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ANADIGICS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) OVERVIEW We are a global leader in the design and manufacture of radio frequency semiconductor solutions for cellular, WiFi, and wireless infrastructure and CATV applications. Our product portfolio includes power amplifiers, FEICs, FEMs, and line amplifiers. Our cellular power amplifiers and FEMs enable mobile handsets, smartphones, tablets, notebooks, datacards, automotive, M2M, and industrial devices to access 3G and 4G wireless networks utilizing international standards, such as LTE, HSPA, WCDMA, EVDO, CDMA, and WiMAX. Our WiFi FEICs and power amplifiers enable wireless LAN connectivity for mobile, multimedia and infrastructure devices, such as smartphones, tablets, notebooks, televisions, set-top boxes, modems, routers, and access points, optimizing the latest WiFi standards, including 802.11ac and 802.11n. Our infrastructure solutions include both wireless infrastructure and CATV products. Our wireless infrastructure power amplifiers enable 3G and 4G small-cell base stations. Our CATV line amplifiers and other RF products provide the critical link in CATV network infrastructure devices, as well as set-top boxes and cable modems. We believe that our solutions are well positioned to address these market dynamics and will enable us to deliver value in the cellular, WiFi, wireless infrastructure and CATV markets. Our business strategy is focused on enabling communications connectivity with RF solutions that offer greater performance and integration to enhance the user's experience. We are a customer-centric organization that works closely with leading equipment manufacturers, such as OEMs and ODMs. We also partner with industry-leading chipset providers where our functionality enhances their reference designs. These relationships enable us to provide targeted applications expertise that helps reduce time-to-market and design new products that target emerging trends in the market. 22 -------------------------------------------------------------------------------- Table of Contents We are focused on the design and manufacture of differentiated RF semiconductors. Many of our products leverage our patented InGaP-Plus™ and proven MESFET technologies. InGaP-Plus provides greater flexibility to our engineers and product designers. This technology enables them to develop unique architectures that combine HBT amplifying structures and pHEMT RF switches on the same die. We believe that our products cost-effectively enhance RF performance, reliability, and overall functionality. Our six-inch diameter GaAs fab located at our corporate headquarters in Warren, New Jersey, has been operational since 1999. In addition, we have a strategic foundry agreement with WIN Semiconductors of Taiwan to supplement our existing wafer fabrication capability and allow for additional and flexible capacity without the requisite capital investment. Our 2013 revenues increased year over year, while remaining below levels reached in 2011. Improvements to revenues and our cost structure, including restructurings, resulted in reduced sequential quarterly losses during 2013. In February 2014, we reduced our workforce by approximately 40 employees and anticipate recording approximately $1.4 million as a restructuring charge in the first quarter of 2014. This workforce reduction along with other cost reduction actions were initiated with a view to achieving annualized savings of approximately $10 million. We believe our markets are, and will continue to remain, competitive which could result in continued quarterly volatility in our net sales. This competition has resulted in, and is expected over the long-term to continue to result in, declining average selling prices for our products and increased challenges in maintaining or increasing market share. We have only one reportable segment. For financial information related to such segment and certain geographic areas, see Note 3 to the accompanying consolidated financial statements. CRITICAL ACCOUNTING POLICIES & SIGNIFICANT ESTIMATES We believe the following accounting policies are critical to our business operations and the understanding of our results of operations. Such accounting policies may require management to exercise a higher degree of judgment and make estimates used in the preparation of our consolidated financial statements. Effect if Actual Results Judgments and Differ Description Uncertainties From Assumptions Revenue Recognition Revenue from product Our revenue recognition We have not made any sales is recognized when accounting methodology material changes in our title to the products is contains uncertainties accounting methodology transferred to the because it requires used to record revenue customer, which occurs management to make allowances for the years upon shipment or assumptions and to apply ended December 31, 2013, delivery, depending upon judgment to estimate the 2012 and 2011. We do not the terms of the sales value of future credits believe there is a order. We maintain to customers for price reasonable likelihood revenue allowances for protection and stock that there will be a price protection and rotation. Our estimates material change in the stock rotation for of the amount and timing future estimates or certain distributor of the reserves is based assumptions that would sales. These allowances primarily on have a material impact to are recorded upon distributors' indicated our consolidated shipment and calculated intent, historical data, financial statements. based on distributors' current economic indicated intent, conditions and historical data, current contractual terms. economic conditions and contractual terms. Allowance for Doubtful Accounts Our allowance for We have not made any We maintain an allowance doubtful accounts material changes in our for doubtful accounts for methodology contains accounting methodology estimated losses uncertainties because it used to create and resulting from our requires management to maintain the allowance customers' failure to apply judgment to for doubtful accounts for make payments. The evaluate credit risk and the years ended December reserve is based on collectability of aged 31, 2013, 2012 and 2011. historical experience and accounts receivables We do not believe there an analysis of credit based on historical is a reasonable risk. experience and forward likelihood that there looking assumptions. will be a material change in the future estimates or assumptions that would have a material impact to our consolidated financial statements. 23-------------------------------------------------------------------------------- Table of Contents Effect if Actual Results Description Judgments and Differ Uncertainties From Assumptions Inventory Valuation We value our inventory at Our inventory reserves We have not made any lower of cost or market contain uncertainties material changes to our (LCM), using the because the calculation inventory reserve first-in, first-out requires management to methodology for the years method. We establish make assumptions and to ended December 31, 2013, reserves for excess and apply judgment regarding 2012 and 2011. We do not obsolete inventory based historical experience, believe that significant upon a review of forecasted demand and changes will be made in forecasted short-term technological future estimates or demand in relation to obsolescence. assumptions we use to on-hand inventory, calculate these reserves. salability, general However, if our estimates market conditions, and are inaccurate or product life cycles. technological changes affect consumer demand we may be exposed to unforeseen gains or losses. A 10% difference in our inventory reserves at December 31, 2013 would affect our consolidated financial statements for the year then ended by approximately $0.4 million. Warranty Costs We provide for potential Our warranty reserve We have not made any warranty claims by methodology contains material changes to our recording a current uncertainties because it warranty reserve charge to income. We requires management to methodology for the years estimate potential claims make assumptions and to ended December 31, 2013, by examining current and apply judgment to 2012 and 2011. We do not historical returns, estimate the value of believe there is a current economic future product returns by reasonable likelihood conditions and customers. Our estimates that there will be a contractual terms to of the amount and timing material change in the provide for an amount of the reserves is based future estimates or which we believe will primarily on historical assumptions that would cover future warranty experience and specific have a material impact to obligations for products contractual arrangements. our consolidated sold. financial statements. Marketable Securities Available-for-sale The valuations include While we have not made securities are stated at numerous assumptions such any material changes to fair value, as determined as assessments of the our valuation methodology by quoted market prices underlying structure of for the years ended or independent valuation each security, expected December 31, 2013, 2012 models, which uses a cash flows, discount and 2011, capital market combination of two rates, credit ratings, expectations, liquidity calculations: (1) a workout periods and and rates have fluctuated discounted cash flow overall capital market in the periods. We do not model and (2) a market liquidity. Further, the believe there is a comparables method. We determination of whether reasonable likelihood review our investments on the impairment is that there will be a an ongoing basis for temporary or material change in the indications of possible other-than-temporary future estimates or impairment, and if an requires significant assumptions that would impairment is identified judgment regarding the have a material impact to and considered extent and timing of our consolidated other-than-temporary, it declines in value versus financial statements. is recorded as a charge its cost basis. to income. The primary factors we consider in classifying the timing of an impairment are the extent to which and period of time that the fair value of each investment has declined below its cost basis. Unrealized improvement gains in value subsequent to recording an impairment charge to income are reflected in other comprehensive income, whereas realized gains and losses are recorded through Other income (expense). The amortized cost of debt securities is adjusted for accretion of market discounts over the effective life of the debt securities and recorded through interest income. 24-------------------------------------------------------------------------------- Table of Contents Effect if Actual Results Description Judgments and Differ Uncertainties From Assumptions Stock-Based Compensation We have a stock-based Option-pricing models and We have not made any compensation plan which generally accepted material changes in the includes non-qualified valuation techniques accounting methodology we stock options, share require management to used to calculate awards, and an employee make assumptions and to stock-based compensation stock purchase plan. See apply judgment to for the years ended Note 9 of Item 8 for a determine the fair value December 31, 2013, 2012 discussion of our of our awards. These and 2011. We do not stock-based compensation assumptions and judgments believe that there is a programs. We determine include estimating the reasonable likelihood the fair value of future rates of there will be a material stock-based compensation volatility of our stock change in future for our non-qualified price, employee turnover estimates or assumptions stock options and and employee stock option used to determine employee stock purchase exercise behaviors. stock-based compensation plans at the date of Changes in these expense. grant using the Black assumptions can Scholes options-pricing materially affect the model. Our determination fair value estimate and of fair value of stock based compensation share-based payment recognized by the awards on the date of Company. grant contains assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the award, risk-free rate, the expected life and potential forfeitures of awards. Management periodically evaluates these assumptions and updates stock-based compensation expense accordingly. 25-------------------------------------------------------------------------------- Table of Contents Effect if Actual Results Description Judgments and Differ Uncertainties From Assumptions Valuation of Long-Lived Assets Our impairment loss We have not made any Long-lived assets is calculations contain material changes in the primarily comprised of uncertainties because accounting methodology we fixed assets. We they require management use to assess impairment regularly review these to make assumptions and loss for the years ended assets for indicators of to apply judgment to December 31, 2013, 2012 impairment and assess the estimate asset fair and 2011. As of December carrying value of the values, including 31, 2013, we evaluated assets against market estimating future cash fixed assets for values. When an flows, useful lives and impairment and with the impairment exists, we selecting an appropriate assistance of a third record an expense to the discount rate that party valuation extent that the carrying reflects the risk specialist, a valuation value exceeds fair market inherent in future cash analysis was performed. value. We assess the flows. The results of the impairment of long-lived valuation analysis assets whenever events or indicated that the assets changes in circumstances are fully-recoverable. indicate that their We do not believe there carrying value may not be is a reasonable recoverable. likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may record material losses. Income Taxes We account for income Management judgment is We have not made any taxes using the asset and required in developing material changes in the liability method, under our provision for income accounting methodology we which deferred tax assets taxes, including the used to measure our and liabilities are determination of deferred deferred tax asset recognized for the tax assets and valuation allowance for expected future tax liabilities and any the years ended December consequences of temporary valuation allowances that 31, 2013, 2012 and 2011. differences between tax might be required against We do not believe there and financial reporting. the deferred tax assets. is a reasonable Deferred tax assets and We maintain a full likelihood that there liabilities are measured valuation allowance on will be a material change using the currently our deferred tax assets. in the estimates or enacted tax rates that Accordingly, we have not assumptions we use to apply to taxable income recorded a benefit or record our valuation in effect for the years provision for income allowances for deferred in which those tax assets taxes. tax assets. However, if are expected to be actual results are not realized or settled. We consistent with our record a valuation estimates and assumptions allowance to reduce used in estimating future deferred tax assets to taxable income, we may the amount that is record material income believed more likely than tax benefits. not to be realized. 26-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table sets forth statements of operations data as a percentage of net sales for the periods indicated: 2013 2012 2011 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 93.8 101.1 79.6 Gross profit (loss) 6.2 % (1.1 %) 20.4 % Research and development expense 28.8 39.0 29.5 Selling and administrative expenses 17.7 21.5 23.0 Restructuring charges 1.4 2.1 0.7 Operating loss (41.7 %) (63.7 %) (32.8 %) Interest income 0.2 0.5 0.4 Interest expense (0.1 ) - - Other income, net 1.4 1.2 0.1 Net loss (40.2 %) (62.0 %) (32.3 %) 2013 COMPARED TO 2012 NET SALES. Net sales for the year ended December 31, 2013 increased 19.2% to $134.2 million, compared to net sales for the year ended December 31, 2012 of $112.6 million. The net sales increase primarily resulted from an increase in demand for WiFi products. Net sales for the year ended December 31, 2013 of the Company's cellular wireless products decreased 11.5% to $74.1 million compared to net sales for the year ended December 31, 2012 of $83.8 million. The decrease in sales was primarily due to decreased demand in our CDMA market. Net sales for the year ended December 31, 2013 of the Company's infrastructure products decreased 17.4% to $19.6 million compared to net sales for the year ended December 31, 2012 of $23.7 million. The decrease in sales was primarily due to decreased demand for CATV applications. Net sales for the year ended December 31, 2013 of the Company's WiFi products increased 687.5% to $40.5 million compared to net sales for the year ended December 31, 2012 of $5.1 million. The increase in sales was primarily due to increased market demand for our front-end modules in cellular handset and tablet applications. GROSS MARGIN. Gross margin for 2013 increased to 6.2% of net sales, compared with (1.1%) of net sales in the prior year. The increase in gross margin was primarily due to increased revenues and fixed production costs decreasing as a percent of revenue. RESEARCH & DEVELOPMENT. Company-sponsored Research and development (R&D) expenses decreased 12.1% during 2013 to $38.6 million from $43.9 million during 2012. The decrease was primarily due to improved cost efficiency on our projects and cost savings achieved from restructuring. SELLING AND ADMINISTRATIVE. Selling and administrative expenses decreased 2.0% during 2013 to $23.8 million from $24.3 million in 2012. The decrease was primarily due to primarily due to savings achieved from our cost reduction and restructuring actions, partly offset by increased sales expense for WiFi. 27 -------------------------------------------------------------------------------- Table of Contents RESTRUCTURING CHARGES. In the first quarter of 2013, we implemented workforce reductions that eliminated approximately 25 positions throughout the Company, resulting in restructuring charges of approximately $1.9 million for severance, related benefits and other costs. During 2012, we implemented workforce reductions that eliminated approximately 40 positions throughout the Company, resulting in restructuring charges of $2.3 million for severance, related benefits and other costs. OTHER INCOME, NET. During 2013, Other income of $1.9 million was primarily from redemptions received on three of our ARS which were in excess of our amortized cost basis. During 2012, Other income of $1.4 million was primarily from redemption proceeds received on one of our auction rate securities (ARS) which was in excess of our amortized cost basis. 2012 COMPARED TO 2011 NET SALES. Net sales for the year ended December 31, 2012 decreased 26.3% to $112.6 million, compared to net sales for the year ended December 31, 2011 of $152.8 million. The net sales decrease primarily resulted from a decrease in market demand for WCDMA cellular device markets. Net sales for the year ended December 31, 2012 of the Company's cellular wireless products decreased 29.9% to $83.8 million compared to net sales for the year ended December 31, 2011 of $119.5 million. The decrease in sales was primarily the result of decreased demand in our WCDMA cellular device markets primarily due to decreased demand from our former largest customer due to certain products reaching end of life and their change in chipset providers that do not utilize our power amplifiers. Net sales for the year ended December 31, 2012 of the Company's infrastructure products decreased 15.9% to $23.7 million compared to net sales for the year ended December 31, 2011 of $28.2 million. The decrease in sales was primarily due to decreased demand for tuner and splitter products in cable set-top box applications. Net sales for the year ended December 31, 2012 of the Company's WiFi products remained flat at $5.1 million compared to net sales for the year ended December 31, 2011. GROSS MARGIN. Gross margin for 2012 decreased to (1.1%) of net sales, compared with 20.4% of net sales in the prior year. The decrease in gross margin was primarily due to lower production and sales volume and a concentration of fixed costs as a percent of smaller revenues. Fixed production costs include, but are not limited to depreciation, maintenance and operations' support functions. RESEARCH & DEVELOPMENT. Company-sponsored Research and development (R&D) expenses decreased 2.5% during 2012 to $43.9 million from $45.0 million during 2011. The decrease was primarily due to a management separation charge of $0.8 million included in the first quarter of 2011. SELLING AND ADMINISTRATIVE. Selling and administrative expenses decreased 30.9% during 2012 to $24.3 million from $35.1 million in 2011. The decrease was primarily due to cost savings from staff reductions from restructurings and the elimination of management separation charges recorded in the first and fourth quarters of 2011 which total $6.4 million. RESTRUCTURING CHARGES. During 2012, we implemented workforce reductions that eliminated approximately 40 positions throughout the Company, resulting in restructuring charges of $2.3 million for severance, related benefits and other costs. During the second quarter of 2011, we implemented workforce reductions, which eliminated approximately 40 positions throughout the Company, resulting in a restructuring charge of $1.0 million for severance and related benefits. OTHER INCOME, NET. During 2012, Other income of $1.4 million was primarily from redemption proceeds received on one of our auction rate securities (ARS) which was in excess of our amortized cost basis. LIQUIDITY AND SOURCES OF CAPITAL At December 31, 2013, we had $21.0 million of cash and cash equivalents and $3.4 million in marketable securities. 28 -------------------------------------------------------------------------------- Table of Contents Operations used $42.0 million in cash during 2013, primarily as a result of our operating results adjusted for non-cash expenses, including $7.2 million of cash used for working capital. Investing activities provided $18.0 million of cash during 2013, consisting of net sales of marketable securities of $24.4 million, which were partly offset by purchases of fixed assets of $6.4 million. Financing activities provided $20.0 million of cash during 2013, primarily from net proceeds received from the issuance of stock in the 2013 Offering. At December 31, 2013, the Company had unconditional purchase obligations of approximately $2.1 million. We believe that our existing sources of capital, including our existing cash, cash equivalents and marketable securities, will be adequate to satisfy operational needs and anticipated capital needs for at least the next twelve months. We may elect to finance all or part of our future capital requirements through additional equity or debt financing. There can be no assurance that such additional financing would be available on satisfactory terms. See "Risk Factors-We face a risk that capital needed for our business will not be available when we need it." The table below summarizes required cash payments as of December 31, 2013: CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD (in thousands) Less than 1 Total year 1 - 3 years 4 - 5 years After 5 years Operating leases 8,173 2,783 5,038 341 11 Unconditional purchase obligations 2,073 2,073 - - - Total contractual cash obligations $ 10,246 $ 4,856 $ 5,038 $ 341 $ 11 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS Changes to accounting principles generally accepted in the United States of America ("U.S. GAAP") are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates to the FASB's Accounting Standards Codification. In February 2013, the FASB amended its disclosure requirements for those amounts reclassified out of accumulated other comprehensive income. Entities are required to separately disclose each component of other comprehensive income, current period reclassifications out of accumulated other comprehensive income, and other amounts of current-period other comprehensive income. Additional information is required about the effects on net income of significant amounts reclassified out of each component of accumulated other comprehensive income. These additional disclosure requirements are required for reporting periods beginning after December 31, 2012. Adoption of this guidance during the first quarter of 2013 resulted in us making the required disclosures in the Notes to our consolidated financial statements. In December 2011, the FASB and International Accounting Standards Board ("IASB") issued joint requirements related to balance sheet disclosures related to offsetting assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards ("IFRS"). Disclosures are required to be retrospective for all comparative periods presented. Adoption of this standard was required in the first quarter of 2013 and did not have a material impact on our consolidated financial statements. OFF-BALANCE SHEET ARRANGEMENTS None. 29 -------------------------------------------------------------------------------- Table of Contents |