable segment as of January 3, 2016 and March 29, 2015 are as follows:
 
Reportable Segment
 
(in thousands)
Communications
 
Computing, Consumer and Industrial
 
Total
Balance as of March 29, 2015
$
122,248

 
$
13,396

 
$
135,644

Addition - ZMDI acquisition (see Note 3)

 
170,089

 
170,089

Balance as of January 3, 2016
$
122,248

 
$
183,485

 
$
305,733


Goodwill balances as of January 3, 2016 and March 29, 2015 are net of $920.3 million and $922.5 million , respectively, in accumulated impairment losses.
Intangible asset balances as of January 3, 2016 and March 29, 2015 are summarized as follows:
 
January 3, 2016
(in thousands)
Gross Assets
 
Accumulated
Amortization
 
Net Assets
Purchased intangible assets:
 
 
 
 
 
Existing technology
$
279,514

 
$
(201,992
)
 
$
77,522

Trademarks
5,211

 
(4,274
)
 
937

Customer relationships
172,787

 
(129,146
)
 
43,641

Intellectual property licenses
11,400

 
(1,324
)
 
10,076

Backlog
5,800

 
(487
)
 
5,313

Total purchased intangible assets
$
474,712

 
$
(337,223
)
 
$
137,489


 
March 29, 2015
(in thousands)
Gross Assets
 
Accumulated
Amortization
 
Net Assets
Purchased intangible assets:
 
 
 
 
 
Existing technology
$
211,170

 
$
(206,491
)
 
$
4,679

Trademarks
4,411

 
(3,850
)
 
561

Customer relationships
131,045

 
(130,750
)
 
295

Total purchased intangible assets
$
346,626

 
$
(341,091
)
 
$
5,535


As a result of the acquisition of ZMDI, the Company recognized additional intangible assets with total original value of $126.2 million during the three months ended January 3, 2016 (see Note 3).
During the three months ended January 3, 2016, the Company purchased an intangible asset with a cost of $1.5 million and an average estimated useful life of 3 years . During the three months ended September 27, 2015, the Company individually purchased intangible assets with a total cost of $9.9 million and an average estimated useful life of 6.25 years . These intangible assets are comprised of intellectual property licenses that are being used by the Company in the development, manufacture and sale of certain products.
Amortization expense for the three months ended January 3, 2016 and December 28, 2014 was $3.2 million and $1.3 million , respectively. Amortization expense for the nine months ended January 3, 2016 and December 28, 2014 was $5.6 million for each of the periods.
During the first quarter of fiscal 2015, the Company recorded an impairment charge relating to the HSC assets held for sale of $5.6 million , which consisted of existing technology of $4.6 million , customer relationships of $0.9 million and non-compete agreements of $0.1 million . Refer to Note 4 for additional information.
The intangible assets are being amortized over estimated useful lives of 1 to 7.5 years.

24


Based on the intangible assets recorded at January 3, 2016 , and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated amortization expense is expected to be as follows (in thousands):
Fiscal Year
Amount
2016 (Remaining 3 months)
$
7,150

2017
25,651

2018
19,322

2019
18,868

2020 and thereafter
66,498

Total purchased intangible assets
$
137,489


Note 13. Restructuring
The following table shows the provision of the restructuring charges and the liability remaining as of January 3, 2016 :
(in thousands)
Continuing Operations
Discontinued Operations (HSC)
Total
Balance as of March 29, 2015
$
295

$
10,217

$
10,512

Provision
8,910


8,910

Payments and other adjustments
(2,290
)
(8,564
)
(10,854
)
Balance as of January 3, 2016
$
6,915

$
1,653

$
8,568

Integration-related Restructuring Plan
In December 2015, the Company began the implementation of planned cost reduction and restructuring activities in connection with the acquisition of ZMDI. The Company recognized approximately $4.5 million of employee termination cost for two former executives in operating expenses for the quarter ended January 3, 2016. The termination benefits are expected to be paid in the fourth quarter of fiscal 2016.
Other
During the three months ended January 3, 2016, the Company recorded charges of $1.5 million and reduced headcount by 2 employees. During the nine months ended January 3, 2016 , the Company recorded charges of $4.4 million and reduced headcount by 37 employees, and paid $2.3 million related to these actions. As of January 3, 2016 , the total accrued balance for employee severance costs related to these actions was $2.4 million . The Company expects to complete these actions by the fourth quarter of fiscal 2016.
During fiscal 2015, the Company recorded other charges of $1.1 million and reduced headcount by 28 employees in multiple reductions in workforce actions. During fiscal 2015, the Company paid $0.8 million related to these actions. During first quarter of fiscal 2016, the Company paid $0.3 million related to these actions, which reduced the total accrual balance to zero.
HSC Business
In fiscal 2015, the Company prepared a workforce-reduction plan (the Plan) with respect to employees of its HSC business in France and the Netherlands. The Plan sets forth the general parameters, terms and benefits for employee dismissals. The Plan was approved by the French Works Council and Labor Administrator and the related Plan details were communicated to the affected employees in France and the Netherlands. No works council consultation was required in the Netherlands. The Company has not historically offered similar termination benefits as defined in the Plan for these locations. The Plan identified the number of employees to be terminated, their job classification or function, their location and the date that the Plan was expected to be completed. The Plan also established the terms of the benefit arrangement in sufficient detail to enable the employees to determine the type and amount of benefits that they would receive if terminated. In addition, the actions required to complete the Plan indicated that it was unlikely that substantial changes to the Plan would be made after communication to the employees. Accordingly, the Company accrued restructuring charges in accordance with ASC 420, Exit or Disposal Cost Obligations . The restructuring charges recorded to discontinued operations in the Condensed Consolidated Statement of Operations were approximately $18.3 million for the fiscal year ended March 29, 2015 , for a total of 53 employees in France and the Netherlands combined.
The Company expects to complete payments of these termination benefits and the restructuring action by December 2017.


25


Note 14. Commitments and Contingencies
Warranty
The Company maintains an accrual for obligations it incurs under its standard product warranty program and customer, part, or process specific matters. The Company’s standard warranty period is one year, however in certain instances the warranty period may be extended to as long as two years. Management estimates the fair value of the Company’s warranty liability based on actual past warranty claims experience, its policies regarding customer warranty returns and other estimates about the timing and disposition of product returned under the standard program. Customer, part, or process specific accruals are estimated using a specific identification method. Historical profit and loss impact related to warranty returns activity has been minimal. The total warranty accrual was $0.3 million as of January 3, 2016 and March 29, 2015 .
Litigation
In January 2012, Maxim I Properties, a general partnership that had purchased a certain parcel of real property (the Property) in 2003, filed a complaint in the Northern District of California naming approximately 30 defendants, including the Company ("Defendants"), alleging various environmental violations of the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Resource Conservation and Recovery Act (RCRA), the California Hazardous Substance Account Act (HSAA), and other common law claims (the Complaint). The Complaint alleged that Defendants including the Company “…generated, transported, and/or arranged for the transport and/or disposal of hazardous waste to the Property.” On August 15, 2012, Maxim I Properties voluntarily dismissed its Complaint without prejudice. However, another defendant, Moyer Products, Inc., counter-claimed against the plaintiff, Maxim, and cross-claimed against the remaining co-Defendants, including the Company. Thus, the Company remains a cross-defendant in this action.
In a related, but independent action, the California Department of Toxic Substances Control (DTSC) notified the Company in September 2012 that the Company, and more than 50 other entities, were being named as respondents to DTSC's Enforcement Order, as “a generator of hazardous waste.” In April 2013, the Company, along with the other “respondent” parties, entered into a Corrective Action Consent Agreement (CACA) with the DTSC, agreeing to conduct the Property investigation and corrective action selection. The CACA supersedes the DTSC’s Enforcement Order. The Northern District of California federal court stayed the Maxim/Moyer litigation pending the Property investigation under the CACA and DTSC's corrective action selection.
Property investigation activity took place between April 2013 and June, 2015. On June 23, 2015, the DTSC deemed the Property investigation complete. The DTSC continues to evaluate corrective action alternatives. The Company will continue to vigorously defend itself against the allegations in the Complaint and evaluate settlement options with Moyer upon notification from DTSC of its corrective action selection. No specific corrective action has been selected yet, and thus no specific monetary demands have been made.
As of January 3, 2016 , the Company is also a party to various other legal proceedings and claims arising in the normal course of business. With regard to these or future litigation matters that may arise, potential liability and probable losses or ranges of possible losses due to an unfavorable litigation outcome cannot be reasonably estimated at this time. Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in the Maxim lawsuit or any other particular lawsuit or claim. Pending lawsuits, claims as well as potential future litigation, could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's financial condition, results of operations or cash flows.

Note 15. Employee Benefit Plans
401(k) Plan
The Company sponsors a 401(k) retirement matching plan for qualified domestic employees.  The Company recorded expenses of approximately $ 1.9 million and $ 1.3 million in matching contributions under the plan during the nine months ended January 3, 2016 and December 28, 2014 , respectively.
Deferred Compensation Plans
Effective November 1, 2000, the Company established an unfunded deferred compensation plan to provide benefits to executive officers and other key employees. Under the plan, participants can defer any portion of their salary and bonus compensation into the plan and may choose from a portfolio of funds from which earnings are measured. Participant balances are always 100% vested. As of January 3, 2016 and March 29, 2015 , obligations under the plan totaled approximately $13.8 million and $13.1 million . Additionally, the Company has set aside assets in a separate trust that is invested in corporate owned life insurance intended to substantially fund the liability under the plan. As of January 3, 2016 and March 29, 2015 , the deferred compensation plan assets were approximately $14.5 million and $16.5 million respectively.
During the first quarter of fiscal 2013, the Company assumed a deferred compensation plan associated with the acquisition of Fox. Under this plan, participants in retirement are entitled to receive a fixed amount from the Company on a monthly basis. The

26


Company has purchased life insurance policies with the intention of funding the liability under this plan. As of January 3, 2016 and March 29, 2015 , the deferred compensation plan assets under this plan were approximately $0.8 million . As of January 3, 2016 and March 29, 2015 , the deferred compensation plan liabilities under this plan were approximately $ 1.8 million and $1.7 million , respectively.
International Employee Benefit Plans
The Company sponsors defined-benefit pension plans, defined-contribution plans, multi-employer plans and other post-employment benefit plans covering employees in certain of the Company's international locations. As of January 3, 2016 and March 29, 2015, the net liability for all of these international benefit plans totaled $ 0.8 million and $1.0 million respectively.

Note 16. Convertible Senior Notes, Warrants and Hedges
Convertible Notes Offering
On October 29, 2015, the Company priced its private offering of $325 million in aggregate principal amount of 0.875% Convertible Senior Notes due 2022 ("Initial Convertible Notes"). On November 3, 2015, the initial purchasers in such offering exercised in full the over-allotment option to purchase an additional $48.8 million in aggregate principal amount of Convertible Notes (“Additional Convertible Notes”, and together “Convertible Notes”). The net proceeds from this offering were approximately $363.4 million , after deducting the initial purchasers’ discounts and commissions and the offering expenses. The Company used approximately $37.4 million of the net proceeds to pay the cost of the Bond Hedges described below (after such cost was partially offset by the proceeds to the Company from the Warrant Transactions described below). The Company used portion of the remaining net proceeds from the offering to purchase an aggregate of $300 million of its common stock, as authorized under its share repurchase program. The Company used $75.0 million under the currently approved repurchased authorization, to purchase shares of common stock from a purchaser of the Convertible Notes in privately negotiated transaction concurrently with the closing of the offering, and $225 million to purchase additional shares of common stock under the ASR Agreements. The Company intends to use the remainder of the net proceeds for working capital and general corporate purposes.
The Convertible Notes are governed by the terms of an indenture, dated November 4, 2015 (“Indenture”), between the Company and a trustee. The Convertible Notes are the senior unsecured obligations of the Company and bear interest at a rate of 0.875% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, commencing May 15, 2016. The Convertible Notes will mature on November 15, 2022, unless earlier repurchased or converted. At any time prior to the close of business on the business day immediately preceding August 15, 2022, holders may convert their Convertible Notes at their option only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on April 3, 2016 (and only during such fiscal quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after August 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election. Holders will not receive any additional cash payment or additional shares of the Company's common stock representing accrued and unpaid interest, if any, upon conversion of a Convertible Note, except in limited circumstances. Instead, interest will be deemed to be paid by the cash and shares, if any, of the Company’s common stock paid or delivered, as the case may be, to such holder upon conversion of a Convertible Note.
The conversion rate for the Convertible Notes will initially be 29.8920 shares of common stock per $1,000 principal amount of Convertible Notes, which corresponds to an initial conversion price of approximately $33.45 per share of common stock. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of certain stock dividends on common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, the payment of cash dividends and certain issuer tender or exchange offers.
The Company may not redeem the Convertible Notes prior to the maturity date and no sinking fund is provided for the Convertible Notes, which means that the Company is not required to periodically redeem or retire the Convertible Notes. Upon the occurrence of certain fundamental changes involving the Company, holders of the Convertible Notes may require the Company to repurchase for cash all or part of their Convertible Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

27


The Indenture does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Indenture contains customary terms and covenants and events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization involving the Company) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding Convertible Notes by written notice to the Company and the Trustee, may declare 100% of the principal of and accrued and unpaid interest, if any, on all the Convertible Notes to be due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately. Upon the occurrence of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of and accrued and unpaid interest, if any, on all of the Convertible Notes will become due and payable automatically. Notwithstanding the foregoing, the Indenture provides that, to the extent the Company elects, the sole remedy for an event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right to receive additional interest on the Convertible Notes. As of January 3, 2016, none of the conditions allowing holders of the Notes to convert had been met.
In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. Such amount was based on the contractual cash flows discounted at an appropriate market rate for a non-convertible debt at the date of issuance, which was determined to be 5.5% . The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the Convertible Notes using the effective interest method with an effective interest rate of 5.5% per annum. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accordance with ASU No. 2015-03, the Company allocated the total transaction costs related to the Convertible Note issuance to the liability and equity components based on their relative values. Issuance costs attributable to the $274.4 million liability component are being amortized to expense over the term of the Convertible Notes, and issuance costs attributable to the $99.3 million equity component are included along with the equity component in stockholders' equity.
At the debt issuance date, the Convertible Notes, net of issuance costs, consist of the following (in thousands):
 
November 3, 2015

Liability component
 
    Principal
$
274,435

    Less: Issuance cost
(7,568
)
    Net carrying amount
266,867

Equity component *


    Allocated amount
99,316

    Less: Issuance cost
(2,738
)
    Net carrying amount
96,578

Convertible Notes, net
$
363,445

* Recorded in the consolidated condensed balance sheet within additional paid-in capital.

The following table includes total interest expense recognized related to the Convertible Notes during the three months period ended January 3, 2016 (in thousands):
 
 Three Months Ended January 3, 2016

Contractual interest expense
$
545

Amortization of debt issuance costs
180

Amortization of debt discount
1,984

 
$
2,709


The net liability component of Convertible Notes is comprised of the following as of January 3, 2016 (in thousands):

28


 
January 3, 2016

Net carrying amount at issuance date
$
266,867

Amortization of debt issuance costs during the period
180

Amortization of debt discount during the period
1,984

 
$
269,031


See Note 5 to the Company's consolidated financial statements for fair value disclosures related to the Company's Convertible Notes.
Convertible Note Hedge and Warrant Transactions
In connection with the pricing of the Convertible Notes, on October 29, 2015, the Company entered into convertible note hedge transaction (the "Initial Bond Hedge"), with JPMorgan Chase Bank, National Association (the “Option Counterparty”) and paid $81.9 million .
On October 29, 2015, the Company also entered into separate warrant transaction (the "Initial Warrant Transaction") with the Option Counterparty and received $49.4 million .
In connection with the exercise of the Over-Allotment Option, on November 3, 2015, the Company entered into a convertible note hedge transaction (the “Additional Bond Hedge”, and together with the Initial Bond Hedges, the “Bond Hedge”) with the Option Counterparty and paid $12.3 million . On November 3, 2015, the Company also entered into separate additional warrant transaction (the “Additional Warrant Transaction”, and together with the Initial Warrant Transaction, the “Warrant Transactions”) with the Option Counterparty and received $7.4 million . Total amount paid for the purchase of bond hedge and total amount received for the sale of warrants were $94.2 million and $56.8 million , respectively.
The Bond Hedges are generally expected to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any payments in cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, that the Company is required to make in excess of the principal amount of the Convertible Notes upon conversion of any Convertible Notes, as the case may be, in the event that the market price per share of common stock, as measured under the terms of the Bond Hedges, is greater than the strike price ( $33.45 ) of the Bond Hedges, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes. The Warrant Transactions will separately have a dilutive effect to the extent that the market value per share of common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants issued pursuant to the Warrant Transactions (the “Warrants”). The initial strike price of the Warrants is $48.66 per share. The Bond Hedges and Warrants are not marked to market. The value of the Bond Hedges and Warrants were initially recorded in stockholders' equity and continue to be classified as stockholders' equity in accordance with ASC 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity. As of January 3, 2016, no warrants have been exercised.
Aside from the initial payment of a premium to the Option Counterparty under the Bond Hedges, which amount is partially offset by the receipt of a premium under the Warrant Transactions, the Company is not required to make any cash payments to the Option Counterparty under the Bond Hedges and will not receive any proceeds if the Warrants are exercised.

Note 17. Income Taxes
During the three and nine months ended January 3, 2016 , the Company recorded an income tax benefit from continuing operations of $3.9 million and $2.9 million , respectively. The income tax benefit recorded in the three and nine months ended January 3, 2016 was primarily due to the tax benefit on the amortization of acquired intangible assets and severance costs in jurisdictions where no valuation allowance is in place, partially offset by taxes on earnings in foreign jurisdictions. The Company recorded an income tax expense from continuing operations of $0.1 million and $0.8 million in the three and nine months ended December 28, 2014, respectively. The income tax expense recorded in the three and nine months ended December 28, 2014 was primarily due to taxes on earnings in foreign jurisdictions.
As of January 3, 2016 , the Company continued to maintain a valuation allowance against its net U.S. and foreign deferred tax assets, as the Company could not conclude that it was more likely than not that the Company would be able to realize its U.S. and foreign deferred tax assets. Given the continued improvement in the Company’s operations combined with certain tax strategies, it is reasonably possible that within the next 12 months, positive evidence will be sufficient to release a material amount of the Company’s valuation allowance. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. The exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that the Company is able to actually achieve. The Company will continue to evaluate the release of the valuation allowance on a quarterly basis.

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After examination of the Company’s projected offshore cash flows, and global cash requirements, the Company determined that beginning in fiscal year 2016, the Company would no longer require 100% of its future foreign generated cash to support its foreign operations. The Company plans to repatriate a portion of its current year offshore earnings to the U.S. for domestic operations, and has accrued for the related tax impacts accordingly. For earnings accumulated as of March 29, 2015, the Company continues to indefinitely reinvest such amounts in its foreign jurisdictions, except to the extent there is any previously taxed income which is expected to be repatriated. If circumstances change and it becomes apparent that some or all of those undistributed earnings of the Company's offshore subsidiary will be remitted in the foreseeable future but income taxes have not been recognized, the Company will accrue income taxes attributable to that remittance.
The Company benefits from tax incentives granted by local tax authorities in certain foreign jurisdictions. In the fourth quarter of fiscal 2011, the Company agreed with the Malaysia Industrial Development Board to enter into a new tax incentive agreement which is a full tax exemption on statutory income for a period of 10 years commencing April 4, 2011. This tax incentive agreement is subject to the Company meeting certain financial targets, investments, headcounts and activities in Malaysia.
During the quarter ended June 28, 2015, the Company reached an understanding regarding the terms for settling with the U.S. Internal Revenue Service ("IRS") and closed out all positions as part of the examination of the Company's income tax returns for the fiscal years 2010 through 2012. As a result, the Company remeasured its tax positions based on the facts, circumstances, and information available at the reporting date. The outcome did not have a material effect on the Company’s financial position, cash flows or results of operations due to its tax attributes, which are fully offset by a valuation allowance.
As of January 3, 2016 , the Company was under examination in Singapore. The Company's fiscal years 2009 through 2012 are under audit by the Inland Revenue Authority of Singapore. Although the final outcome is uncertain, based on currently available information, the Company believes that the ultimate outcome will not have a material adverse effect on its financial position, cash flows or results of operations.
The Company's open years in the U.S. federal jurisdiction are fiscal 2013 and later years. In addition, the Company is effectively subject to federal tax examination adjustments for tax years ended on or after fiscal year 1999, in that the Company has tax attribute carryforwards from these years that could be subject to adjustments, if and when utilized. The Company's open years in various state and foreign jurisdictions are fiscal years 2008 and later.
The Company does not expect a material change in unrecognized tax benefits within the next twelve months.
On July 27, 2015, in Altera Corp. v. Commissioner , the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any benefit as of January 3, 2016 . The Company will continue to monitor ongoing developments and potential impacts to our financial statements.

Note 18. Segment Information
The Chief Operating Decision Maker is the Company’s President and Chief Executive Officer.
The Company's reportable segments include the following:
Communications segment: includes clock and timing solutions, flow-control management devices including Serial RapidIO ® switching solutions, multi-port products, telecommunications products, high-speed static random access memory, first in and first out, digital logic, radio frequency, and frequency control solutions.
Computing, Consumer and Industry segment: includes clock generation and distribution products, high-performance server memory interfaces, PCI Express switching solutions, power management solutions, signal integrity products, and sensing products for mobile, automotive and industrial solutions.
The Company completed the acquisition of ZMDI in December 2015 and is in the process of integrating the ZMDI business into the Company's reporting segment. During the three months ended January 3, 2016, the Company renamed its Computing and Consumer reportable segment to Computing, Consumer and Industrial in order to reflect the operations of ZMDI which are primarily aggregated into the Computing, Consumer and Industrial reportable segment.

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