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SIGMA DESIGNS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
[September 10, 2014]

SIGMA DESIGNS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes in this Form 10-Q. Except for historical information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "potential," "plan," or the negative of these terms, and similar expressions intended to identify forward-looking statements. These forward-looking statements, include, but are not limited to, statements about our capital resources and needs, including the adequacy of our current cash reserves, the expectation that our revenue from the home control market will continue to increase in the foreseeable future, anticipated deployments and design wins in the set-top box market, anticipated seasonality associated with our DTV business and our expectations that our gross margin will vary from period to period. These forward-looking statements involve risks and uncertainties. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those discussed under Part II, Item 1A "Risk Factors" in this Form 10-Q as well as other information found in the documents we file from time to time with the Securities and Exchange Commission. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.



Overview Our goal is to be a leader in intelligent media platforms for use in home entertainment and control. We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world's leading consumer products, including televisions, set-top boxes and video networking products.

All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We sell our products into four primary markets which are the Digital Television, or DTV market, the home networking market, the set-top box market, and the home control market. We derive a portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.


Our chipset products and target markets We consider all of our semiconductor products to be chipsets because each of our products is comprised of multiple semiconductors. We believe our chipsets enable our customers to efficiently bring consumer multimedia devices to market. We design our highly integrated products to significantly improve performance, lower power consumption, and reduce cost.

We derive nearly all of our operating net revenue from sales of chipset products and we sell our chipsets into four primary target markets, plus licensing. We separately report revenues that we derive from sales into each of these target markets.

DTV Market We have defined the DTV market to include all products that are sold into digital televisions or "SmartTVs" as well as other adjacent markets using chipset products that are designed for video post-processing. We believe DTV products complement our existing set-top box products, which will provide substantial research and development leverage and improved operating scale to augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the connected home. We serve this market with our media processor SoCs and dedicated post-processing products.

Set-top Box Market We have defined the set-top box market to include all set-top box products delivering IP streaming video, including hybrid versions of these products. We serve this market primarily with our media processor products.

Home Networking Market The home networking market consists of communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP, or data through wired or wireless connectivity. We serve the home networking market with our wired home networking controllers that are designed to provide the most reliable connectivity solutions between various home entertainment products and incoming video streams.

21 -------------------------------------------------------------------------------- Home Control Market We define the home control market to include all the gateways and interconnected appliances that provide home monitoring and control for the management of security, safety, energy, health, and convenience. Our home control product line consists of our wireless Z-Wave modules and chipsets, which consist of wireless transceiver devices along with a mesh networking protocol.

License and Other Markets This market includes other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

Restructuring program In fiscal 2013, as a result of significant expansion in our infrastructure and operational activities in connection with purchases and acquisitions that took place between fiscal years 2008 and 2013, and in response to certain redundancies, underperforming operations and delays in programs and product releases, we implemented a restructuring program to realign our global operating expenses with our new business conditions, and to improve efficiency, competitiveness and profitability. Costs relating to facilities closure or lease commitment are recognized when the facility has been exited. Terminations costs are recognized when the costs are deemed both probable and estimable.

In the first quarter of fiscal 2015, we incurred restructuring charges of $1.0 million, all of which was related to workforce reductions of 29 employees across several geographic regions, the majority of which were in our operations in Israel. Of the total restructuring charges recorded in the first fiscal quarter, approximately $0.1 million was reflected in cost of revenue and $0.9 million was reflected in operating expenses. During the second quarter of fiscal 2015, we incurred less than $0.1 million of restructuring charges.

In the first quarter of fiscal 2014, we incurred restructuring charges of $0.3 million, all of which was related to workforce reductions of 17 employees across several geographic regions. During the second quarter of fiscal 2014, we incurred net restructuring charges of approximately $0.5 million related to a contingent liability under our lease obligation in Canada and $0.2 million in severance-related charges that resulted from a workforce reduction of eight employees. The aforementioned charges were substantially all reflected in operating expenses for their respective periods.

Expenses recognized for restructuring activities impacting our operating expenses are included in "Restructuring costs" in the condensed consolidated statements of operations. Our restructuring measures could negatively impact our revenue and results of operations in the future as a result of less employees developing future products and working to sell existing products.

Critical accounting policies and estimates There have been no significant changes in our critical accounting policies during the six months ended August 2, 2014, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended February 1, 2014. For a complete summary of our significant accounting policies, refer to Note 1, "Organization and Summary of Significant Accounting Policies", in Part II, Item 8 of our fiscal 2014 Annual Report.

22 -------------------------------------------------------------------------------- Results of operations The following table is derived from our unaudited condensed consolidated financial statements and sets forth our historical operating results as a percentage of net revenue for each of the periods indicated (in thousands, except percentages): Three Months Ended Six Months Ended August 2, % of Net August 3, % of Net August 2, % of Net August 3, % of Net 2014 Revenue 2013 Revenue 2014 Revenue 2013 Revenue Net revenue $ 42,810 100 % $ 53,762 100 % $ 79,683 100 % $ 106,302 100 % Cost of revenue 20,921 49 % 25,696 48 % 37,569 47 % 51,290 48 % Gross profit 21,889 51 % 28,066 52 % 42,114 53 % 55,012 52 % Operating expenses Research and development 16,452 38 % 18,769 35 % 33,555 42 % 38,973 37 % Sales and marketing 5,475 13 % 5,527 10 % 10,925 14 % 11,209 11 % General and administrative 4,555 11 % 4,937 9 % 9,586 12 % 9,699 9 % Restructuring costs 46 0 % 680 1 % 1,020 1 % 890 1 % Impairment of IP, mask sets and design tools 1,156 3 % - - 1,266 2 % 188 0 % Total operating expenses 27,684 65 % 29,913 55 % 56,352 71 % 60,959 58 % Loss from operations (5,795 ) (14% ) (1,847 ) (3% ) (14,238 ) (18% ) (5,947 ) (6% ) Gain on sale of development project - - - - - - 1,079 1 % Interest income and other income, net 372 1 % 121 0 % 320 0 % 812 1 % Loss before income taxes (5,423 ) (13% ) (1,726 ) (3% ) (13,918 ) (18 %) (4,056 ) (4% ) Provision for income taxes 2,197 (5% ) 3,065 (6% ) 3,616 4 % 5,268 5 % Net loss $ (7,620 ) (18% ) $ (4,791 ) (9% ) $ (17,534 ) (22% ) $ (9,324 ) (9% ) Net revenue Our net revenue for the three months ended August 2, 2014 decreased $11.0 million, or 20%, compared to the corresponding period in the prior fiscal year due to a $6.0 million decrease within the set-top box market, a decrease in the DTV market of $4.4 million, and a decrease of $1.7 million in the home networking market, partially offset by an increase in sales into the home control market and licensing and other market of $0.7 million and $0.4 million, respectively.

For the six months ended August 2, 2014, our net revenue decreased $26.6 million, or 25%, compared to the corresponding period in the prior fiscal year. This was driven by a $14.2 million decrease within the DTV market, a decrease in the set-top box market of $9.6 million, and a decrease of $5.8 million in the home networking market, partially offset by an increase in sales into the home control market and licensing and other market of $2.3 million and $0.7 million, respectively.

23-------------------------------------------------------------------------------- Net revenue by target market We sell our products into four primary target markets, which are: the DTV market, home networking market, set-top box market, and home control market. We also have license revenue included in the license and other market, which we receive from the license of our technology to third parties.

The following table sets forth our net revenue by target market and the percentage of net revenue represented by our product sales to each target market (in thousands, except percentages): Three Months Ended Six Months Ended August 2, % of Net August 3, % of Net August 2, % of Net August 3, % of Net 2014 Revenue 2013 Revenue 2014 Revenue 2013 Revenue Home networking $ 17,827 42 % $ 19,557 36 % $ 33,946 43 % $ 39,738 37 % DTV 10,033 23 % 14,438 27 % 16,097 20 % 30,280 28 % Home control 6,576 15 % 5,849 11 % 12,716 16 % 10,438 10 % Set-top box 5,528 13 % 11,480 21 % 11,217 14 % 20,795 20 % License and other 2,846 7 % 2,438 5 % 5,707 7 % 5,051 5 % Net revenue $ 42,810 100 % $ 53,762 100 % $ 79,683 100 % $ 106,302 100 % Home networking market: For the three months ended August 2, 2014, net revenue from sales of our products into the home networking market decreased $1.7 million, or 9%, compared to the corresponding period in the prior fiscal year, primarily due to a decline of 19% in units shipped, partially offset by an increase in average selling price of 13%. The decrease in units shipped was primarily the result of reduced demand due to the introduction of wireless technologies in the market impacting our existing product offerings.

For the six months ended August 2, 2014, net revenue decreased $5.8 million, or 15%, compared to the corresponding period in the prior fiscal year, primarily due to declines of 10% in units shipped and 6% in average selling price. The decrease in units shipped was primarily the result of reduced demand due to the introduction of wireless technologies in the market impacting our existing product offerings. We expect our revenue from the home networking market to fluctuate in future periods based on changes in inventory levels at contract manufacturers who manufacture equipment incorporating our products for deployment by telecommunication providers and as a result of transitions to next generation technologies.

DTV market: For the three months ended August 2, 2014, net revenue from sales of our products into the DTV market decreased by $4.4 million, or 31%, compared to the corresponding period in the prior fiscal year. The decline in our DTV market resulted primarily from a decline of 37% in units shipped due to reduced demand as there continues to be a shift away from legacy products, partially offset by an increase in average selling price of 10% due to new product transitions. The rate of decline in demand for our legacy DTV products, many of which are now approaching end-of-life, has been greater than the transition rate to newer product offerings into the market partially due to the disparity in timing in which our new products become available and the limited product transition windows of our operators.

For the six months ended August 2, 2014, net revenue decreased by $14.2 million, or 47%, compared to the corresponding period in the prior fiscal year, primarily due to declines of 43% in units shipped and 7% in average selling price. The decline in our DTV market resulted primarily from the continued erosion of demand for our older legacy products, many of which are now approaching end-of-life. Our DTV revenue was derived mainly from our Asia and Europe regions. We typically expect our strongest DTV sales in the third calendar quarter and slower DTV sales in the first and fourth quarter of each calendar year. We expect our revenue from the DTV market to continue to be a significant percentage of net revenues but will fluctuate in future periods as we continue to develop and introduce new products for this market.

Home control market: For the three months ended August 2, 2014, net revenue from sales of our products into the home control market increased $0.7 million, or 12%, compared to the corresponding period in the prior fiscal year. For the six months ended August 2, 2014, net revenue increased $2.3 million, or 22%, compared to the corresponding period in the prior fiscal year. In both cases, the increase was primarily the result of increased demand in the home control market, evidenced by increases of 23% and 35% in unit shipments primarily to the United States and Europe for the three and six months ended August 2, 2014, respectively. These increases were partially offset by a decline in average selling prices of 8% and 10% for the three and six months ended August 2, 2014, respectively, due to higher volume pricing of service providers.

We have compelling products for our home control market and we continue to target large operators who are introducing home control products primarily in the North America and European regions. We expect our revenue from the home control market to continue to increase in the foreseeable future.

24 -------------------------------------------------------------------------------- Set-top box market: For the three months ended August 2, 2014, net revenue from sales of our products into the set-top box market decreased $6.0 million, or 52%, compared to the corresponding period in the prior fiscal year. For the six months ended August 2, 2014, net revenue decreased $9.6 million, or 46%, compared to the corresponding period in the prior fiscal year. In both cases, the decrease in set-top box market net revenue was attributable to our operators customers' pending transitions from our MIPS based products to the newer generation ARM based products resulting in declines of 48% and 36% in units shipped and 8% and 16% decreases in average selling price on legacy products some operators continued to use for the three and six months ended August 2, 2014, respectively.

IPTV service providers deploy set-top boxes for many years and take a long time to evaluate potential new platforms, which results in long cycles between design wins and actual revenue. As such, the overall decline in revenue is a result of design losses that took place over three years ago. We expect our revenue from the set-top box market to fluctuate in future periods as this revenue is dependent on IPTV service deployments by telecommunication service providers, adoption of newer and future generations of our technology, changes in inventory levels at the contract manufacturers that supply them and competitive market pressures.

License and other markets: Our license and other market consist primarily of technology license revenue and revenue from other ancillary markets. The license revenue is attributable to two license agreements pursuant to which we license our technology to third parties for which we were able to recognize revenue. Our obligations under the aforementioned license arrangements were completed during the three months ended August 2, 2014. We expect license revenue to fluctuate in future periods.

Net revenue by geographic region The following table sets forth net revenue for each geographic region based on the ship-to location of customers (in thousands, except percentages): Three Months Ended Six Months Ended August 2, % of Net August 3, % of Net August 2, % of Net August 3, % of Net 2014 Revenue 2013 Revenue 2014 Revenue 2013 Revenue Asia $ 34,073 80 % $ 40,426 75 % $ 63,318 79 % $ 78,466 74 % North America 5,209 12 % 5,630 10 % 9,546 12 % 10,660 10 % Europe 2,060 5 % 5,978 11 % 4,362 6 % 13,968 13 % Other regions 1,468 3 % 1,728 4 % 2,457 3 % 3,208 3 % Net revenue $ 42,810 100 % $ 53,762 100 % $ 79,683 100 % $ 106,302 100 % Asia: Our net revenue from Asia decreased $6.4 million, or 16%, for the three months ended August 2, 2014, compared to the corresponding period in the prior fiscal year. Our net revenue for the six months ended August 2, 2014 decreased $15.1 million, or 19%, compared to the corresponding period in the prior fiscal year. In both cases, the decrease was primarily attributable to lower demand for some legacy products in the home networking and DTV markets due to a shift in consumers' preferences. This region also experienced a decline in the set-top box market due to decreasing demand for legacy products partially offset by the deployment of newer generation products by our operators' customers. Net revenue as a percentage of our total net revenue for both the three and six months ended August 2, 2014 increased five percentage points compared to the corresponding period in the prior fiscal year primarily due to the significant reduction in revenue in Europe.

North America: Our net revenue from North America decreased $0.4 million, or 7%, for the three months ended August 2, 2014 compared to the corresponding period in the prior fiscal year. Our net revenue for the six months ended August 2, 2014 decreased $1.1 million, or 10%, compared to the corresponding period in the prior fiscal year. In both cases, the decrease was primarily due to the continuing shift away from legacy products with our operators' pending transitions into newer generation products within the DTV and set-top box markets, partially offset by increases in our home control market as demand for our products continue to rise. Net revenue as a percentage of our total net revenue for both the three and six months ended August 2, 2014 increased two percentage points compared to the corresponding period in the prior fiscal year primarily due to the significant reduction in revenue in Europe.

Europe: Our net revenue from Europe decreased $3.9 million, or 66%, for the three months ended August 2, 2014, compared to the corresponding period in the prior fiscal year. Our net revenue for the six months ended August 2, 2014 decreased $9.6 million, or 69%, compared to the corresponding period in the prior fiscal year. Net revenue as a percentage of our total net revenue for the three and six months ended August 2, 2014 decreased six and seven percentage points, respectively, compared to the corresponding periods in the prior fiscal year. The decreases are primarily the result of a decrease in shipments to our DTV market, primarily in Hungary, as we continue to experience a shift away from legacy products.

25-------------------------------------------------------------------------------- Other regions: Our net revenue from other regions decreased $0.3 million, or 15%, for the three months ended August 2, 2014 compared to the corresponding period in the prior fiscal year. Our net revenue for the six months ended August 2, 2014 decreased $0.8 million, or 23%, compared to the corresponding period in the prior fiscal year. The decreases were primarily the result of a decrease in demand for our products in the home networking market in Brazil.

Major customers During the three and six months ended August 2, 2014, Benchmark Electronics accounted for 14% and 13% of our net revenue, respectively. During the three and six months ended August 3, 2013, Flextronics accounted for 10% and 12% of our net revenue, respectively.

As of August 2, 2014, Benchmark Electronics and Nanning Fugui Precision accounted for approximately 14% and 10% of net accounts receivable, respectively. As of February 1, 2014, four customers accounted for approximately 15%, 12%, 11% and 10% of net accounts receivable, respectively.

Gross profit and gross margin The following table sets forth our gross profit and gross margin (in thousands, except percentages): Three Months Ended Six Months Ended August 2, % August 3, August 2, % August 3, 2014 Change 2013 2014 Change 2013 Gross profit $ 21,889 (22 )% $ 28,066 $ 42,114 (23 )% $ 55,012 Gross margin % 51.1 % (2 )% 52.2 % 52.9 % 2 % 51.8 % Gross profit decreased $6.2 million, or 22%, for the three months ended August 2, 2014, compared to the corresponding period in the prior fiscal year. Gross profit decreased $12.9 million, or 23%, for the six months ended August 2, 2014, compared to the corresponding period in the prior fiscal year. In both cases, the decrease was primarily due to lower revenue volumes from the set-top box, DTV and home networking markets with associated impacts of $6.6 million, or 23%, and $14.6 million, or 26%, partially offset by increases in gross profit of $0.2 million and $1.5 million from the home control market due to a rise in product sales for the three and six months ended August 2, 2014, respectively. Gross profit for license and other markets increased $0.2 million for both the three and six months ended August 2, 2014, compared to the corresponding periods in the prior fiscal year.

Our gross margin declined 1.1 percentage points for the three months ended August 2, 2014, compared to the corresponding period in the prior fiscal year.

The decrease was primarily due to a decrease in the average selling price within the set-top box market due to the decreasing demand for legacy products, partially offset by an increase in licensing revenue due to timing of recognition of contract deliverables.

Gross margin rose 1.1 percentage points for the six months ended August 2, 2014, compared to the corresponding period in the prior fiscal year. The increase was primarily due to an increase in shipments coupled with a more favorable mix of products sold within our home control market. Additionally, the DTV market exhibited favorable changes in product mix on certain legacy products which contributed to the gross margin increase. Although average selling prices, or ASP, declined across most of our target markets, we continued our significant efforts to reduce the average cost per unit, or ACU, across our markets. These improvements were partially offset by the decline in ASP of our home networking market. The decrease in ACUs was primarily due to cost reduction efforts through restructuring and other activities targeting fixed costs. Our fixed costs include items such as depreciation and amortization and compensation costs for operations.

26--------------------------------------------------------------------------------Research and development expense Research and development expense consists of compensation and benefits costs including variable compensation expense, development and design costs such as mask, prototyping, testing and subcontracting costs, depreciation and amortization of our engineering design tools and equipment costs, stock-based compensation expense, and other expenses such as costs for facilities and travel. During certain periods, research and development expense may fluctuate relative to product development phases and project timing. The following table sets forth our research and development expense and the related change (in thousands, except percentages): Three Months Ended August 2, August 3, 2014 2013 $ Change % Change Research and development expense $ 16,452 $ 18,769 $ (2,317 ) -12.3 % Percent of net revenue 38.4 % 34.9 % Six Months Ended August 2, August 3, 2014 2013 $ Change % Change Research and development expense $ 33,555 $ 38,973 $ (5,418 ) -13.9 % Percent of net revenue 42.1 % 36.7 % The decrease in research and development expense for the three and six months ended August 2, 2014 compared to the corresponding periods in the prior fiscal year is primarily due to a decrease in headcount by 13% from August 3, 2013 to August 2, 2014, primarily in North America, due to reductions in force as part of our restructuring efforts. The decreases were partially offset by increases in amortization and depreciation expenses of $0.5 million for both the three and six months ended August 2, 2014 due to increased purchases of equipment primarily used in the development and deployment of new product lines for the DTV market.

Sales and marketing expense Sales and marketing expense consists primarily of compensation and benefits costs, including commissions to our direct sales force, stock-based compensation expense, trade shows, travel and entertainment expenses and external commissions.

Our sales and marketing expense is summarized as follows (in thousands, except percentages): Three Months Ended August 2, August 3, 2014 2013 $ Change % Change Sales and marketing expense $ 5,475 $ 5,527 (52 ) -1.0 % Percent of net revenue 12.8 % 10.3 % Six Months Ended August 2, August 3, 2014 2013 $ Change % Change Sales and marketing expense $ 10,925 $ 11,209 $ (284 ) -2.5 % Percent of net revenue 13.7 % 10.5 % The decrease in sales and marketing expense for the three and six months ended August 2, 2014 compared to the corresponding periods in the prior fiscal year is primarily due to a decrease in headcount by 17% from August 3, 2013 to August 2, 2014, primarily in North America, Asia, and Israel due to reductions in force as part of our restructuring efforts. The decreases were partially offset by increases in consulting fees and compensation-related expenses in Israel of $0.1 million and $0.2 million, respectively, for the three and six months ended August 2, 2014.

27--------------------------------------------------------------------------------General and administrative expense General and administrative expense consists primarily of compensation and benefits costs, stock-based compensation expense, legal, accounting and other professional fees and facilities expenses.

Our general and administrative expense is summarized as follows (in thousands, except percentages): Three Months Ended August 2, August 3, 2014 2013 $ Change % Change General and administrative expense $ 4,555 $ 4,937 $ (382 ) -7.7 % Percent of net revenue 10.6 % 9.2 % Six Months Ended August 2, August 3, 2014 2013 $ Change % Change General and administrative expense $ 9,586 $ 9,699 $ (113 ) -1.2 % Percent of net revenue 12.0 % 9.1 % The decrease in general and administrative expense for the three and six months ended August 2, 2014 compared to the corresponding periods in the prior fiscal year is primarily due to a decrease in headcount by 16% from August 3, 2013 to August 2, 2014, primarily in North America, due to reductions in force as part of our restructuring efforts. The decrease during the six months ended August 2, 2014 was partially offset by increases in legal, audit and tax fees of $0.2 million.

Impairment of IP, mask sets and design tools We test long-lived assets, including our purchased intangible assets, for impairment whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets may not be recoverable. If indicators of impairment exist, we determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows that the assets are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long-lived assets and purchased intangible assets. We also periodically review our current assets for other-than-temporary declines in fair-value based on the specific identification method and write-down the carrying value when an other-than temporary decline has occurred. During the three and six months ended August 2, 2014, we recorded an impairment of intangible assets of $1.2 million and $1.3 million, respectively, primarily related to a mask set and related IP within the set-top box market for which the related product had little to no market. During the three months ended August 3, 2013, no such impairments were recorded, and during the six months ended August 3, 2013, we recorded impairments of intangible assets of $0.2 million.

Restructuring costs In fiscal 2013, as a result of significant expansion in our infrastructure and operational activities in connection with purchases and acquisitions that took place between fiscal years 2008 and 2013, and in response to certain redundancies, underperforming operations and delays in programs and product releases, we implemented a restructuring program to realign our global operating expenses with our new business conditions, and to improve efficiency, competitiveness and profitability. Costs relating to facilities closure or lease commitment are recognized when the facility has been exited. Terminations costs are recognized when the costs are deemed both probable and estimable.

In the first quarter of fiscal 2015, we incurred restructuring charges of $1.0 million, all of which was related to workforce reductions of 29 employees across several geographic regions, the majority of which were in our operations in Israel. Of the total restructuring charges recorded in the first fiscal quarter, approximately $0.1 million was reflected in cost of revenue and $0.9 million was reflected in operating expenses. During the second quarter of fiscal 2015, we incurred less than $0.1 million of restructuring charges.

In the first quarter of fiscal 2014, we incurred restructuring charges of $0.3 million, all of which was related to workforce reductions of 17 employees across several geographic regions. During the second quarter of fiscal 2014, we incurred net restructuring charges of approximately $0.5 million related to a contingent liability under our lease obligation in Canada and $0.2 million in severance-related charges that resulted from a workforce reduction of eight employees. The aforementioned charges were substantially all reflected in operating expenses for their respective periods.

28 -------------------------------------------------------------------------------- Expenses recognized for restructuring activities impacting our operating expenses are included in "Restructuring costs" in the condensed consolidated statements of operations. Our restructuring measures could negatively impact our revenue and results of operations in the future as a result of less employees developing future products and working to sell existing products.

A combined summary of the recent activity of the restructuring plans initiated by us is as follows (in thousands): Cumulative Workforce Facility Exit Restructuring Reduction Costs Total Costs Liability, February 2, 2013 $ 1,014 $ 8 $ 1,022 $ 3,264 Charges in fiscal 2014 1,696 610 2,306 2,306 Cash payments (2,347 ) (616 ) (2,963 ) - Liability, February 1, 2014 363 2 365 5,570 Charges for the three months ended May 3, 2014 1,025 - 1,025 1,025 Cash payments (802 ) (2 ) (804 ) - Liability, May 3, 2014 586 - 586 6,595 Charges for the three months ended August 2, 2014 46 - 46 46 Cash payments (386 ) - (386 ) - Liability, August 2, 2014 $ 246 $ - $ 246 $ 6,641 Interest and other income, net The following table sets forth net interest and other income and the related change (in thousands, except percentages): Three Months Ended Six Months Ended August 2, August 3, August 2, August 3, 2014 % change 2013 2014 % change 2013 Interest and other income, net $ 372 207 % $ 121 $ 320 (61) % $ 812 Interest and other (expense) income primarily consist of interest income from marketable securities, income from refundable research and development credits, gains or losses on foreign exchange transactions, gains or losses on sales of marketable securities and gains or losses on disposals of assets. The increase of $0.3 million for the three months ended August 2, 2014 compared to the corresponding period in the prior fiscal year was primarily a result of a $0.7 million gain in connection with investments we have made in support of our Z-Wave brand and a $0.3 million hedging loss during the three months ended August 3, 2013 with no corresponding loss during the three months ended August 2, 2014, partially offset by $0.6 million of impairment charges on one privately-held investment and lower interest income of $0.1 million from a lower average marketable security balance.

The decrease of $0.5 million for the six months ended August 2, 2014 compared to the corresponding period in the prior fiscal year was primarily a result of $0.6 million of impairment charges on one privately-held investment, an unfavorable change of $0.3 million in foreign currency fluctuations, lower interest income of $0.2 million from a lower average marketable security balance and a $0.1 million lower hedging loss during the six months ended August 2, 2014, partially offset by a $0.7 million gain in connection with investments we have made in support of our Z-Wave brand.

Provision for income taxes We recorded a provision for income taxes of $2.2 million and $3.1 million for the three months ended August 2, 2014 and August 3, 2013, respectively. The provision for income taxes was $3.6 million and $5.3 million for the six months ended August 2, 2014 and August 3, 2013, respectively. The decrease in tax expense is primarily attributable to lower profitability in taxable jurisdictions in the first and second quarters of fiscal year 2015 as compared to the same periods in fiscal year 2014. During the three and six months ended August 2, 2014 and August 3, 2013, we were unable to reasonably project our annual effective tax rate, and therefore computed our provision for income taxes based on year-to-date actual financial results. Included in our provision for income taxes are foreign exchange gains or losses on unsettled income tax liabilities.

29--------------------------------------------------------------------------------Liquidity and capital resources The following table sets forth the balances of cash and cash equivalents and short-term marketable securities (in thousands): August 2, February 1, 2014 2014Cash and cash equivalents $ 69,848 $ 64,326 Short-term marketable securities 5,828 7,791 $ 75,676 $ 72,117 As of August 2, 2014, our principal sources of liquidity consisted of cash and cash equivalents and short-term marketable securities of $75.7 million, which represents approximately $2.17 per share of outstanding common stock as compared to $2.09 as of February 1, 2014. Working capital as of August 2, 2014 was $97.0 million. Total cash and cash equivalents increased by $5.5 million compared to February 1, 2014, primarily due to $11.0 million of sales and maturities of marketable securities and net proceeds of $1.2 million from exercises of employee stock options and other purchase rights, partially offset by changes in working capital of $3.1 million and purchases of intangible and tangible assets of $4.6 million. Net loss was $0.9 million after adjusting for non-cash items.

As of August 2, 2014, we held $6.3 million of long-term marketable securities. Although these marketable securities have maturities of greater than one year, we hold them as available-for-sale and may access these funds prior to their contractual maturities.

The following table sets forth the primary net cash inflows and outflows (in thousands): Six Months Ended August 2, August 3, 2014 2013 Net cash (used in) provided by: Operating activities $ (3,909 ) $ 11,744 Investing activities 6,930 (7,108 ) Financing activities 2,489 1,447Effect of foreign exchange rate changes on cash and cash equivalents 12 (160 ) Net increase in cash and cash equivalents $ 5,522 $ 5,923 Cash flows from operating activities Net cash used in operating activities of $3.9 million for the six months ended August 2, 2014 was primarily due to a $17.5 million net loss and a net change of $3.1 million in operating assets and liabilities, substantially offset by non-cash adjustments of $16.7 million. Cash provided by accounts receivable of $2.9 million during the six months ended August 2, 2014 was primarily related to decreased revenue and timing of collections. Cash used in income taxes payable of $3.8 million was primarily the result of a large income tax payment in Israel. Cash used in other long-term liabilities of $2.4 million was primarily the result of the payments for design tools.

Net cash used in operating activities of $3.9 million for the six months ended August 2, 2014 represents a $15.7 million decrease from the cash provided by operating activities during the corresponding period in fiscal 2014. The change was partially attributable to the increase in net loss of $9.0 million after adjusting for non-cash items. Cash used for inventory and accounts payable contributed $5.5 million and $13.6 million, respectively, to the net decrease from the same period in fiscal 2014. These decreases were partially offset by increased cash provided by accounts receivable in the amount of $20.3 million.

The six months ended August 3, 2013 experienced lower media processor wafer purchases resulting in favorable changes to inventory. Inventory levels during the six months ended August 2, 2014 increased in anticipation of expected sales in subsequent quarters. The change in accounts payable from the same period in fiscal 2014 was primarily due to decreased purchases and timing of payments. The change in accounts receivable from the corresponding period in fiscal 2014 was primarily the result of decreased revenue as well as the timing of product shipments and collections.

Cash flows from our operating activities will continue to fluctuate based upon our ability to grow net revenues while reducing our costs through restructuring efforts and managing the timing of payments to us from customers and to vendors from us, the timing of inventory purchases and subsequent manufacture and sale of our products.

30--------------------------------------------------------------------------------Cash flows from investing activities Net cash provided by investing activities was $6.9 million for the six months ended August 2, 2014, which was primarily due to sales and maturities of marketable securities of $11.0 million, primarily to support research and development activities. This source was partially offset by purchases of IP and software, equipment and leasehold improvements of $1.6 million and $3.0 million, respectively, primarily to support the development and advancement of emerging technologies within the DTV market. Other sources of cash provided by investing activities included $0.2 million from repayment of a note receivable and $0.2 million of releases in restricted cash.

Net cash provided by investing activities of $6.9 million for the six months ended August 2, 2014 represents a $14.0 million increase from the amount of cash used in investing activities during the corresponding period in fiscal 2014. The increase was primarily due to an increase from net proceeds from the sale and maturities of marketable securities of $11.3 million. Additionally, fewer purchases of tangible and intangible property and equipment were made in comparison to the same period in fiscal 2014 resulting in a net increase of $4.5 million. These favorable changes were partially offset by net proceeds received during the six months ended August 3, 2013 from the sale of a development project, net of transaction fees in the amount of $2.0 million with no corresponding amount in the current period.

Cash flows from financing activities Net cash provided by financing activities was $2.5 million for the six months ended August 2, 2014, which primarily was due to the net proceeds from exercises of employee stock options and employee stock purchases of $1.2 million and an excess tax benefit from stock-based compensation of $1.2 million. The change from the same period in fiscal 2014 was a result of the realization of the aforementioned tax benefit in the current period where previously there was none due, in part, to the granting of options for employees in Israel.

Our marketable securities primarily include corporate bonds, money market funds, municipal bonds and notes and fixed income mutual funds. We monitor all of our marketable securities for impairment and if these securities are reported to have had a decline in fair value, we may need to use significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of each investment including: (i) the nature of the investment; (ii) the cause and duration of any impairment; (iii) the financial condition and near term prospects of the issuer; (iv) for securities with a reported decline in fair value, our ability to hold the security for a period of time sufficient to allow for any anticipated recovery of fair value; (v) the extent to which fair value may differ from cost; and (vi) a comparison of the income generated by the securities compared to alternative investments. We would recognize an impairment charge if a decline in the fair value of our marketable securities is judged to be other-than-temporary.

Contractual obligations and commitments We generally do not have guaranteed price or quantity commitments from any of our suppliers. Additionally, we generally acquire products for sale to our customers based on purchase orders received as well as forecasts from such customers. Purchase orders with delivery dates greater than twelve weeks are typically cancelable without penalty to our customers. We currently place non-cancelable orders to purchase semiconductor wafers, other materials and finished goods from our suppliers on an eight to twelve week lead-time basis.

The following table sets forth the amounts of payments due under specified contractual obligations as of August 2, 2014 (in thousands): Payments Due by Period Fiscal 2015 (Remaining Fiscal 2016 Fiscal 2018 - 6 months) - 2017 2019 Total Operating leases $ 2,396 $ 5,689 $ 804 $ 8,889 Non-cancelable purchase obligations 39,318 - - 39,318 Total contractual obligations $ 41,714 $ 5,689 $ 804 $ 48,207 Recent accounting pronouncements See Note 1, "Recent Accounting Pronouncements," of the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

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