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TRIQUINT SEMICONDUCTOR INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Introduction You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and the related notes thereto included in this Report on Form 10-Q and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The discussion in this Report contains forward-looking statements, including statements regarding our beliefs and expectations regarding the pending litigation related to the proposed business combination with RF Micro Devices, Inc., our belief that investments in premium filters, wafer level packaging and copper flip, will drive solutions for our customers, our expectations regarding defense & aerospace programs, our expectations regarding the factors we believe will drive growth in our 4G/LTE end market, our expectations about reinvestment of foreign earnings, settlement of long-term income tax liability, deferred income taxes and unrecognized tax benefits, our beliefs regarding anticipated customer needs, our expectations regarding the sufficiency of our sources of liquidity, our expectations regarding the proposed business combination transaction with RF Micro Devices, Inc., and other statements preceded by terminology such as "believes," "continue," "could," "estimates," "expects," "goal," "hope," "intends," "may," "our future success depends," "plans," "potential," "predicts," "projects," "reasonably," "should," "thinks," "will" or the negative of these terms or other comparable terminology. These statements are only predictions. A number of factors affect our operating results and could cause our actual future results to differ materially from any forward-looking statements made below, including those related to demand and growth in the wireless mobile devices, networks and defense & aerospace markets and our ability to take advantage of that growth; the ability to diversify our customer base; our ability to achieve scale through targeted growth and continue to offer a diversified product portfolio to customers in our primary end markets; transitions in the mobile devices market including concentration of revenue in the handset market, continued growth of smartphones, shifts in end market demand to top smartphone suppliers, and growth in data traffic outpacing the capability of the existing infrastructure worldwide; strong growth in demand for our optical products; our ability to achieve positive operating results; transactions affecting liquidity and our ability to satisfy our projected expenditures through the next twelve months; factory utilization levels; the receipt of required regulatory approvals related to the proposed business combination with RF Micro Devices, Inc., and the completion of the proposed transaction; and other factors and risks referenced in this Report on Form 10-Q and in Item 1A of Part II of the Company's Annual Report on Form 10-K for the year ended December 31, 2013 entitled "Risk Factors." In addition, historical information should not be considered an indicator of future performance. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not guarantee future results, levels of activity, performance or achievements. Moreover, we do not intend to update any of the forward-looking statements after the date of this Report on Form 10-Q to conform these statements to actual results. These forward-looking statements are made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995. Overview TriQuint Semiconductor, Inc. provides a comprehensive portfolio of advanced, high-performance radio frequency ("RF") solutions. We are a high-volume supplier of both active and passive technologies. We design, develop and manufacture high-performance power amplifier, switch and filter modules in-house and provide them to the broad market, uniquely integrating many of the world's most advanced RF solutions to deliver solid customer value. We have built core competencies in gallium arsenide ("GaAs"), gallium nitride ("GaN"), surface acoustic wave ("SAW") and bulk acoustic wave ("BAW") technologies. We reach further, with solutions that boost performance and extend range while reducing size and bill of materials. We reach faster, utilizing our broad technology portfolio to simplify complex RF challenges and allow our customers better time to market. We serve customers worldwide in three primary end markets: mobile devices, networks, and defense & aerospace. Our mission is to deliver RF solutions that improve performance and lower the overall cost of our customers' applications. Our strategies to achieve this mission are to drive innovation and integration, ensure we serve a complementary and diverse set of markets, achieve scale through targeted growth and continue to offer a diversified product portfolio to customers in our primary end markets. In the mobile devices end market, we provide high performance devices such as integrated modules, SAW and BAW filter components, duplexers, 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. 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 costs 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 content 14-------------------------------------------------------------------------------- Table of Contents expansion in smartphones, demand increased for our products. In response, we increased capital expenditures in order to add capacity to our factories. We have utilized this increased capacity to fulfill customer demand for our high value premium filter products, which has positively impacted our operating results. Highlights for the Nine Months Ended September 27, 2014 Revenue increased 9% for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. 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 the nine months ended September 27, 2014 increased 7% compared to the nine months ended September 28, 2013. The increase was primarily due to an increase in sales of premium filters, including our 4G and long-term evolution ("LTE") products. We believe our investments in premium filters, wafer level packaging and copper flip, will continue to drive solutions to our customers' problems with crowded spectrum and constrained board space as LTE demand increases. Revenue from sales of our products in the networks end market increased 24% for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. This increase was attributed to sales of our base station and transport products in support of the time division LTE ("TD-LTE") build out in China, partially offset by decreased revenue from the sales of our multi-market products. Growth in data traffic, in the form of streaming video, location services, machine to machine communications and social networking, continues to drive infrastructure changes worldwide. TriQuint products support the continuing evolution of new frequency spectrum allocations, relieve the issues caused by spectrum interference and enable higher throughput networks. Revenue from sales of our products in the defense & aerospace end market decreased 8% for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013 due to program timing, which can result in swings from quarter to quarter. With the current uncertainty over federal defense budgets, we are seeing some delays in spending from our customers. Overall, however, we are in a strong position on the programs we support, such as the Joint Strike Fighter, TPQ-53 and radar upgrade programs targeting the large domestic and international fleets of F-16 and F/A18 fighter aircraft, but budget uncertainty limits our timing visibility. We continue to accelerate the release of new products to support this market. Plan of Merger and Reorganization On February 22, 2014, TriQuint and RF Micro Devices, Inc. ("RFMD") entered into an Agreement and Plan of Merger and Reorganization pursuant to which TriQuint and RFMD agreed, on the terms and subject to the conditions of the merger agreement, to effect a strategic combination of their respective businesses through a "merger of equals" business combination transaction. At the closing of the transaction, TriQuint and RFMD will each become a wholly owned subsidiary of a newly formed holding company, Qorvo, Inc., formerly names Rocky Holding, Inc. ("Qorvo"). Qorvo has applied to list its common stock on the NASDAQ Global Select Market, subject to official notice of issuance. Current RFMD Chief Executive Officer Robert A. Bruggeworth will serve as President and Chief Executive Officer of Qorvo and current TriQuint Chief Executive Officer Ralph G. Quinsey will serve as the non-executive Chairman of the Board of Directors. The combined company's board will consist of ten directors, with five directors from the existing boards of each company, and eight of the ten directors will be independent. On July 15, 2014, TriQuint and RFMD amended the merger agreement in order to revise certain equity compensation plan provisions and to reflect the requirement that TriQuint stockholders separately approve the absence of a majority voting provision from Qorvo's certificate of incorporation, including making the completion of the business combination contingent upon the approval of such stockholder proposal. The amended merger agreement was separately adopted by stockholders of TriQuint and RFMD on September 8, 2014. Pursuant to the terms of the merger agreement, and upon completion of the mergers, TriQuint stockholders will receive 0.4187 of a share of common stock of the new holding company for each share of TriQuint common stock, and RFMD shareholders will receive 0.2500 of a share of common stock of the new holding company for each share of RFMD common stock. We anticipate that TriQuint stockholders and RFMD shareholders will each hold approximately 50% of the shares of common stock of the new holding company issued and outstanding immediately after completion of the mergers, which we expect to occur by year end. 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 15-------------------------------------------------------------------------------- Table of Contents 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. The 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; precious metals reclaim, which affects cost of goods sold; and stock-based compensation, which affects cost of goods sold and operating expenses. We also have other policies that we consider to be key accounting policies, such as the valuation of accounts receivable and 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. For further discussion of our critical accounting policies and estimates, see Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates contained in our Annual Report on Form 10-K for the year ended December 31, 2013. Results of Operations The following table sets forth the results of our operations expressed as a percentage of revenue for the three and nine months ended September 27, 2014 and September 28, 2013: Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold 54.5 63.2 59.5 70.0 Gross profit 45.5 36.8 40.5 30.0 Operating expenses: Research, development and engineering 18.3 18.7 21.7 22.4 Selling, general and administrative 14.0 10.6 15.4 12.7 Total operating expenses 32.3 29.3 37.1 35.1 Income (loss) from operations 13.2 7.5 3.4 (5.1 ) Other (expense) income: Interest income 0.0 0.0 0.0 0.0 Interest expense (0.3 ) (0.5 ) (0.4 ) (0.6 ) Other, net 0.1 0.0 0.0 0.0 Total other expense, net (0.2 ) (0.5 ) (0.4 ) (0.6 ) Income (loss) before income tax 13.0 7.0 3.0 (5.7 ) Income tax expense (benefit) 3.4 1.6 1.2 (1.0 ) Net Income (loss) 9.6 % 5.4 % 1.8 % (4.7 )% Three Months Ended September 27, 2014 and September 28, 2013 Revenue from Operations Revenue increased $21.3 million, or 8%, for the three months ended September 27, 2014 compared to the three months ended September 28, 2013. 16-------------------------------------------------------------------------------- Table of Contents Revenue by end market for the three months ended September 27, 2014 and September 28, 2013, was as follows: Three Months Ended September 27, September 28, (in millions) 2014 2013 Mobile Devices $ 185.2 $ 180.8 Networks 58.5 40.4 Defense & Aerospace 28.4 29.6 Total $ 272.1 $ 250.8 Mobile Devices Revenue from the sales of our products in the mobile devices end market increased approximately 2% for the three months ended September 27, 2014 compared to the three months ended September 28, 2013 primarily as a result of increased revenue from sales of our 4G/LTE products, which includes premium filters, partially offset by decreased revenue from our 3G/2G and wireless local area networks ("WLAN") products. We expect the combination of crowded spectrum, carrier aggregation, and expanding LTE adoption will continue to drive growth in our 4G/LTE end market. Revenue from the sales of our products in the three primary submarkets of the mobile devices end market was as follows: Three Months Ended September 27, September 28, (in millions) 2014 2013 4G/LTE $ 132.0 $ 88.4 3G/2G 36.7 68.6 WLAN 16.5 23.8 Total $ 185.2 $ 180.8 Networks Revenue from the sales of our products in the networks end market increased approximately 45% for the three months ended September 27, 2014 compared to the three months ended September 28, 2013. The increase was primarily due to increased sales of our base station and transport products in support of the time division LTE ("TD-LTE") build out in China, while sales from our multi-market products remained relatively flat. Revenue from the sales of our products in the three primary submarkets of the networks end market was as follows: Three Months Ended September 27, September 28, (in millions) 2014 2013 Base Station $ 25.6 $ 16.7 Transport 25.4 16.1 Multi-market 7.5 7.6 Total $ 58.5 $ 40.4 Defense & Aerospace Revenue from the sales of our products in the defense & aerospace end market decreased approximately 4% for the three months ended September 27, 2014 compared to the three months ended September 28, 2013, primarily as a result of the timing of programs. Significant Customers For the three months ended September 27, 2014 and September 28, 2013, sales to Foxconn Technology Group accounted for 30% and 35% of our revenue, respectively. For the three months ended September 28, 2013, sales to Protek (Shanghai) Limited accounted for 13% of our revenue. Our customers' product life cycles typically are short because they continually develop new products. The selection process for our products to be included in our customers' new products is highly competitive. While we strive to maintain a strong relationship with our customers, there are no guarantees that our products will be included in the next generation of products introduced by Foxconn Technology Group, Protek (Shanghai) Limited, or our other customers. Any significant loss of, or a significant reduction in purchases by, these or other significant customers, could have an adverse effect on our financial condition and results of operations. 17-------------------------------------------------------------------------------- Table of Contents 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. Gross Profit Our gross profit as a percentage of revenue increased to 45.5% for the three months ended September 27, 2014, from 36.8% for the three months ended September 28, 2013. The increase in gross profit was primarily the result of growth in our premium filter business, higher revenues, improved yields and cost reduction efforts. Operating expenses Research, development and engineering Our research, development and engineering expenses for the three months ended September 27, 2014 increased $2.8 million, or 6%, compared to the three months ended September 28, 2013. The increase was primarily the result of increased spending on material to develop new products and was below the rate of revenue growth. Selling, general and administrative Selling, general and administrative expenses for the three months ended September 27, 2014 increased $11.6 million, or 44%, compared to the three months ended September 28, 2013. The increase was primarily the result of higher professional fees associated with the proposed merger with RFMD, and higher compensation related costs. Other expense, net Other expense, net for the three months ended September 27, 2014 compared to the three months ended September 28, 2013 decreased $0.6 million, or 53%, primarily due to the non-routine sale of a website domain. Income tax expense We recorded an income tax expense of $9.2 million and $4.1 million for the three months ended September 27, 2014 and September 28, 2013, respectively. The income tax expense for the three months ended September 27, 2014 was primarily the result of our pre-tax earnings and the recognition of the tax impact of discrete events occurring during the quarter. The income tax expense for the three months ended September 28, 2013 was primarily associated with U.S. federal and state income taxes due to the mix of profits and losses between jurisdictions. Nine Months Ended September 27, 2014 and September 28, 2013 Revenue from Operations Revenue increased $55.4 million, or 9%, for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. Revenue by end market for the nine months ended September 27, 2014 and September 28, 2013, was as follows: Nine Months Ended September 27, September 28, (in millions) 2014 2013 Mobile Devices $ 433.0 $ 404.2 Networks 170.3 137.2 Defense & Aerospace 77.2 83.7 Total $ 680.5 $ 625.1 Mobile Devices Revenue from the sales of our products in the mobile devices end market increased approximately 7% for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013 primarily as a result of increased revenue from sales of our 4G/LTE products, which includes premium filters, partially offset by decreased revenue from our 3G/2G and WLAN products. Revenue from the sales of our products in the three primary submarkets of the mobile devices end market was as follows: 18-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 27, September 28, (in millions) 2014 2013 4G/LTE $ 283.9 $ 96.8 3G/2G 110.0 233.5 WLAN 39.1 73.9 Total $ 433.0 $ 404.2 Networks Revenue from the sales of our products in the networks end market increased approximately 24% for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. The increase was primarily due to increased sales of our base station and transport products in support of the time division LTE ("TD-LTE") build out in China, partially offset by decreased revenue from the sales of our multi market products. Revenue from the sales of our products in the three primary submarkets of the networks end market was as follows: Nine Months Ended September 27, September 28, (in millions) 2014 2013 Base Station $ 76.9 $ 49.8 Transport 72.0 62.8 Multi-market 21.4 24.6 Total $ 170.3 $ 137.2 Defense & Aerospace Revenue from the sales of our products in the defense & aerospace end market decreased approximately 8% for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013, primarily due to the timing of programs. Significant Customers For the nine months ended September 27, 2014 and September 28, 2013, sales to Foxconn Technology Group accounted for 27% and 28% of our revenue, respectively. Gross Profit Our gross profit as a percentage of revenue increased to 40.5% for the nine months ended September 27, 2014, from 30.0% for the nine months ended September 28, 2013. The increase in gross profit was primarily the result of better product mix, higher revenues, efficient factory management and cost reduction efforts. Operating expenses Research, development and engineering Our research, development and engineering expenses for the nine months ended September 27, 2014 increased $7.5 million, or 5%, compared to the nine months ended September 28, 2013. The increase was primarily the result of higher payroll taxes attributed to an increase in stock option exercises, increased spending on material to develop new products and severance costs associated with our restructuring plans. Selling, general and administrative Selling, general and administrative expenses for the nine months ended September 27, 2014 increased $24.9 million, or 31%, compared to the nine months ended September 28, 2013. The increase was primarily the result of higher professional fees associated with the proposed merger with RFMD, and higher compensation related costs. Other expense, net Other expense, net for the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013 decreased $0.5 million, or 17%, primarily due to the non-routine sale of a website domain. 19-------------------------------------------------------------------------------- Table of Contents Income tax expense (benefit) We recorded an income tax expense (benefit) of $8.3 million and $(6.1) million for the nine months ended September 27, 2014 and September 28, 2013, respectively. The income tax expense for the nine months ended September 27, 2014 was primarily the result of our pre-tax earnings and the recognition of the tax impact of discrete events. The income tax benefit for the nine months ended September 28, 2013 was primarily the result of our pre-tax loss and the recognition of U.S. federal tax credits. Liquidity and Capital Resources Liquidity As of September 27, 2014, our cash, cash equivalents and short-term marketable securities increased $168.9 million, or 214%, from December 31, 2013, primarily as a result of : • proceeds from the subscription/issuance of common stock of $104.8 million primarily attributed to stock options exercised by employees, • changes in working capital balances, other than cash, cash equivalents and short-term marketable securities, of $31.9 million, and • net income of $12.3 million, partially offset by • capital expenditures of $97.1 million, which outpaced depreciation of $74.2 million for the nine months ended September 27, 2014, and excludes the timing effect of capital expenditure payments in prepaid expenses and accounts payable of $12.3 million. Sources of Liquidity Our current cash, cash equivalents and short-term investments balances, together with cash anticipated to be generated from operations, 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 those of liquidating foreign entities and existing earnings that have been previously taxed. As of September 27, 2014, cash and short-term investments held by our foreign entities amounted to $41.5 million. Management intends to utilize this balance to satisfy intercompany trade activity between our foreign entities and the U.S. company, which is entered into through the normal course of business, and not subject to additional U.S. income taxes or foreign withholding taxes. At this time, we believe our domestic funds, together with cash anticipated to be generated from operations, 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 expenditure requirements in excess of our expectations. As of September 27, 2014, we had approximately $2.3 million of net unrecognized tax benefits, which are included in Long-term income tax liability on 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. Off Balance Sheet Arrangements As of September 27, 2014, we did not have any off balance sheet arrangements, as defined in Regulation S-K Item 303(a)(4), except for operating leases for various facilities. We did not have any relationships with unconsolidated entities or financial partnerships such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. |