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 1, 2017 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 3, 2017 was approximately 133,419,588 .



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 1, 2017
 
April 3, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
117,325

 
$
203,231

Short-term investments
277,139

 
151,233

Accounts receivable, net of allowances of $5,859 and $4,629
81,261

 
74,386

Inventories
45,058

 
54,243

Prepayments and other current assets
13,500

 
15,008

Total current assets
534,283

 
498,101

Property, plant and equipment, net
81,498

 
73,877

Goodwill
306,925

 
305,733

Other intangible assets, net
114,158

 
127,761

Deferred tax assets
83,578

 
60,929

Other assets
38,215

 
32,788

Total assets
$
1,158,657

 
$
1,099,189

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
40,592

 
$
39,858

Accrued compensation and related expenses
23,734

 
45,269

Deferred income on shipments to distributors
5,539

 
7,006

Other accrued liabilities
24,099

 
14,974

Total current liabilities
93,964

 
107,107

Deferred tax liabilities
15,419

 
19,712

Convertible notes
282,149

 
272,221

Other long-term liabilities
18,731

 
23,454

Total liabilities
410,263

 
422,494

Commitments and contingencies (Note 16)


 


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; 133,599 and 133,885 shares outstanding at January 1, 2017 and April 3, 2016, respectively
134

 
134

Additional paid-in capital
2,672,032

 
2,628,381

Treasury stock at cost: 121,166 shares and 117,720 shares at January 1, 2017 and April 3, 2016, respectively
(1,596,289
)
 
(1,522,808
)
Accumulated deficit
(319,227
)
 
(425,298
)
Accumulated other comprehensive loss
(8,256
)
 
(3,714
)
Total stockholders' equity
748,394

 
676,695

Total liabilities and stockholders' equity
$
1,158,657

 
$
1,099,189


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 1, 2017
 
January 3, 2016
 
January 1,
2017
 
January 3,
2016
Revenues
$
176,358

 
$
177,610

 
$
552,545

 
$
508,015

Cost of revenues
72,273

 
69,699

 
233,579

 
194,324

Gross profit
104,085

 
107,911

 
318,966

 
313,691

Operating expenses:
 

 
 

 
 
 
 
Research and development
38,173

 
38,429

 
129,571

 
107,484

Selling, general and administrative
32,737

 
38,851

 
108,968

 
96,221

Total operating expenses
70,910

 
77,280

 
238,539

 
203,705

Operating income
33,175

 
30,631

 
80,427

 
109,986

Interest expense
(4,217
)
 
(2,934
)
 
(12,582
)
 
(2,957
)
Interest income and other, net
407

 
926

 
3,679

 
3,783

Income before income taxes from continuing operations
29,365

 
28,623

 
71,524

 
110,812

Income tax benefit
(4,072
)
 
(3,922
)
 
(7,451
)
 
(2,876
)
Net income (loss) from continuing operations
33,437

 
32,545

 
78,975

 
113,688

 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
   Gain from divestiture before income taxes
1,385

 

 
1,385

 

Loss from discontinued operations before income taxes

 

 

 
(547
)
   Income tax expense
87

 

 
87

 
15

Net income (loss) from discontinued operations
1,298

 

 
1,298

 
(562
)
 
 
 
 
 
 
 
 
Net income
$
34,735

 
$
32,545

 
$
80,273

 
$
113,126

 
 
 
 
 
 
 
 
Basic net income per share - continuing operations
$
0.25

 
$
0.23

 
$
0.59

 
$
0.78

Basic net income per share - discontinued operations
0.01

 

 
0.01

 

Basic net income per share
$
0.26

 
$
0.23

 
$
0.60

 
$
0.78

 
 
 
 
 
 
 
 
Diluted net income per share - continuing operations
$
0.24

 
$
0.22

 
$
0.57

 
$
0.75

Diluted net loss per share - discontinued operations
0.01

 

 
0.01

 

Diluted net income per share
$
0.25

 
$
0.22

 
$
0.58

 
$
0.75

 
 
 
 
 
 
 
 
Weighted average shares:
 

 
 

 
 

 
 

Basic
133,846

 
140,411

 
133,987

 
145,382

Diluted
137,167

 
145,705

 
137,581

 
150,614


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 1,
2017
 
January 3,
2016
 
January 1,
2017
 
January 3,
2016
 
 
 
 
 
 
 
 
Net income
$
34,735

 
$
32,545

 
$
80,273

 
$
113,126

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Currency translation adjustments, net of tax
(1,949
)
 
(1,040
)
 
(3,091
)
 
(2,044
)
Change in net unrealized gain (loss) on investments, net of tax
(1,418
)
 
(731
)
 
(1,451
)
 
(1,409
)
Change in unrealized loss on post-employment and post-retirement benefit plans, net of tax

 
(2
)
 

 
(613
)
Total other comprehensive loss
(3,367
)
 
(1,773
)
 
(4,542
)
 
(4,066
)
Comprehensive income
$
31,368

 
$
30,772

 
$
75,731

 
$
109,060


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 1, 2017
 
January 3, 2016
Cash flows from operating activities:
 
 
 
Net income
$
80,273

 
$
113,126

Adjustments:
 

 
 

Depreciation
14,940

 
13,056

Amortization of intangible assets
18,313

 
5,628

Amortization of debt issuance costs and debt discount
9,928

 
2,164

Assets impairment
2,180

 

Net gain from divestitures
(675
)
 

Gain on sale of property, plant and equipment

 
(325
)
Stock-based compensation expense, net of amounts capitalized in inventory
29,602

 
25,878

Deferred income tax and deferred tax charge
(7,297
)
 
(4,147
)
Changes in assets and liabilities, net of impact of acquisitions:
 

 
 

   Accounts receivable, net
(8,596
)
 
8,319

   Inventories
8,167

 
10,446

   Prepayments and other assets
201

 
4,532

   Accounts payable
2,092

 
(2,832
)
   Accrued compensation and related expenses
(21,535
)
 
(5,427
)
   Deferred income on shipments to distributors
(1,467
)
 
(7,171
)
   Income taxes payable and receivable
121

 
(70
)
   Other accrued liabilities and long-term liabilities
8,240

 
(4,079
)
   Net cash provided by operating activities
134,487

 
159,098

Cash flows from investing activities:
 

 
 

Acquisitions, net of cash acquired
(1,528
)
 
(279,138
)
Cash in escrow related to acquisitions

 
2,700

Net proceeds from divestitures
231

 

Investment in convertible note
(1,955
)
 
(2,020
)
Purchases of property, plant and equipment, net
(21,388
)
 
(12,541
)
Purchases of intangible assets
(4,896
)
 
(10,800
)
Purchases of short-term investments
(256,163
)
 
(313,246
)
Proceeds from sales of short-term investments
105,529

 
466,890

Proceeds from maturities of short-term investments
22,776

 
80,695

 Net cash used in investing activities
(157,394
)
 
(67,460
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
14,082

 
16,516

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
(73,481
)
 
(344,216
)
Repayment of loans

 
(9,195
)
Payment of capital lease obligations
(1,183
)
 

 Net cash used in financing activities
(60,582
)
 
(55,788
)
Effect of exchange rates on cash and cash equivalents 
(2,417
)
 
197


6


 
Nine Months Ended
 
(Unaudited, in thousands)
January 1, 2017
 
January 3, 2016
Net increase (decrease) in cash and cash equivalents
(85,906
)
 
36,047

Cash and cash equivalents at beginning of period
203,231

 
116,945

Cash and cash equivalents at end of period
$
117,325

 
$
152,992

 
 
 
 
Noncash investing activities:
 

 
 

  Additions to property, plant and equipment included in accounts payable
$
3,030

 
$
321

  Conversion of investment in convertible note to ordinary shares of stock
$
(1,955
)
 
$
(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 2017 and fiscal 2016 were 13 week periods, the third quarter of fiscal 2017 was 13 weeks, and the third quarter of fiscal 2016 was 14 weeks.
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 April 3, 2016. There have been no material changes to the Company's significant accounting policies since the filing of the annual report on Form 10-K.
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.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, amending the existing accounting standards for stock-based compensation. The amendments impact several aspects of accounting for stock-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for reporting periods in fiscal years beginning after December 15, 2016, including interim periods within those years, with early adoption permitted. The Company early adopted the standard prospectively in the first quarter of fiscal 2017. In the first quarter of fiscal year 2017, stock-based compensation excess tax benefits or deficiencies are reflected in the Condensed Consolidated Statements of Operations as a component of the provision for income taxes, whereas they previously were recognized in equity. As there will no longer be excess tax benefits recognized in equity, when applying the treasury stock method in computing diluted earnings per share, the assumed proceeds will not include any windfall tax benefits. Additionally, the Company’s Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity prospectively. The Company recorded a cumulative-effect adjustment to its opening accumulated deficit on April 4, 2016 of $25.8 million to recognize deferred tax assets associated with excess tax benefits not previously recognized. The Company has elected to continue to estimate forfeitures that are expected to occur when estimating the amount of compensation expense to record in each period.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying Accounting for Measurement Period Adjustments, 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. The guidance is applied prospectively and was effective for the Company in the first quarter of fiscal 2017. There was no impact to the period of adoption.
In April 2015, the FASB issued ASU 2015-05  - Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provides additional guidance to customers about whether a cloud computing arrangement includes a software license. Under ASU 2015-05, if a cloud computing arrangement contains a software license, customers should account for the license element of the arrangement in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, customers should account for the arrangement as a service contract. ASU 2015-05 also removes the requirement to analogize

8


to ASC 840-10 - Leases, to determine the asset acquired in a software licensing arrangement. The Company adopted the new guidance prospectively in the first quarter of fiscal 2017. There was no material impact to the period of adoption.
Accounting Pronouncements Not Yet Effective for Fiscal 2017
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to a third party or otherwise recovered through use. The new standard will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. Upon adoption, companies must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is evaluating whether to adopt the new guidance early. As of January 1, 2017, the Company has a deferred tax charge of $5.2 million recorded in prepayments and other current assets and other assets, which represents the tax expense that was deferred in accordance with current GAAP. At adoption, the Company will recognize the unamortized portion of the deferred tax charge through a cumulative-effect adjustment to retained earnings. Additionally, a deferred tax asset will be recognized, through a cumulative-effect adjustment to retained earnings, for the unamortized tax basis in the assets, which as of January 1, 2017 would have been $0.8 million .

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard will be effective for the Company starting in the first quarter of fiscal 2018. Early adoption is permitted. The Company does not believe that the adoption of this new accounting guidance will have any material impact on its condensed consolidated financial statements.

In June 2016, the FASB issued new guidance that changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The new guidance will be effective for the Company starting in the first quarter of fiscal 2021. Early adoption is permitted starting in the first quarter of fiscal 2020. The Company is in the process of determining the effects the adoption will have on its condensed consolidated financial statements as well as whether to adopt the new guidance early.

In February 2016, the FASB issued an ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases.  This ASU is effective for annual and interim periods beginning after December 15, 2018.  Early adoption is permitted. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP.  The Company is currently evaluating the impact the pronouncement will have on the Company’s condensed consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires 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 requires 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

9


Company does not believe that the adoption of this new accounting guidance will have any material impact on its condensed consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which provides the 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 condensed consolidated financial statements and related disclosures.
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. In March, April and May 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a gross versus net basis, identifying performance obligations and licensing arrangements, and narrow-scope improvements and practical expedients, respectively. The new standard will be effective for the Company beginning April 1, 2018. The Company has elected to use the modified retrospective method as its transition method in adoption of the new revenue standard. The Company continues to make progress in assessing all potential impacts of the standard, including any impacts from recently issued amendments and the guidance issued by the FASB Transition Resource Group.

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 1,
2017
 
January 3,
2016
 
January 1,
2017
 
January 3,
2016
Numerator (basic and diluted):
 
 
 
 
 
 
 
Net income from continuing operations
$
33,437

 
$
32,545

 
$
78,975

 
$
113,688

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
133,846

 
140,411

 
133,987

 
145,382

Dilutive effect of employee stock options, restricted stock units and performance stock units
3,321

 
5,294

 
3,594

 
5,232

Weighted average common shares outstanding, diluted
137,167

 
145,705

 
137,581

 
150,614

 
 
 
 
 
 
 
 
Basic net income per share from continuing operations
$
0.25

 
$
0.23

 
$
0.59

 
$
0.78

Diluted net income per share from continuing operations
$
0.24

 
$
0.22

 
$
0.57

 
$
0.75


Potential dilutive common shares of 0.4 million pertaining to employee stock options and restricted stock units were excluded from the calculation of diluted earnings per share for each of the three months ended January 1, 2017 and January 3, 2016 , respectively, because the effect would have been anti-dilutive. Potential dilutive common shares of 0.5 million and 0.4 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 1, 2017 and January 3, 2016 , because the effect would have been anti-dilutive.

The denominator for diluted net income per share for the three and nine months ended January 1, 2017 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,

10


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 and nine months ended January 1, 2017 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 18 for further discussion regarding the Convertible Notes.
Note 3. Business Combination
Acquisition of Synkera Technologies, Inc.
On July 22, 2016, IDT purchased substantially all of the assets and liabilities of Synkera Technologies, Inc. (Synkera), a company engaged in developing and marketing metal oxide gas sensor technology, for total purchase consideration of approximately $2.8 million , of which $1.5 million was paid in cash at closing and $1.3 million was recorded as a liability representing the fair value of contingent cash consideration of up to $1.5 million . The contingent cash consideration will be paid based upon the achievement of certain milestones to be completed within 3.5 years.
Pro forma results of operations for this acquisition have not been presented because the effect of the acquisition was not material to the Company's financial results.
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.
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 ZMDI business is primarily included in the Company's Computing, Consumer and Industrial reportable segment. Goodwill is primarily attributable to the assembled workforce of ZMDI, expected synergies and economies of scale expected from the operations of the combined company.

11


The Company's allocation of the purchase price 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 allocation of intangible assets is as follows:
(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

 

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 2016. 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 year 2016 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 1, 2017
January 3, 2016
 
January 1, 2017
January 3, 2016
 
Revenues
$
176,358

$
191,959

 
$
552,545

$
570,967

*
Net income
$
34,978

$
26,928

 
$
84,055

$
94,821

 
Basic net income per share - continuing operations
$
0.26

$
0.19

 
$
0.63

$
0.65

 
Diluted net income per share - continuing operations
$
0.25

$
0.18

 
$
0.61

$
0.63

 

* Includes one-time revenue of approximately $10.3 million related to an intellectual property licensing agreement with a customer for nine months ended January 3, 2016.

12



Note 4. Discontinued Operations
High-Speed Converter (“HSC”) Business
On April 27, 2015, the Company completed the sale of the remaining HSC business to eSilicon, for $1.5 million which was to 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.
During the third quarter of fiscal 2017, the Company collected the receivable of $1.5 million and recognized gain from discontinued operations of $1.4 million , which represents the excess of sale price of $1.5 million over the carrying value of assets sold of $0.1 million .
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.

Note 5. Other Divestitures (not accounted for as discontinued operations)
Fox Enterprises, Inc.
In the first quarter of fiscal 2017, the Company reclassified certain assets and liabilities of its wholly-owned subsidiary Fox Enterprises, Inc. (the disposal group) as held for sale. As a result, the long-lived assets (comprised of goodwill, intangible assets and fixed assets) included in the disposal group were fully impaired and the Company recorded total impairment charge of $0.8 million in the first quarter of fiscal 2017.
On October 3, 2016, the Company completed the sale of the disposal group for approximately $1.2 million and recorded a loss on divestiture (included in interest income and other, net in the condensed Consolidated Statement of Operations) of approximately $0.7 million in the third quarter of fiscal 2017.
Note 6. Fair Value Measurements
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of January 1, 2017 :
 
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
$
79,337

 
$

 
$

 
$
79,337

Money market funds
35,461

 

 

 
35,461

Asset-backed securities

 
11,492

 

 
11,492

Corporate bonds


 
147,371

 

 
147,371

International government bonds

 
4,828

 

 
4,828

Corporate commercial paper

 
22,704

 

 
22,704

Bank deposits

 
11,407

 

 
11,407

Repurchase agreement

 
441

 

 
441

Total assets measured at fair value
$
114,798

 
$
198,243

 
$

 
$
313,041



13


The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of April 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
Cash Equivalents and Short-Term Investments:
 
 
 
 
 
 
 
US government treasuries and agencies securities
$
32,519

 
$

 
$

 
$
32,519

Money market funds
124,504

 

 

 
124,504

Asset-backed securities

 
10,515

 

 
10,515

Corporate bonds

 
91,388

 

 
91,388

International government bonds

 
2,208

 

 
2,208

Corporate commercial paper

 
1,992

 

 
1,992

Bank deposits

 
11,711

 

 
11,711

Repurchase agreements

 
114

 

 
114

Municipal bonds

 
900

 

 
900

Total assets measured at fair value
$
157,023

 
$
118,828

 
$

 
$
275,851


The deferred compensation plan assets of $15.5 million and $14.6 million as of January 1, 2017 and April 3, 2016 , are carried on the Condensed Consolidated Balance Sheets at their fair value which were determined on the basis of market prices observable for similar instruments and are considered Level 2 in the fair value hierarchy. See Note 17 for additional information on the Employee Benefit Plans.
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 costs. The Convertible Notes are not marked to fair value at the end of each reporting period. The fair value of Convertible Notes was $390.7 million and $351.5 million as of January 1, 2017 and April 3, 2016 , which was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. See Note 18 for additional information on the Convertible Notes.
U.S. government treasuries and U.S. government agency securities as of January 1, 2017 and April 3, 2016 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.
In connection with the acquisition of Synkera, liability was recognized for the Company’s estimate of the fair value of contingent consideration on the acquisition date based on probability-based attainment of certain milestones. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement, which reflects the Company’s own assumptions concerning the milestones related to the acquired business in measuring fair value. The fair value of the of the liability measured using significant unobservable inputs (Level 3) was approximately $1.3 million as of January 1, 2017 and July 22, 2016 (acquisition date).
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 1, 2017 and January 3, 2016 .


14


Note 7. Investments
Available-for-Sale Securities
Available-for-sale investments at January 1, 2017 were as follows:
 
(in thousands)
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Estimated Fair
 Value
U.S. government treasuries and agencies securities
$
79,898

 
$
17

 
$
(578
)
 
$
79,337

Money market funds
35,461

 

 

 
35,461

Asset-backed securities
11,497

 
5

 
(10
)
 
11,492

Corporate bonds
147,964

 
91

 
(684
)
 
147,371

International government bonds
4,845

 

 
(17
)
 
4,828

Corporate commercial paper
22,757

 

 
(53
)
 
22,704

Bank deposits
11,407

 

 

 
11,407

Repurchase agreements
441

 

 

 
441

Total available-for-sale investments
314,270

 
113

 
(1,342
)
 
313,041

Less amounts classified as cash equivalents
(35,902
)
 

 

 
(35,902
)
Short-term investments
$
278,368

 
$
113

 
$
(1,342
)
 
$
277,139


Available-for-sale investments at April 3, 2016 were as follows:
 
(in thousands)
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
 Losses
 
Estimated Fair
 Value
U.S. government treasuries and agencies securities
$
32,374

 
$
146

 
$
(1
)
 
$
32,519

Money market funds
124,504

 

 

 
124,504

Asset-backed securities
10,518

 
4

 
(7
)
 
10,515

Corporate bonds
91,321

 
246

 
(179
)
 
91,388

International government bonds
2,195

 
13

 

 
2,208

Corporate commercial paper
1,992

 

 

 
1,992

Bank deposits
11,711

 

 

 
11,711

Repurchase agreements
114

 

 

 
114

Municipal bonds
900

 

 

 
900

Total available-for-sale investments
275,629

 
409

 
(187
)
 
275,851

Less amounts classified as cash equivalents
(124,618
)
 

 

 
(124,618
)
Short-term investments
$
151,011

 
$
409

 
$
(187
)
 
$
151,233


The cost and estimated fair value of available-for-sale securities at January 1, 2017 , by contractual maturity, were as follows:
( in thousands )
Amortized
Cost
 
Estimated Fair
Value
Due in 1 year or less
$
104,085

 
$
104,012

Due in 1-2 years
94,096

 
93,938

Due in 2-5 years
116,089

 
115,091

Total investments in available-for-sale securities
$
314,270

 
$
313,041



15


The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses as of January 1, 2017 , 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
$
120,575

 
$
(684
)
 
$

 
$

 
$
120,575

 
$
(684
)
Asset-backed securities
3,561

 
(10
)
 

 

 
3,561

 
(10
)
U.S. government treasuries and agencies securities
68,369

 
(578
)
 

 

 
68,369

 
(578
)
International govt bonds
4,828

 
(17
)
 
 
 
 
 
4,828

 
(17
)
Corporate commercial paper
6,948

 
(53
)
 

 

 
6,948

 
(53
)
Total
$
204,281

 
$
(1,342
)
 
$

 
$

 
$
204,281

 
$
(1,342
)

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, as of April 3, 2016 , 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
$
33,407

 
$
(179
)
 
$

 
$

 
$
33,407

 
$
(179
)
Asset-backed securities
4,979

 
(7
)
 

 

 
4,979

 
(7
)
U.S. government treasuries and agencies securities
6,097

 
(1
)
 

 

 
6,097

 
(1
)
Total
$
44,483

 
$
(187
)
 
$

 
$

 
$
44,483

 
$
(187
)

Currently, a significant portion of the Company’s available-for-sale investments that it holds are high grade instruments.  As of January 1, 2017 , 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 1, 2017 and April 3, 2016 .
Non-marketable Equity Securities
As of January 1, 2017 and April 3, 2016 , the Company holds capital stock of privately-held companies with total amount of $12.0 million and $10.0 million , respectively. These investments in stocks (included under Other Assets on the Condensed Consolidated Balance Sheets) are accounted for as cost-method investments, 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 1, 2017 and January 3, 2016

On October 31, 2016, the total principal including accrued interests of the Company's investment in convertible note of a privately-held company automatically converted into shares of common stock for a total amount of approximately $2.0 million .
Note 8. Accounts Receivable
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 an acquisition during the quarter ended January 3, 2016. The agreement was subsequently terminated on September 30, 2016. Total receivables sold under the factoring facility during the three and nine months ended January 1, 2017 was zero and $26.2 million , respectively. Total collections from sale of receivables and from deferred purchase payment during the quarter ended January 1, 2017 were zero as the result of terminating the agreement. Total collections from sale of receivables and from deferred purchase payment during the nine months ended January 1, 2017 were $33.3 million and $3.4 million , respectively. Under the terms of the factoring agreement, the total available amount of the factoring facility as of April 3, 2016 was $1.9 million . The sales of accounts receivable in accordance with the factoring agreement are reflected as a

16


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 payment 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 $0.8 million as of April 3, 2016, and was shown in Prepayments and Other Current Assets in the Condensed Consolidated Balance Sheets. As the result of terminating the agreement, the total available amount of the factoring facility and the amount due from the factoring institution were zero as of January 1, 2017.
Note 9. 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 first 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 1, 2017 , there were 5.2 million shares available for future grant under the 2004 Plan.
Compensation Expense
The following table summarizes stock-based compensation expense by line items appearing in the Company’s Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
January 1,
2017

January 3,
2016
 
January 1,
2017
 
January 3,
2016
Cost of revenue
$
689

 
$
666

 
$
2,270

 
$
1,993

Research and development
4,342

 
4,433

 
11,841

 
11,608

Selling, general and administrative
4,875

 
4,363

 
15,491

 
12,309

Discontinued operations

 

 

 
(32
)
Total stock-based compensation expense
$
9,906

 
$
9,462

 
$
29,602

 
$
25,878

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 1, 2017
(shares in thousands)
Shares
 
Price
Beginning stock options outstanding
2,594

 
$
10.47

Exercised (1)
(950
)
 
7.32

Canceled
(88
)
 
14.21

Ending stock options outstanding
1,556

 
$
12.18

Ending stock options exercisable
1,113

 
$
10.40

(1)
Upon exercise, the Company issues new shares of common stock.
As of January 1, 2017 , the unrecognized compensation cost related to non-vested stock options, net of estimated forfeitures, was $0.7 million and will be recognized over a weighted-average period of approximately 0.87 year.

17


As of January 1, 2017 , stock options vested and expected to vest totaled approximately 1.5 million with a weighted-average exercise price of $11.97 and a weighted-average remaining contractual life of 3.63 years. The aggregate intrinsic value was approximately $17.5 million .
As of January 1, 2017 , fully vested stock options totaled approximately 1.1 million with a weighted-average exercise price of $10.40 and a weighted-average remaining contractual life of 3.24 years. The aggregate intrinsic value was approximately $14.7 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 1, 2017 , 3.9 million restricted stock unit awards were outstanding under the 2004 Plan.
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 1, 2017 :
 
Nine Months Ended January 1, 2017
(shares in thousands)
Shares
 
Weighted-average grant date fair value per share
Beginning RSUs outstanding
3,693

 
$
16.09

Granted
1,830

 
20.50

Released
(1,206
)
 
13.88

Forfeited
(395
)
 
17.68

Ending RSUs outstanding
3,922

 
$
18.66

As of January 1, 2017 , restricted stock units expected to vest totaled approximately 3.4 million with a weighted-average remaining contract life of 1.37 years. The aggregate intrinsic value was approximately $79.0 million .
As of January 1, 2017 , the unrecognized compensation cost related to restricted stock units granted under the Company’s equity incentive plan was approximately $31.9 million , net of estimated forfeitures, and is expected to be recognized over a weighted-average period of 1.49 years.
Performance-Based Stock Units
In fiscal 2013, the Compensation Committee of the Board of Directors of IDT approved the Company's Key Talent Incentive Plan (Incentive Plan). The Incentive Plan provides for the grant of performance-based stock units under the 2004 Plan which vest and convert into one share of the Company's common stock based on the level of achievement of pre-established performance goals during a specified performance period. The initial performance period under the Incentive Plan is the Company's fourth quarter of fiscal 2013 through the fourth quarter of fiscal 2016 for which performance goals relate to cumulative revenue targets for a specific product group. The performance-based stock units that were granted under the Incentive Plan have vested in the first quarter of fiscal 2017 based on actual achievement of the performance goals, and the expense associated with that had been fully recognized as of July 3, 2016.

 
Nine Months Ended January 1, 2017
(shares in thousands)
Shares
 
Weighted-average grant date fair value per share
Beginning PSUs outstanding
204

 
$
9.04

Released
(78
)
 
7.85

Forfeited
(126
)
 
7.74

Ending PSUs outstanding

 
$

Market-Based Stock Units
In June 2016, under the 2004 Plan, the Company granted approximately 0.3 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

18


years. The earned market-based stock units will vest in two equal installments, with the first installment of vesting to occur on June 15, 2018, and the second to occur on June 15, 2019.
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 to occur 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 years. The earned market-based stock units will vest in two equal installments, with the first installment of vesting occurred on June 15, 2016, and the second to occur 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, 2016
June 15, 2015
June 15, 2014
Estimated fair value
$
28.01

$
33.08

$
21.00

Expected volatility
46.90
%
41.22
%
34.60
%
Expected term (in years)
1.80

1.80

1.80

Risk-free interest rate
0.70
%
0.65
%
0.38
%
Dividend yield
%
%
%
As of January 1, 2017 , the total market-based stock units outstanding were approximately 0.8 million .
As of January 1, 2017 , market-based stock units vested and expected to vest totaled approximately 0.7 million with a weighted-average remaining contract life of 1.14 years. The aggregate intrinsic value was approximately $15.7 million .
As of January 1, 2017 , the unrecognized compensation cost related to market-based stock units granted under the Company’s equity incentive plans was approximately $8.4 million , net of estimated forfeitures, and is expected to be recognized over a weighted-average period of 1.21 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 1, 2017 is summarized in the following table:
(in thousands, except per share amounts)
 
Number of shares issued
403

Average issuance price
$
17.78

Number of shares available at January 1, 2017
3,369



19


Note 10. 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 1, 2017 , the Company repurchased 0.8 million shares for $19.1 million and 3.4 million shares for $73.5 million , respectively. As of January 1, 2017 , approximately $112.2 million was available for future purchase under the new share repurchase program. Shares repurchased were recorded as treasury stock and resulted in a reduction of stockholder's equity.


Note 11. Balance Sheet Detail
(in thousands)
January 1,
2017
 
April 3,
2016
Inventories, net
 
 
 
Raw materials
$
1,817

 
$
3,251

Work-in-process
29,023

 
29,408

Finished goods
14,218

 
21,584

Total inventories, net
$
45,058

 
$
54,243

 
 
 
 
Property, plant and equipment, net
 

 
 

Land
$
11,535

 
$
11,535

Machinery and equipment
263,915

 
250,628

Building and leasehold improvements
49,106

 
49,015

  Total property, plant and equipment, gross
324,556

 
311,178

Less: accumulated depreciation (1)
(243,058
)
 
(237,301
)
Total property, plant and equipment, net
$
81,498

 
$
73,877

Other accrued liabilities
 
 
 
Accrued restructuring costs (2)
$
11,165

 
$
2,641

Other (3)
12,934

 
12,333

Total other accrued liabilities
$
24,099

 
$
14,974

Other long-term liabilities
 
 
 
Deferred compensation related liabilities
$
14,987

 
$
13,052

Other (4)
3,744

 
10,402

Total other long-term liabilities
$
18,731

 
$
23,454


(1) Depreciation expense was $4.7 million and $4.4 million for the three months ended January 1, 2017 and January 3, 2016 , respectively. Depreciation expense was $14.9 million and $13.1 million for the nine months ended January 1, 2017 and January 3, 2016 .
(2) Includes accrued severance costs related to integration and other restructuring actions. Refer to Note 15.
(3) 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.
(4) Other long-term liabilities consist primarily of non-current income tax payable and other long-term accrued liabilities.


20


Note 12. Deferred Income on Shipments to Distributors
Included in the caption “Deferred income on shipments to distributors” on the Condensed Consolidated 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 1, 2017 and April 3, 2016 are as follows:
(in thousands)
January 1,
2017
 
April 3,
2016
Gross deferred revenue
$
9,416

 
$
9,460

Gross deferred costs
(3,877
)
 
(2,454
)
Deferred income on shipments to distributors
$
5,539

 
$
7,006


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 23% to 34% 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 13. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component, net of tax, for the nine months ended January 1, 2017 consisted of the following:
(in thousands)
Cumulative translation adjustments
 
Unrealized gain (loss) on available-for-sale investments
 
Pension adjustments
 
Total
Balance, April 3, 2016
$
(4,001
)
 
$
222

 
$
65

 
$
(3,714
)
Other comprehensive loss before reclassifications
(3,091
)
 
(1,793
)
 

 
(4,884
)
Amounts reclassified out of accumulated other comprehensive loss

 
342

 

 
342

Net current-period other comprehensive loss
(3,091
)
 
(1,451
)
 

 
(4,542
)
Balance as of January 1, 2017
$
(7,092
)
 
$
(1,229
)
 
$
65

 
$
(8,256
)

Comprehensive loss components consisted of:
(in thousands)
Nine Months Ended January 1, 2017
 
Location
Amounts reclassified out of accumulated other comprehensive loss
$
342

 
interest and other, net
 

 
 


21


Note 14. Goodwill and Intangible Assets, Net
Goodwill balances by reportable segment as of January 1, 2017 and April 3, 2016 are as follows:
 
Reportable Segments
(in thousands)
Communications
 
Computing, Consumer and Industrial
 
Total
Balance as of April 3, 2016
$
122,848

 
$
182,885

 
$
305,733

Impairment - the Disposal Group (see Note 5)
(161
)
 

 
(161
)
Additions - Synkera acquisition (see Note 3)

 
1,353

 
1,353

Balance as of January 1, 2017
$
122,687

 
$
184,238

 
$
306,925

Goodwill balances as of January 1, 2017 and April 3, 2016 are net of $920.5 million and $920.3 million , respectively, in accumulated impairment losses.
Intangible asset balances as of January 1, 2017 and April 3, 2016 are summarized as follows:
 
January 1, 2017
(in thousands)
Gross Assets
 
Impairment
 
Accumulated
Amortization
 
Net Assets
Purchased intangible assets:
 
 
 
 
 
 
 
Developed technology
$
278,767

 

 
$
(213,337
)
 
$
65,430

Trademarks
5,081

 

 
(4,991
)
 
90

Customer relationships
172,685

 

 
(135,188
)
 
37,497

Intellectual property licenses
16,196

 
(1,310
)
 
(3,745
)
 
11,141

Total purchased intangible assets
$
472,729

 
(1,310
)
 
$
(357,261
)
 
$
114,158


 
April 3, 2016
(in thousands)
Gross Assets
 
Accumulated
Amortization
 
Net Assets
Purchased intangible assets:
 
 
 
 
 
Developed technology
$
279,514

 
$
(205,307
)
 
$
74,207

Trademarks
5,211

 
(4,576
)
 
635

Customer relationships
172,787

 
(130,745
)
 
42,042

Intellectual property licenses
11,400

 
(1,819
)
 
9,581

Order backlog
5,800

 
(4,504
)
 
1,296

Total purchased intangible assets
$
474,712

 
$
(346,951
)
 
$
127,761


During the third quarter of fiscal 2017, the Company purchased an intangible asset with a cost of $4.6 million with an estimated useful life of 7 years. This intangible asset pertains to an intellectual property license that is being used by the Company in the development, manufacture and sale of certain products.
As a result of the acquisition of Synkera, the Company recognized additional intangible assets with total original value of $1.4 million during the three months ended October 2, 2016 (see Note 3).
Amortization expense for the three months ended January 1, 2017 and January 3, 2016 was $6.5 million and $3.2 million , respectively. Amortization expense for the nine months ended January 1, 2017 and January 3, 2016 was $18.3 million and $5.6 million respectively.
During the third quarter of fiscal 2017, the Company recorded an impairment charge of $1.3 million in the carrying value of an intangible asset as a result of change in future estimated cash flows related to the intangible asset.
During the first quarter of fiscal 2017, the Company recorded an impairment charge of $0.2 million and $0.3 million in the carrying value of goodwill and intangible assets, respectively, as a result of reclassifying a disposal group as held for sale. Refer to Note 5 for additional information.

22


Intangible assets are being amortized over estimated useful lives of 1 to 7 years.
Based on the intangible assets recorded at January 1, 2017 , 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
2017 (Remaining 3 months)
$
5,340

2018
19,998

2019
19,884

2020
19,657

2021 and thereafter
49,279

Total purchased intangible assets
$
114,158


Note 15. Restructuring
The following table shows the provision of the restructuring charges and the liability remaining as of January 1, 2017 :
(in thousands)
Continuing Operations
Discontinued Operations (HSC)
Total
Balance as of April 3, 2016
$
1,282

$
1,534

$
2,816

Provision
17,898


17,898

Payments and other adjustments
(9,441
)
(108
)
(9,549
)
Balance as of January 1, 2017
$
9,739

$
1,426

$
11,165

As part of an effort to streamline operations with changing market conditions and to create a more efficient organization, the Company has undertaken restructuring actions to reduce its workforce and consolidate facilities.  The Company’s restructuring expenses consist primarily of severance and termination benefit costs related to the reduction of its workforce.
Integration-related Restructuring Plan
In the first quarter of fiscal 2017, the Company prepared a workforce-reduction plan with respect to employees of its Automotive and Industrial business (formerly ZMDI) in Germany. The plan which required consultation with the German Works Council was approved by the German Works Council as of July 3, 2016. Also, the details of the plan were communicated to the affected employees as of July 3, 2016. The plan identified the number of employees to be terminated, their job classification or function, their location and the date that the plan is expected to be completed. The plan also established the terms of the benefit arrangement in sufficient details 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 of the employees. Accordingly, the Company accrued restructuring charges in accordance with ASC 420, Exit and Disposal Cost Obligations. The restructuring charges recorded in the Condensed Consolidated Statements of Operations, in connection with the workforce-reduction plan, were approximately $6.4 million for nine months ended January 1, 2017 , for a total 49 employees. During nine months ended January 3, 2016 , the Company paid $3.1 million related to these actions. The Company expects to complete these actions by the fourth quarter of fiscal 2017.
During fiscal 2016, the Company began the implementation of planned cost reduction and restructuring activities in connection with the acquisition of ZMDI. The Company recorded charges of approximately $6.9 million of employee termination cost for two former executives of ZMDI and 36 employees for the fiscal year ended April 3, 2016. During nine months ended January 3, 2016 , the Company paid $1.1 million related to these actions, which reduced the total accrual balance to zero.

23


Radio Frequency Business
In the first quarter of fiscal 2017, the Company prepared a workforce-reduction plan with respect to employees of its Radio Frequency business in France. The plan sets forth the general parameters, terms and benefits for employee dismissals. The plan which required consultation with the French Works Council has been submitted to the French Works Council in June 2016. The Company determined that an ongoing benefit arrangement existed as the affected employees are being protected under the provisions of prior plan and the minimum statutory requirement. Accordingly, the Company recorded employee severance costs associated with these activities in accordance with ASC 712, Compensation - Nonretirement Post Employment Benefits. In the third quarter of fiscal 2017, the Company and the affected employees signed agreements with regards to the timing and payment of severance benefits. There was no significant incremental benefit amount from previously recognized severance benefits during the first and second quarters of fiscal 2017. During the nine months ended January 1, 2017 , the Company recorded in the Condensed Consolidated Statement of Operations, approximately $7.5 million of severance benefits, for a total of 13 employees. During the three months and nine months ended January 1, 2017, the Company paid $2.9 million and $3.2 million related to this action. As of January 1, 2017, the total accrued balance for employee severance costs related to this action was $4.3 million . The Company expects to complete this action by December 31, 2017.
HSC Business
In fiscal 2015, the Company prepared a workforce-reduction plan with respect to employees of its HSC business in France and the Netherlands. The Company expects to complete the action by December 2017.
Other
During the nine months ended January 1, 2017, the Company recorded charges of $2.8 million and reduced headcount by 57 employees. During the three months and nine months ended January 1, 2017, the Company paid $0.9 million and $1.0 million related to these actions. As of January 1, 2017 , the total accrued balance for employee severance costs related to these actions was $1.8 million . The Company expects to complete these actions by the first quarter of fiscal 2018.
During the three months ended July 3, 2016, the Company recorded charges of $1.2 million as a result of reducing headcount. During the nine months ended January 1, 2017 , the Company paid $1.0 million related to these actions. As of January 1, 2017 , the total accrued balance for employee severance costs related to these actions was $0.2 million . The Company expects to complete these actions by the end of fiscal 2017.

Note 16. 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 1, 2017 and April 3, 2016 , respectively.
Litigation
In November 2016, North Star Innovations, Inc. (“NSI”), an IP licensing non-practicing entity and subsidiary of Wi-Lan, Inc., filed a complaint against the Company in the federal courts of the Central District of California, alleging the Company infringed three U.S. patents assigned to and owned by NSI. The Company has never filed an Answer or other responsive pleading in this litigation. On or about January 13, 2017, RPX Corporation, a membership-based defensive patent aggregator, entered a license agreement with NSI, to which the Company is a beneficiary based on the Company’s membership in RPX. Based on this license, the Company and NSI signed a Release Agreement effective January 31, 2017, releasing the Company from liability under the claims for infringement of the three asserted patents. On January 31, 2017, the court ordered the litigation against IDT to be formally dismissed.
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.,

24


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 1, 2017 , 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 17. 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 $ 2.0 million and $ 1.9 million in matching contributions under the plan during the nine months ended January 1, 2017 and January 3, 2016 , 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 1, 2017 and April 3, 2016 , obligations under the plan totaled approximately $15.0 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 1, 2017 and April 3, 2016 , the deferred compensation plan assets were approximately $15.5 million and $14.6 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 1, 2017 and April 3, 2016, the net liability for all of these international benefit plans totaled $ 0.7 million and $0.8 million , respectively.

Note 18. 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 aggregate principal amount of Convertible Notes is $373.8 million . The net proceeds from this offering were approximately $363.4 million , after deducting the initial purchasers’ discounts and commissions and the offering expenses.
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 certain circumstances as defined in the Indenture. 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 such circumstances.

25


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.
As of January 1, 2017 , none of the conditions allowing holders of the Notes to convert had been met.
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 costs
(7,568
)
    Net carrying amount
266,867

Equity component *


    Allocated amount
99,316

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

Convertible Notes, net
$
363,445

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

The following table includes total interest expense recognized related to the Convertible Notes during the three and nine months period ended January 1, 2017 and January 3, 2016 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
January 1, 2017
 
January 3, 2016
 
January 1, 2017
 
January 3, 2016
Contractual interest expense
$
836

 
$
545

 
$
2,480

 
$
545

Amortization of debt issuance costs
270

 
180

 
810

 
180

Amortization of debt discount
3,080

 
1,984

 
9,118

 
1,984

 
$
4,186

 
$
2,709

 
$
12,408

 
$
2,709


The net liability component of Convertible Notes is comprised of the following as of January 1, 2017 and April 3, 2016 (in thousands):
 
January 1, 2017

April 3, 2016

Net carrying amount at beginning of the period
$
272,221

$
266,867

Amortization of debt issuance costs during the period
810

450

Amortization of debt discount during the period
9,118

4,904

 
$
282,149

$
272,221


During the three and nine months ended January 1, 2017 , the Company paid contractual interest on the Convertible Note of approximately $1.6 million and $3.4 million , respectively.

See Note 6 to the Company's condensed 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 .

26


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. As of January 1, 2017 , no warrants have been exercised.
Note 19. Income Taxes
During the three and nine months ended January 1, 2017, the Company recorded an income tax benefit of $4.1 million and $7.5 million , respectively. The Company recorded an income tax benefit of $3.9 million and $2.9 million in the three and nine months ended January 3, 2016, respectively.
The Company’s effective tax rate was significantly less than the U.S. federal statutory rate of 35% in all periods primarily due to the benefits of lower-taxed earnings in foreign jurisdictions, including Malaysia, where a tax holiday is in effect through fiscal 2021.
The income tax benefit recorded in the nine months ended January 1, 2017 was primarily due to the tax benefit recorded on the loss in jurisdictions where no valuation allowance is in place. The loss was primarily attributable to the amortization of acquired intangible assets for the three and nine months ended January 1, 2017 as well as severance costs for the nine months ended January 1, 2017. Additionally, stock-based compensation excess tax benefits of $0.4 million and $2.2 million for the three and nine months ended January 1, 2017, respectively, were reflected in the Condensed Consolidated Statements of Operations as a component of the income tax benefit as a result of the early adoption of ASU 2016-09. Refer to Note 1 for more details regarding the adoption of ASU 2016-09. 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.
During the quarter ended January 1, 2017, the Company recorded a deferred tax charge of $5.2 million in prepayments and other current assets and other assets, which represents the tax expense that was deferred, in accordance with ASC 740-10-25-3, on the intercompany transfer of intangible assets in connection with a change to the Company’s corporate structure. The deferred tax charge is being amortized over the tax life of the intangible assets.
On January 16, 2017, the Malaysia Finance Act of 2017 (the “Act”) was enacted. The Act contains a number of provisions including, most notably, the re-imposition of withholding tax on offshore services provided to Malaysian entities and is effective prospectively from the date of enactment. The Company is currently working with Malaysian officials to understand how this will apply to the Company and its intercompany activities. If it is determined that the withholding tax will apply to some or all of the Company’s intercompany activities there could be material adverse effects on the Company’s results of operations and cash flows. The Act had no impact to the current or historical period consolidated financial statements. The Company is currently evaluating the effect that the Act will have on its consolidated financial statements.
From the fourth quarter of fiscal 2003 to the third quarter of fiscal 2016, the Company maintained a full valuation allowance against the Company's deferred tax assets as there was insufficient positive evidence to overcome the significant negative evidence to conclude that it was more likely than not that the deferred tax assets would be realized. The Company reached this decision based on judgment, which included consideration of historical U.S. operating results, projections of future U.S. profits, and a history of expiring tax attributes. In the fourth quarter of fiscal 2016, the Company generated a substantial amount of U.S. profit, utilizing the Company's remaining U.S. federal net operating loss carryovers available as well as a significant amount of U.S. tax credit carryforwards. In addition, in the fourth quarter of fiscal 2016, the Company completed its business plan for fiscal 2017, and validated its mid-term business plan. The Company also considered forecasts of future taxable income and evaluated the utilization of its remaining tax credit carryforwards prior to their date of expiration. All of these were significant positive factors

27


that overcame prior negative evidence and the Company concluded that it was appropriate to release the valuation allowance against the Company's deferred tax assets, with the exception of deferred tax assets related to certain foreign and state jurisdictions.
As of January 1, 2017, the Company continues to maintain a valuation allowance against the Company's net deferred tax assets in certain foreign and state jurisdictions, as the Company is not able to conclude that it is more likely than not that these deferred tax assets will be realized. The Company reached this decision based on judgment, which included consideration of historical operating results and projections of future profits. The Company will continue to monitor the need for the valuation allowance on a quarterly basis.
In fiscal year 2016, after examination of the Company’s projected offshore cash flows, and global cash requirements, the Company determined that it would no longer require 100% of its future foreign generated cash to support its foreign operations. The Company plans to continue to repatriate a portion of its offshore earnings generated after March 29, 2015 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 October 2, 2016, the Company closed out all positions as part of the examination of the Company's Singapore income tax returns for the fiscal years 2009 through 2012. The outcome did not have a material effect on the Company’s financial position, cash flows or results of operations.
As of January 1, 2017, the Company is under examination in Germany for calendar years 2012 through 2014, in Malaysia for fiscal year 2013 and 2014, and in India for fiscal year 2015. Although the final outcome of each examination 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 2014 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.
Note 20. 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 Industrial 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 tables below provide information about these segments:
  Revenues by segment
Three Months Ended
 
Nine Months Ended
(in thousands)
January 1,
2017

January 3,
2016
 
January 1,
2017
 
January 3,
2016
Communications
$
65,978

 
$
85,502

 
$
210,172

 
$
222,688

Computing, Consumer and Industrial
110,380

 
92,108

 
342,373

 
285,327

Total revenues
$
176,358

 
$
177,610

 
$
552,545

 
$
508,015



28


Income by segment from continuing operations
Three Months Ended
 
Nine Months Ended
 
(in thousands)
January 1,
2017
 
January 3,
2016
 
January 1,
2017

January 3,
2016
Communications
$
28,054

 
$
35,238

 
$
77,226

 
$
85,588

Computing, Consumer and Industrial
21,395

 
17,248

 
71,835

 
66,934

Unallocated expenses:
 
 
 
 
 
 
 
Amortization of intangible assets
(5,557
)
 
(2,732
)
 
(16,578
)