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TRIQUINT SEMICONDUCTOR INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes and the "Important Notice to Stockholders" that appear elsewhere in this report. Overview We are a supplier of high performance modules and components for wireless communications applications. We design, develop and manufacture advanced high-performance RF solutions with GaAs, GaN, SAW and BAW technologies for customers worldwide. We serve growing markets and a diverse customer base of manufacturers building connected mobile devices, 2G/3G/4G cellular base stations, triple-play cable solutions, fiber optic networks, WLAN, worldwide interoperability for microwave access/long-term evolution and defense & aerospace applications. We provide our customers with high-performance, low-cost RF solutions in the mobile devices, networks, and defense & aerospace end markets. Our mission is to deliver RF solutions that improve performance and lower the overall cost of our customers' applications and we accomplish this through a diversified product portfolio within these markets. In the mobile devices end market, we provide high performance devices such as integrated modules, duplexers and other filters, small signal components, power amplifiers and switches. In the networks end market, we are a supplier of an extensive portfolio of GaAs microwave monolithic integrated circuits and transistors and SAW and BAW filter components. We provide the defense & aerospace end market with phased-array radar, communications and electronic warfare components and have been recognized as a leader in GaN development. Wafer and semiconductor manufacturing facilities require a significant level of fixed cost due to investments in plant and equipment, labor costs and repair and maintenance costs. During periods of high demand, factories run at higher utilization rates, generally resulting in improved financial performance. As the overall RF market has grown in recent years, with continuing desire for content expansion in smartphones, there was increased demand for our products. In response, we increased capital expenditures in order to add capacity to our factories. Since January 2012, with the increased capacity installed and demand for our products lower than originally anticipated, higher fixed manufacturing costs have adversely affected operating results because factories were not fully utilized. As a result, our gross margin decreased to 28.7% in 2012 from 35.9% in 2011. We experienced an overall decline in revenue of 7% for 2012 compared to 2011, following 2% overall revenue growth in 2011 compared to 2010. Mobile devices represents the largest of our three major end markets. Revenue from the sales of our products in the mobile devices end market for 2012 decreased 15% compared to 2011. The decrease was primarily due to reduced demand from our largest customer and a decline in sales to some of our smaller customers as demand shifted among the top smartphone suppliers. Revenue from sales of our products in the networks end market increased 8% for 2012 compared to 2011. This increase was driven primarily by base station expansion and strong demand for our optical products. Growth in data traffic, in the form of streaming video, location services and social networking continues to outpace the capability of the existing infrastructure worldwide. Billions of terabytes of electronic data move around the globe today and traffic continues to expand at an unprecedented rate. This creates demand for TriQuint products to support the upgrades and build-out of the worldwide wireless and wireline networks. 24-------------------------------------------------------------------------------- Table of Contents Revenue from sales of our products in the defense & aerospace end market increased 18% in 2012 compared to 2011 primarily due to the impact of federal program timing, which can result in swings from period to period. We have continued to win significant production orders during 2012 for the latest generation of radar systems such as the F-35 Lightning II Joint Strike Fighter, and the Army's TPQ-53 Counter Fire Target and Acquisition Radar. We continue to accelerate the release of new products to support this market which was the primary driver for the increase in defense & aerospace revenue in the second half of 2012. Most notably, we extended our family of industry leading products for radar and communications applications, releasing and shipping new products that provide superior gain and efficiency in a variety of industry standard packages. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. These accounting policies involve critical accounting estimates because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. Although we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used. Changes in the accounting estimates we use are reasonably likely to occur from time to time, which may have a material effect on the presentation of our financial condition and results of operations. Our most critical accounting estimates include revenue recognition; valuation of inventory, which affects gross margin; accounting for income taxes, which affects our tax provision; precious metals reclaim, which affects cost of goods sold and stock-based compensation, which affects cost of goods sold and operating expenses and our accounting for litigation and settlement costs. We also have other policies that we consider to be key accounting policies, such as the valuation of accounts receivable, reserves for sales returns and allowances: however, these policies either do not meet the definition of critical accounting estimates described above or are not currently material items in our financial statements. We review our estimates, judgments, and assumptions periodically and reflect the effects of revisions in the period in which they are deemed to be necessary. We believe that these estimates are reasonable; however, actual results could differ from these estimates. Revenue Recognition We derive revenue primarily from the sale of products in the mobile devices, networks, and defense & aerospace end markets. We also receive revenue from foundry services, non-recurring engineering fees and cost-plus contracts for research and development work, which collectively comprised less than 10% of consolidated revenue for any period. Our distribution channels include our direct sales staff, manufacturers' representatives and independent distributors. The majority of our shipments are made directly to our customers. Revenue from the sale of products is recognized when title passes to the buyer. Our product sales include warranty provisions that provide that the products will be free of faulty workmanship or defective materials and that the products will conform to our published specifications or other specifications mutually agreed upon with the customer. If we are unable to repair or replace products returned under warranty, we will issue a credit for a warranty return. Our historical warranty claims experience, and our warranty liability, have not been material. Revenue from our distributors is recognized when the product is sold to the distributors. Sales to our distributors were between 9% and 12% of our total revenue for 2012, 2011 and 2010. Our distributor agreements provide selling prices that are fixed at the date of sale, although in certain circumstances we offer price protection credits, which are specific, of a fixed duration and for which we reserve when offered. Further, the distributor's payment obligation is not contingent on reselling the product. The distributors take title to the product and bear the risks of ownership, the sales to distributors have economic substance and we can reasonably estimate the amount of future returns. We reduce revenue and record reserves for product returns and allowances for price protection and stock rotation based on historical experience or specific identification depending on the contractual terms of the arrangement. The revenue reserves have remained relatively consistent as a percentage of revenue and we have visibility into the distributors' inventory levels and qualifying sales, and are, therefore, able to reasonably estimate the revenue reserves. We receive periodic reports from customers who utilize inventory hubs and recognize revenue when customers acknowledge they have pulled inventory from our hub, which is the point at which title to the product passes to the customer. Revenue from foundry services and non-recurring engineering fees is recorded when the service is completed. Revenue from cost plus contracts is recognized as costs are incurred. 25-------------------------------------------------------------------------------- Table of Contents Inventories We state our inventories at the lower of cost or market. We use standard cost methodology to determine our cost basis for our inventories. This methodology approximates actual cost on a first-in, first-out basis. In addition to stating our inventory at the lower of cost or market, we also evaluate it each period for excess quantities and obsolescence. We analyze historical usage as well as forecasted demand compared to quantities on hand, and reserve for the excess and identify and record other specific reserves. In addition, we are currently investigating a potential scrap issue related to the ramp of new GaAs capacity. This issue could potentially result in an additional charge of approximately $5.0 million during the three months ending March 30, 2013. Precious Metals Reclaim We use historical experience to estimate the amount of reclaim on precious metals used in manufacturing at the end of each period and state the reclaim value at the lower of average cost or market. The estimated value to be received from precious metal reclaim is included in other current assets. Income Taxes We are subject to taxation from federal, state and international jurisdictions. A significant amount of judgment is involved in preparing our provision for income taxes and the calculation of resulting deferred tax assets and liabilities. We follow the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between tax and financial reporting. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We use the with-and-without approach, disregarding indirect tax impacts, for determining the period in which tax benefits for excess share-based deductions are recognized. Net operating losses from prior years reduced federal and state income tax obligations to the extent that we did not have significant income taxes payable at December 31, 2012 or December 31, 2011. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more-likely-than-not to be realized in future tax returns. Significant management judgment is required in determining any valuation allowances that might be required against the deferred tax assets. Accounting Standards Codification ("ASC") 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with GAAP. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This statement also provides guidance on derecognition, classification, interest and penalties, accounting in the interim periods and disclosure. In 2002, we determined that a valuation allowance should be recorded against all of our net deferred tax assets. Due to strong results in 2010 and increased confidence that we will continue to generate taxable income into the foreseeable future, our assessment regarding the potential to realize our deferred tax assets changed. This assessment required us to exercise significant judgment and make estimates about our ability to generate revenue, gross profit, operating income and taxable income in future periods. The result was the release of a majority of the valuation allowance on the deferred tax assets. We continue to maintain a valuation allowance against a portion of U.S. and state deferred tax assets, as we do not believe it is more likely than not that these will be realized in future periods. Specifically, the statute of limitations may expire before certain state net operating loss and credit carryforwards are utilized. The calculation of our tax liabilities is subject to legal and factual interpretation, judgment, and uncertainty in a multitude of jurisdictions. This includes addressing uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions in the U.S. and other tax jurisdictions based on recognition and measurement criteria prescribed by ASC 740. The liabilities are periodically reviewed for their adequacy and appropriateness. Changes to our assumptions could cause us to find a revision of estimates appropriate. Such a change in measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest will be due. We record an amount as an estimate of probable additional income tax liability at the largest amount that we determine is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority. As of December 31, 2012, we were not under audit by any income tax authorities. Tax periods within the statutory period of limitations not previously audited are potentially open for examination by the tax authorities. Potential liabilities associated with these years will be resolved when an event occurs to warrant closure, primarily through the completion of audits by the tax jurisdictions and/or the expiration of the statutes of limitation. To the extent audits or other events result in a material 26-------------------------------------------------------------------------------- Table of Contents adjustment to the accrued estimates, the effect would be recognized during the period of the event. We believe that an appropriate estimated liability has been established for potential exposures. Our net unrecognized tax benefits are recorded as a liability in the consolidated balance sheets. To the extent interest and penalties would be assessed by taxing authorities of any underpayment of income taxes, such amounts are accrued and classified as a component of income tax expense on the consolidated statement of operations. Realization of the unrecognized tax benefits results in a favorable impact to the effective tax rate. No provision has been made for the U.S., state or additional foreign income taxes related to approximately $110.0 million of undistributed earnings of foreign subsidiaries which have been permanently reinvested outside the U.S. except existing earnings that have been previously taxed. It is not practicable to determine the U.S. federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested outside the U.S. In the event the foreign subsidiaries repatriate these earnings, the earnings may be subject to U.S. federal and state income taxes and foreign withholding taxes. Stock-Based Compensation We include stock-based compensation costs in our financial statements. We use the Black-Scholes option valuation model to value our options and employee stock purchase plan issuances. The table below summarizes the stock-based compensation expense for 2012, 2011 and 2010, included in our consolidated statements of income (in millions): Year ended December 31, 2012 2011 2010 Cost of goods sold $ 9.0 $ 6.9 $ 4.7 Operating expenses: Research, development and engineering 9.3 8.5 6.3 Selling, general and administrative 10.9 9.7 6.6 Stock-based compensation expense included in operating expenses 20.2 18.2 12.9 Total stock-based compensation expense included in income from operations $ 29.2 $ 25.1 $ 17.6 We estimate the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model which requires a number of assumptions, including the expected lives of stock options, the volatility of the public market price for our common stock and interest rates. The value of the stock-based payment award is recognized as stock-based compensation expense on a straight line basis over the award's vesting schedule. We determine our risk-free rate assumption based upon the U.S. Treasury yield for obligations with contractual lives similar to the expected lives of our option grants and ESPP subscription periods. The expected life represents the weighted average period the options are expected to remain outstanding, based upon historical experience. The dividend yield assumption is based on our historical and anticipated dividend distributions. The expected volatility is based upon a blend of our historical volatility of our stock price and our exchange traded options for the expected life of the award. Forfeitures are estimated based upon historical and anticipated future experience for the expected life of the award. Litigation and settlement costs From time to time, we are involved in legal actions. There are many uncertainties associated with any litigation or investigation, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with GAAP. However, the actual liability in any such litigation or investigations may be materially different from our estimates, which could require us to record additional costs. In addition, settlement agreements can be complex and involve multiple elements. Determining the fair value of elements within a multiple element settlement arrangement involves estimates and assumptions determined by management, which if different estimates had been used, could materially change the determination of fair value of the elements. Additionally, certain elements of an arrangement may not be reliably determinable and in these cases, we use a residual approach to value these elements. 27-------------------------------------------------------------------------------- Table of Contents Results of Operations The following discussion and analysis of operations addresses continuing operations only, unless otherwise noted. The table below sets forth the results of our operations expressed as a percentage of revenue. These historical operating results are not necessarily indicative of the results for any future period. Year ended December 31, 2012 2011 2010 Revenue 100.0 % 100.0 % 100.0 % Cost of goods sold 71.3 64.1 60.1 Gross profit 28.7 35.9 39.9 Operating expenses: Research, development and engineering 19.4 16.4 14.7 Selling, general and administrative 12.9 10.8 10.9 Litigation expense 0.9 2.1 1.1 Total operating expenses 33.2 29.3 26.7 (Loss) income from operations (4.5 ) 6.6 13.2 Other income (expense): Interest income 0.1 0.0 0.0 Interest expense (0.2 ) (0.2 ) (0.1 ) Recovery (impairment) of investments in other companies 0.8 0.2 0.2 Other, net 0.0 0.0 (0.1 ) Total other income (expense), net 0.7 0.0 0.0 (Loss) income from continuing operations, before income tax (3.8 ) 6.6 13.2 Income tax (benefit) expense (0.6 ) 1.2 (8.5 ) Net (loss) income (3.2 )% 5.4 % 21.7 % Years ended December 31, 2012 and 2011 Revenue Revenue decreased $66.9 million, or 7%, in 2012, compared to 2011. Revenue by end market for 2012 and 2011, was as follows: Year ended December 31, (in millions) 2012 2011 Mobile devices $ 538.3 $ 634.5 Networks 192.7 178.4 Defense & aerospace 98.2 83.2 $ 829.2 $ 896.1 Mobile Devices Revenue from sales of our products in the mobile devices end market decreased approximately 15% in 2012 compared to 2011. Revenue from the sales of our products in the three primary submarkets of the mobile devices end market was as follows: Year ended December 31, (in millions) 2012 2011 3G/4G $ 424.0 $ 467.9 2G 21.7 37.8 Connectivity 92.6 128.8 Total $ 538.3 $ 634.5 28-------------------------------------------------------------------------------- Table of Contents 3G/4G revenue declined primarily as a result of reduced demand from our largest customer. 2G revenue declined as we shifted focus away from this product area. Revenue from the sales of our connectivity products declined as a result of a decline in sales to some of our smaller customers as demand shifted among the top smartphone suppliers. Networks Revenue from the sales of our products in the networks end market increased approximately 8% for 2012 compared to 2011. The increase was primarily due to an increase in revenue in the transport submarket, driven largely by the strong growth in demand for our optical products. Sales performance of our optical products benefited from the increasing need for faster data transfer rates and the evolution to 40 and 100 Gb/s standards. Revenue from the sales of our radio access products increased as a result of LTE expansion in North America and China. Revenue from the sales of our products in the three primary submarkets of the networks end market was as follows: Year ended December 31, (in millions) 2012 2011 Radio access $ 65.2 $ 60.3 Transport 97.1 89.3 Multi-market 30.4 28.8 Total $ 192.7 $ 178.4 Defense & Aerospace Revenue from the sales of our products in the defense & aerospace end market increased approximately 18% in 2012 compared to 2011. The increase was primarily the result of 29% and 25% increases in the sales of our radar and communications products, respectively, due to the release and shipment of new products, specifically with one of our largest defense & aerospace customers. Significant Customers Foxconn Technology Group accounted for 31% and 35% of our revenue for the years ended December 31, 2012 and 2011, respectively. While we strive to maintain a strong relationship with our customers, our customers' product life cycles are short as they continually develop new products. The selection process for our products to be included in our customers' new products is highly competitive. There are no guarantees that our products will be included in the next generation of products introduced by Foxconn Technology Group or our other customers. Any significant loss of, or a significant reduction in purchases by this, or other significant customers, could have an adverse affect on our financial condition and results of operations. Some of our mobile devices end customers use multiple subcontractors for product assembly and test and some of those subcontractors have multiple customers. Therefore, revenues from our customers may not necessarily equal the business of a single mobile devices end customer. Domestic and International Revenue Revenue from sales to our domestic customers was approximately $201.2 million in 2012, compared to approximately $246.1 million in 2011. Revenue from sales to our international customers was approximately $628.0 million in 2012, compared to approximately $650.0 million in 2011. As a percentage of total revenue, revenue from sales to our international customers was 76% in 2012, compared to 73% in 2011. Revenue from sales to our international customers decreased primarily as a result of shifts in market share and consolidation among top smartphone suppliers and lower demand from Foxconn Technology Group which is included as an international customer. Gross Profit Our gross profit margin as a percentage of total revenue decreased to 28.7% in 2012, compared to 35.9% from 2011. The decrease in gross profit was primarily the result of increased capacity placed into service at the end of 2011 and during 2012 coupled with lower demand, thereby resulting in a lower factory utilization rate. 29-------------------------------------------------------------------------------- Table of Contents Research, development and engineering expenses Our research, development and engineering expenses in 2012 increased $13.6 million, or 9%, from 2011. The increase was primarily the result of increased spending on material to develop new products, qualification costs and prototypes as well as an increase in employee salary and benefit costs due to higher headcount. Selling, general and administrative expenses Selling, general and administrative expenses increased $9.9 million, or 10%, in 2012 compared to 2011. The increase in selling, general and administrative expenses primarily resulted from more medical claims submitted under our self-insurance program and an increase in employee salary and benefit costs due to higher headcount. Litigation expense Litigation expense in 2012 decreased $11.7 million, or 61%, from 2011 as a result of settling the Avago litigation in May 2012. Details regarding this matter are more fully described in Part II, Item 1 of our Quarterly Report on Form 10-Q for the period ended September 29, 2012 filed with the SEC on November 1, 2012. Other income (expense), net Other income, net for 2012 was $5.2 million compared to other expense, net of $0.1 million for 2011. The fluctuation in other income (expense), net was primarily due to the $7.0 million gain/recovery on the sale of a previously impaired investment in 2012. Income tax (benefit) expense In 2012, we recorded income tax benefit of $5.7 million, compared to income tax expense of $10.8 million in 2011. The 2012 tax benefit was primarily associated with our pre-tax loss offset by an accrual for unrecognized tax benefits and the recognition of additional valuation allowance. The 2011 tax expense primarily resulted from U.S. federal and state income tax expense, offset by benefits from the release of certain liabilities due to the expiration of the statute of limitations and the recognition of additional tax credits related to Research and Experimental ("R&E") spending. Years ended December 31, 2011 and 2010 Revenue Overall demand for wireless connectivity products from the customer perspective has moved beyond traditional mobile devices to a variety of other applications, including data cards, tablets and various personal media devices. As a result of this evolution, we have reclassified revenue from the sales of certain products between end markets in results of operations data for 2010. Revenue increased $17.4 million or 2% to $896.1 million in 2011, compared to $878.7 million in 2010. Revenue by end market for 2011 and 2010 was as follows: Year ended December 31, (in millions) 2011 2010 Mobile Devices $ 634.5 $ 601.2 Networks 178.4 185.9 Defense & Aerospace 83.2 91.6 $ 896.1 $ 878.7 Mobile Devices Revenue from sales of our products in the mobile devices end market increased 6% in 2011 compared to 2010. The revenue increase resulted primarily from a higher volume of sales of our 3G/4G products. Revenue from sales of our 3G/4G products increased approximately 20% in 2011, compared to 2010. Revenue from sales of our connectivity products also increased approximately 13% in 2011, compared to 2010. The increases in 3G/4G and connectivity products revenue were partially offset by a decrease in revenue from sales of our 2G products of approximately 61% in 2011, compared to 2010. 30-------------------------------------------------------------------------------- Table of Contents Revenue from the sales of our products in the three primary submarkets of the mobile devices end market was as follows: Year ended December 31, (in millions) 2011 2010 3G/4G $ 467.9 $ 390.6 2G 37.8 96.3 Connectivity 128.8 114.3 Total $ 634.5 $ 601.2 Networks Revenue from sales of our products in the networks end market decreased approximately 4% in 2011, compared to 2010. The decrease was due to revenue from sales of our radio access and multi-market products decreasing by 8% and 24%, respectively. Radio access revenue declined as a result of telecommunications companies slowing their investment in the expansion of base station capacity and no new major rollouts of base station infrastructure in emerging markets. These decreases in sales of radio access and multi-market products were partially offset by an 8% increase in revenue from sales of our transport products due to success with our optical product line supporting customer network upgrades to 40 and 100Gb/s systems. Revenue from the sales of our products in the three primary submarkets of the networks end market was as follows: Year ended December 31, (in millions) 2011 2010 Radio access $ 60.3 $ 65.2 Transport 89.3 82.9 Multi-market 28.8 37.8 Total $ 178.4 $ 185.9 Defense & Aerospace Revenue from sales of our products in the defense and aerospace end market decreased approximately 9% in 2011, compared to 2010. The decrease was primarily the result of a 29% decrease in sales of our radar products due to program completions. This decrease was partially offset by increases in contract-based revenue and sales of communications products. Significant Customers Foxconn Technology Group accounted for 35% and 25% of our revenue for the years ended December 31, 2011, and 2010, respectively. During 2010, we experienced higher demand than could be supported by the capacity in our factories. With the capacity constraints, we focused on meeting the demand of certain customers, including Foxconn Technology Group. In 2011, as a result of allocating sales of available products to these customers and the customers' success, revenue resulting from sales to Foxconn Technology Group constituted a larger portion of our total revenue. Domestic and International Revenue Revenue from sales to our domestic customers was approximately $246.1 million in 2011, compared to approximately $326.9 million in 2010. Revenue from sales to our international customers was approximately $650.0 million in 2011, compared to approximately $551.8 million in 2010. As a percentage of total revenue, revenue from sales to our international customers was 73% in 2011, compared to 63% in 2010. As a percentage of total revenue, revenue from sales to our international customers grew as a result of the increasing demand for our products in the mobile devices end market and the growth in revenue from Foxconn Technology Group which is included as an international customer. Gross Profit Our gross profit margin as a percentage of total revenue decreased to 35.9% in 2011, compared to 39.9% from 2010. The decrease in gross profit was primarily due to the mix of higher sales of our products in the mobile devices end market, which have lower gross profit compared to the products used in the other end markets and lower utilization in our factories as demand did not keep pace with capacity expansions during the year. 31-------------------------------------------------------------------------------- Table of Contents Research, development and engineering expenses Our research, development and engineering expenses in 2011 increased $17.7 million, or 14%, from 2010. As a percentage of revenue, research development and engineering expense grew nearly 2 percentage points in 2011 compared to 2010. The increase was primarily due to headcount growth, which led to a combination of higher labor costs and other spending on technical supplies, equipment and materials needed to support additional employees. Selling, general and administrative expenses Selling, general and administrative expenses in 2011 remained relatively flat, increasing less than $1.0 million, or 1%, compared to 2010. Litigation expense Litigation expense in 2011 increased $9.9 million, or 105% compared to 2010. The increase was primarily a result of costs incurred related to the litigation with Avago. Refer to Part II, Item 1 of our Quarterly Report on Form 10-Q for the period ended September 29, 2012 filed with the SEC on November 1, 2012 for more details. Other income (expense), net Other income (expense), net in 2011 remained relatively flat, with other expense, net of $0.1 million compared to other income, net of $0.4 million in 2010. Income tax (benefit) expense In 2011, we recorded income tax expense of $10.8 million, compared to income tax benefit of $74.3 million in 2010. The 2011 tax expense primarily resulted from U.S. federal and state income tax expense, offset by benefits from the release of certain liabilities due to the expiration of the statute of limitations and the recognition of additional tax credits related to Research and Experimental ("R&E") spending. The benefit in 2010 was primarily attributable to the valuation allowance release which was recorded against the deferred tax assets and the release of certain liabilities due to the expiration of the statute of limitations, partially offset by federal and state income taxes. Liquidity and Capital Resources As of December 31, 2012, our cash, cash equivalents and marketable securities decreased $23.4 million, or 14% from December 31, 2011. The decrease was primarily driven by capital expenditures of $75.3 million and the repurchase of approximately 10.2 million shares of our common stock for $50.0 million, offset by other balance sheet changes as follows: • Our inventory balance decreased $13.3 million, or 9%. The decrease was primarily due to higher inventory turns for the three months ended December 31, 2012 at 4.8 compared to 4.2 for the three months ended December 31, 2011; indicating a higher sales volume leading up to the end of 2012 compared to 2011. We calculated inventory turns using ending inventory and cost of goods sold for the three months ended December 31, 2012 and December 31, 2011. • Our net property, plant and equipment decreased $21.2 million, or 5%. The change was primarily due to depreciation expense of $90.0 million, which outpaced capital expenditures of $75.3 million during 2012, which excludes the timing effect of capital expenditure payments in prepaid expenses and accounts payable of $5.9 million. The capital expenditures made in 2012 were primarily for equipment to support new products and technologies. • Our deferred tax assets increased $8.9 million, or 15%. Of the $69.7 million in total deferred tax assets, $12.5 million was classified as current and $57.2 million was classified as noncurrent. This increase was primarily related to the pre-tax loss in 2012. • Our current liabilities increased $7.5 million, or 7%. The increase was primarily related to an increase in variable compensation and the timing effect of capital expenditure payments. 32-------------------------------------------------------------------------------- Table of Contents Line of Credit On August 24, 2011, we extended our Credit Agreement ("the Agreement") with a syndicated group of lenders, including Bank of America, N.A., as administrative agent and lender. The Agreement provided us with an unsecured revolving syndicated credit facility of $200.0 million. Our obligations under the Agreement are jointly and severally guaranteed by our domestic subsidiaries. Outstanding amounts are due in full on the maturity date of September 30, 2014. Upon the occurrence of certain events of default specified in the Agreement, amounts due under the Agreement may be declared immediately due and payable. As of and for the year ended December 31, 2012, there were no amounts outstanding under the Agreement. Because there were no borrowings during the respective period, no interest cost was incurred on borrowings during the year ended December 31, 2012. Sources of Liquidity Our current cash, cash equivalent and short-term investment balances, (consisting of $62.9 million in domestic balances and $76.1 million in foreign balances) together with cash anticipated to be generated from operations and the balance available on our $200.0 million syndicated credit facility, constitute our principal sources of liquidity. We believe these sources will satisfy our projected expenditures through the next twelve months. We intend to permanently reinvest all foreign earnings except for liquidated foreign entities and existing earnings that have been previously taxed. We are not presently aware of any restrictions on the repatriation of these funds. If these funds were needed to fund our operations in the U.S., they could be repatriated. Repatriation of our foreign funds would require board approval and could result in additional U.S. income taxes and foreign withholding taxes which could be partially offset by net operating losses and/or foreign tax credits. Determining the amount of possible future taxes is not practicable. At this time, we believe our domestic funds, along with the syndicated credit facility, are sufficient to meet our net domestic cash requirements for the next twelve months. The principal risks to these sources of liquidity are lower than expected earnings or capital expenditures in excess of our expectations, in which case we may be required to finance any shortfall through additional equity offerings, debt financing or credit facilities. We may not be able to obtain additional financing or credit facilities, or if these funds are available, they may not be available on satisfactory terms. We continue to invest in expanding capacity, specifically for high performance filters and are expecting capital expenditures of approximately $100.0 million in 2013, depending upon business needs. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as of December 31, 2012 or December 31, 2011. Contractual Obligations The following table summarizes our scheduled contractual commitments as of December 31, 2012 that will affect our future liquidity (in millions): Payments Due By Period Less than More (in millions) Total 1 Year 2-3 Years 4-5 Years than 5 Years Operating Leases(1) $ 13.7 $ 3.2 $ 4.0 $ 2.6 $ 3.9 Deferred Compensation(2) 4.6 - - - 4.6 Cross-licensing liability(3) 23.4 3.0 4.8 4.8 10.8 Sabbatical(4) 7.0 1.6 4.5 0.9 - Earnout and milestone payment liability(5) 8.4 2.2 3.2 3.0 - Other Obligations(6) 4.7 0.5 0.4 0.2 3.6 Total $ 61.8 $ 10.5 $ 16.9 $ 11.5 $ 22.9 ______________(1) The amounts presented represent leases of certain equipment, office and manufacturing space under operating leases. The amounts presented in this line item represent commitments for minimum lease payments under non-cancelable operating leases. (2) The amount presented represents the liability for our Non-Qualified Deferred Compensation Plan (the "Plan") established in October 2004. The Plan provides eligible employees and members of the Board of Directors with the opportunity to defer a specified percentage of their cash compensation. The deferred earnings are invested at the discretion of each participating employee or director and the deferred compensation we are obligated to deliver is adjusted for increases or decreases in the deferred amount due to such investment. We include the amounts deferred by the participants and held by 33 -------------------------------------------------------------------------------- Table of Contents us in the "Other noncurrent assets, net" line item of our consolidated balance sheets and our obligation to deliver the deferred compensation in the "Other long-term liabilities" line item on our consolidated balance sheets. (3) The cross-licensing liability represents a payable under a cross-licensing agreement. (4) The balance represents the estimated commitments for sabbatical payments for all eligible full time employees. (5) The balance represents the expected earnout and milestone payments related to acquisitions (6) The balance represents the estimated pension liability payable to the employees of our German subsidiary and the estimated obligation related to an lease agreement for assembly and test services in the Philippines. The pension liability becomes payable when the covered employees reach the age of 60 or 65. The liability was acquired through our purchase of the GaAs business of Infineon in 2002. We elected to secure the liability through a reinsurance program supported by us. We have included the reinsurance receivables of $3.5 million in the "Other noncurrent assets, net" line item on our consolidated balance sheets and our obligation to deliver the pension obligation in the "Other long-term liabilities" line item on our consolidated balance sheets. As of December 31, 2012, we had approximately $2.8 million of net tax liabilities, which are included as "Long term income tax liability" in our consolidated balance sheets. We do not anticipate that settlement of the liabilities will require payment of cash within the next twelve months. Further, we are not able to reasonably estimate the timing of any cash payments required to settle these liabilities and do not believe that the ultimate settlement of these obligations will materially affect our liquidity. Accounting Pronouncements In July 2012, the FASB issued an ASU with regard to "Testing Indefinite-Lived Intangible Assets for Impairment." This ASU extends the guidance under the ASU described above that was issued in September 2011 to impairment tests on indefinite-lived intangible assets. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption is permitted. We will adopt this ASU in the performance of our annual test for the impairment of long-lived assets during the first quarter of 2013. We do not anticipate the adoption of this standard to have a significant impact on our financial position, results of operations or cash flows. |