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ANADIGICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) OVERVIEW The terms "we," "our," "ours," "us" and "Company" refer to ANADIGICS, Inc. We are a global leader in the design and manufacture of radio frequency semiconductor solutions for Infrastructure and Mobile applications. Infrastructure is comprised of products for the following applications: CATV, small cell, WiFi, M2M, optical and other general RF applications. Mobile is comprised of WiFi and Cellular products that primarily address the smartphone, handset and tablet markets. Our CATV line amplifiers, reverse amplifiers, and edgeQAM amplifiers provide the critical link in CATV network infrastructure devices, as well as set-top boxes and cable modems. Our small-cell power amplifiers enable 3G and 4G connectivity in picocells, enterprise-class femtocells, and high-performance customer premises equipment (CPE). Our WiFi power amplifiers and FEICs are optimized for the latest standards, including 802.11n and 802.11ac, enabling wireless LAN connectivity for infrastructure, multimedia and mobile devices, such as modems, routers, access points, set-top boxes, televisions, gaming consoles, smartphones, tablets, and notebooks. Our cellular power amplifiers enable handsets, smartphones, tablets, and datacards, as well as M2M, automotive and industrial devices to access 3G and 4G wireless networks. We believe that our solutions are well positioned to address these market dynamics and will enable us to deliver value in the CATV infrastructure, small cell, WiFi, and cellular communications 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. We are focused on the design and manufacture of differentiated RF semiconductors. Many of our products leverage proven MESFET, high-performance GaN, and patented InGaP-Plus™ technologies. Our MESFET process technology ensures outstanding performance and superior reliability to minimize field failures and extend service life. GaN technology enables exceptional performance, especially for output stages that require high power and linearity. InGaP-Plus technology allows unique architectures that combine HBT amplifying structures and pHEMT RF switches on the same die. We believe that our products cost-effectively enhance RF reliability, performance, 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 foundry agreements that expand our wafer fabrication capability. We executed certain staff reductions earlier in the year and in June 2014, we announced a strategic restructuring plan to better address growth opportunities in infrastructure markets and to lower our operating costs. The plan included expanding our presence in the infrastructure space and reducing the fixed costs associated with certain legacy mobile activities through a resizing of our staff and manufacturing capability. The restructuring plan and other related actions are anticipated to be complete by the end of 2014. In connection with our restructuring plans, workforce reductions eliminated approximately 150 positions throughout the Company, or approximately 30% of our workforce. The workforce reductions, along with other cost reduction actions, will result in achieving annualized savings of approximately $25 million. During the second quarter of 2014, the Company reviewed and identified certain surplus manufacturing fixed assets and recorded a restructuring charge of $3.7 million to write down certain assets to their current market value based on expected cash proceeds for the sale of these fixed assets. During the third quarter of 2014, the Company recorded approximate proceeds on the sale of certain Assets held for sale of $1.8 million and offset the related $1.6 million net gain against Restructuring. As of September 27, 2014, net fixed assets in the amount of $3.2 million are classified as Assets held for sale within Current assets on the Condensed consolidated balance sheets. We believe our markets, particularly in the Mobile business, are, and will continue to remain, competitive which could result in quarterly volatility in our net sales, average selling prices, and market share. 15-------------------------------------------------------------------------------- Table Of Contents We were incorporated in Delaware in 1984. Our corporate headquarters are located at 141 Mt. Bethel Road, Warren, New Jersey 07059, and our telephone number at that address is 908-668-5000. Results of Operations The following table sets forth unaudited consolidated statements of operations data as a percent of net sales for the periods presented: Three months ended Nine months ended September 27, September September 27, September 2014 28, 2013 2014 28, 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 85.0 % 88.9 % 91.2 % 96.2 % Gross margin 15.0 % 11.1 % 8.8 % 3.8 % Research and development expenses 29.7 % 25.8 % 32.8 % 29.9 % Selling and administrative expenses 20.1 % 15.6 % 20.6 % 18.6 % Restructuring charges 0.5 % - 9.1 % 2.0 % Operating loss (35.3 )% (30.3 )% (53.7 )% (46.7 )% Interest income - 0.1 % - 0.2 % Interest expense (0.4 )% (0.1 )% (0.2 )% (0.1 )% Other income, net 0.4 % - 2.8 % 1.6 % Net loss (35.3 )% (30.3 )% (51.1 )% (45.0 )% Net Sales. Net sales decreased 49.0% during the third quarter of 2014 to $18.9 million from $37.0 million in the third quarter of 2013. For the nine months ended September 27, 2014, net sales were $65.4 million, a 33.2% decrease from net sales of $98.0 million for the nine months ended September 28, 2013. The net sales decreases primarily resulted from a decrease in market demand for our Mobile products, slightly offset by increased Infrastructure product sales. Sales of Infrastructure products increased 18.1% during the third quarter of 2014 to $10.0 million from $8.5 million in the third quarter of 2013. For the nine months ended September 27, 2014, net sales of Infrastructure products increased 18.0% to $29.4 million from $25.0 million for the nine months ended September 28, 2013. The increases in sales were primarily due to increased demand in CATV and small cell infrastructure markets. Sales of Mobile products decreased 69.0% during the third quarter of 2014 to $8.9 million from $28.5 million in the third quarter of 2013. For the nine months ended September 27, 2014, net sales of Mobile products decreased 50.7% to $36.0 million from $73.0 million for the nine months ended September 28, 2013. The decreases in sales were primarily due to decreased demand for our cellular and WiFi mobile products. Gross Margin. Gross margin during the third quarter of 2014 increased to 15.0% of net sales from 11.1% of net sales in the third quarter of 2013. For the nine months ended September 27, 2014, gross margin improved to 8.8% of net sales from 3.8% of net sales for the nine months ended September 28, 2013. The nine months ended September 27, 2014 included a non-recurring period charge of $2.1 million for excess inventory write-downs on Mobile products. The nine months ended September 28, 2013 included non-recurring period charges totaling $1.9 million relating to customer cost reimbursement, power interruption costs, and production ramp costs incurred in the first half of 2013. After allowing for the aforementioned non-recurring charges, increases in gross margin during 2014 were primarily due to an increase in Infrastructure product mix and manufacturing cost improvements achieved from restructuring. Research and Development. Company-sponsored research and development expenses decreased 41.4% to $5.6 million during the third quarter of 2014 from $9.6 million during the third quarter of 2013. Company sponsored research and development expenses for the nine months ended September 27, 2014 decreased 26.7% to $21.4 million from $29.3 million during the nine months ended September 28, 2013. The decreases were primarily due to cost savings achieved from restructuring and improved spending focus on our key projects. Selling and Administrative. Selling and administrative expenses decreased 34.4% to $3.8 million during the third quarter of 2014 from $5.8 million during the third quarter of 2013. Selling and administrative expenses for the nine months ended September 27, 2014 decreased 26.2% to $13.5 million from $18.2 million during the nine months ended September 28, 2013. The decreases were primarily due to savings achieved from restructuring and ongoing cost reduction actions. 16-------------------------------------------------------------------------------- Table Of Contents RESTRUCTURING CHARGES. During the three and nine months ended September 27, 2014, we implemented workforce reductions that eliminated approximately 50 and 150 positions, respectively, throughout the Company, and recorded restructuring charges of $1.7 million and $3.8 million, respectively, for severance, related benefits and other costs. Restructuring charges also included a $3.7 million fixed assets restructuring charge recorded in the second quarter of 2014 to write down certain surplus manufacturing assets to their current market value based on expected cash proceeds for the sale of these fixed assets. During the third quarter of 2014, the Company recorded approximate proceeds on the sale of certain Assets held for sale of $1.8 million and offset their related $1.6 million net gain against Restructuring charges. During the nine months ended September 28, 2013, we implemented a workforce reduction that eliminated approximately 25 positions throughout the Company which resulted in recording a restructuring charge of $1.9 million for severance, related benefits and other costs. OTHER INCOME, NET. Other income for the nine months ended September 27, 2014 included a gain of $1.8 million, primarily from redemption proceeds received on two of our auction rate securities (ARS) which were in excess of our amortized cost basis. For the nine months ended September 28, 2013, other income of $1.6 million was primarily from redemptions received on two of our ARS which were in excess of our amortized cost basis. Liquidity and Capital Resources As of September 27, 2014, we had $13.5 million in cash and cash equivalents, of which $4.0 million was drawn from our revolving line of credit. Operating activities used $16.1 million in cash during the nine month period ended September 27, 2014, primarily as a result of our operating results adjusted for non-cash expenses. Investing activities provided $4.6 million of cash during the nine month period ended September 27, 2014 consisting principally of $3.5 million net sales of marketable securities and $1.9 million proceeds received from the sale of certain fixed assets, partly offset by purchases of fixed assets of $0.8 million. Financing activities provided $4.0 million from drawings on our working capital credit line. We had unconditional purchase obligations at September 27, 2014 of approximately $3.5 million. We believe that our existing sources of capital, including our existing cash, 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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS Changes to accounting principles generally accepted in the United States of America are established by the Financial Accounting Standards Board (FASB) in the form of Accounting Standards Updates (ASU) to the FASB's Accounting Standards Codification. In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which requires an entity to evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. The guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter, with early adoption permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements. In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The guidance states that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. The guidance is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted. We are in the process of evaluating the impact of this guidance on our consolidated financial statements. 17-------------------------------------------------------------------------------- Table Of Contents In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will replace most current revenue recognition guidance. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. It also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The guidance is effective for annual and interim periods beginning after December 15, 2016, with early adoption prohibited. We are in the process of evaluating the impact of this guidance on our consolidated financial statements. In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results. The revised guidance is effective prospectively for fiscal and interim periods beginning on or after December 15, 2014. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements. FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains projections and other forward-looking statements (as that term is defined in the Securities Exchange Act of 1934, as amended). These projections and forward-looking statements reflect the Company's current views with respect to future events and financial performance and can generally be identified as such because the context of the statement will include words such as "believe", "anticipate", "expect", or words of similar import. Similarly, statements that describe our future plans, objectives, estimates or goals are forward-looking statements. No assurances can be given, however, that these events will occur or that these projections will be achieved, and actual results and developments could differ materially from those projected as a result of certain factors. Such factors include, but are not limited to, those risk factors listed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and the risk factor set forth in this quarterly report on Form 10-Q. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. |