Summary of HITTITE MICROWAVE CORP

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Our discussion and analysis of financial condition and results of operations contains "forward-looking" statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we "expect," "estimate," "believe," "are planning" or "plan to" are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are several important factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements. Such factors include those described below and in "Risk Factors." Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make, except as required by law.

Overview

We were organized as a Massachusetts corporation in 1985 and reincorporated under the laws of Delaware in 1988. Since our founding, we have established a 28-year track record of innovation in RF, microwave and millimeterwave semiconductor technology. From 1985 to 1993, our principal activity was government-sponsored research and development relating to advanced, application-specific radio frequency integrated circuits, or RFICs, and monolithic microwave integrated circuits, or MMICs, primarily for military and other government-related programs. During this period, we developed many innovative technologies that we continue to incorporate in our products today.

In 1993, we began to transition our focus from government-sponsored research and development activities to the design, development and production of our own ICs, modules, subsystems and instrumentation. Our early products were custom MMICs designed for use in specific defense programs, such as radar applications. In 1996, we published our first catalog, which contained 50 standard products, and began to expand our operations to support our growing commercial business. We also established a dedicated direct technical sales force to promote our emerging standard product line.

In 2001, we opened our first international sales office, and began to focus on expanding our international business. We currently have sales and technical support staff in Canada, China, Egypt, Finland, Germany, India, Ireland, Japan, Korea, Norway, Sweden, Taiwan, Turkey and the United Kingdom, to complement our United States offices. In 2012, we derived 52.9% of our revenue from customers outside the United States.

In 2005, we completed our initial public offering of common stock. We also established our first remote design center in Istanbul, Turkey and acquired substantially all the assets and employees of Q-Dot, Inc., a research and development organization based in Colorado Springs, Colorado. In 2006, we opened a design center in Ottawa, Ontario, Canada.

In October 2007, we entered into a strategic agreement with Northrop Grumman Space Technology sector to market a specified list of existing Velocium products worldwide, to license related technology and to assume the associated customer relationships, at a cost of $7.1 million. In June 2010, we entered into an agreement to license certain millimeterwave technology from IBM at a cost of $6.6 million.

In January 2011, we acquired Arctic Silicon Devices, a developer of advanced mixed-signal IC technology, located in Trondheim, Norway, for approximately $10.4 million in cash. In September 2011, we opened design centers in Cairo, Egypt and Roanoke, Virginia. In 2012, we established our international operations center in Cork, Ireland.

As of December 31, 2012, we offer more than 1,000 standard products in our catalog and many more custom products, which may be categorized for descriptive purposes into 36 functional product lines.

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We employ a fabless business strategy, which means that we do not own a semiconductor fabrication facility, or fab, and purchase all of our semiconductor wafer requirements from third-party wafer fabrication facilities, known as foundries. We believe that our fabless business model enables us to access a broad range of technologies and quickly respond to new market opportunities, while significantly reducing our capital requirements.

2012 Management Summary

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º Our revenue was essentially flat in 2012, increasing 0.1% to $264.4 million compared to $264.1 million in 2011.

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º Our gross profit was 73.7% of revenue in 2012 compared to 73.5% of revenue in 2011.

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º Operating income declined to $107.2 million in 2012 compared to $121.1 million in 2011, primarily due to increased research and development expenses.

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º Our net income per diluted share was $2.22 for 2012 compared to a net income per diluted share of $2.77 for 2011.

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º We generated positive cash flow from operations of $68.1 million for 2012 compared to $81.0 million for 2011, primarily due to decreased profitability as a result of increased operating expenses.

Description of Our Revenue, Costs and Expenses

Revenue. Our revenue is derived primarily from the sale of standard and custom products. We develop standard products from our own specifications, which we sell through our direct sales organization, our network of independent sales representatives, two distributors and our website. We also develop custom products to meet the specialized requirements of individual customers, which are sold by our direct sales organization.

We sell our products to OEMs that supply advanced electronic systems to commercial and military end users, and to these OEMs' contract manufacturers. In general, the decision to purchase our product is made by the OEM, which has designed our product into its system. In the event that we sell to an OEM's contract manufacturer, the contract manufacturer typically does not have discretion to replace our product with one from a different supplier.

Our sales cycle varies substantially, ranging from a period of a month or less when a customer selects a standard product from our selection guide or website, to as long as two years or more for custom products. In the sales process, our sales and application engineers work closely with the OEM customer to analyze the customer's system requirements and select an appropriate standard product or establish a technical specification for a custom product. In the case of a custom product, we also select a semiconductor process and foundry, and evaluate test wafers and finished components before manufacturing in commercial quantities can begin. Volume purchases of our products by an OEM customer, or its contract manufacturer, generally do not occur until the OEM customer has made the decision to begin production of the system incorporating our product. Our receipt of substantial revenue from sales of a product to an OEM customer depends on that customer's commercial success in manufacturing and selling its system incorporating our product. It may take several years for a newly introduced standard product to generate substantial revenue, if ever. However, the life cycles of our standard products tend to be lengthy.

Although most of our revenue is derived from sales of our products, we also receive a small percentage of our revenue from customer-sponsored research and development activities. These activities range from pure research, in which we investigate IC design techniques on new semiconductor technologies at the request of a government agency or commercial customer, to custom development

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projects in which we are paid to enhance or modify an existing product or develop a new product to meet a customer's specifications.

Cost of revenue. Cost of revenue consists primarily of the cost of semiconductor wafers that we purchase from our third-party foundries and other materials such as packages, epoxies, connectors and production masks. Cost of revenue also includes personnel costs and overhead related to our manufacturing and engineering operations, including occupancy and equipment costs, shipping costs, charges for inventory excess and obsolescence and warranty obligations and amortization of related intangible assets.

Research and development. Research and development expense consists primarily of personnel costs of our research and development organization, third-party consulting costs, costs of development wafers, license fees for computer-aided design software, costs of development testing and evaluation, costs of developing automated test software, related occupancy and equipment costs and amortization of related intangible assets. We expense all research and development costs as incurred.

Sales and marketing. Sales and marketing expense consists primarily of personnel costs of our sales and marketing organization, sales commissions paid to independent sales representatives, costs of advertising, trade shows, corporate marketing, promotion, travel, related occupancy and equipment costs, amortization of related intangible assets and other marketing costs.

General and administrative. General and administrative expense consists primarily of personnel costs of our executive management, finance, and other administrative staff, outside professional fees including legal and accounting, related occupancy and equipment costs and other corporate expenses.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we re-evaluate our judgments and estimates, including those related to revenue recognition, uncollectible accounts receivable, inventories, fixed assets, intangible assets, stock-based compensation, income taxes, accrued expenses and other contingencies. We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and material effects on our operating results and financial position may result. The accounting policies described below are those which, in our opinion, involve the most significant application of judgment, or involve complex estimation, and which could, if different judgments or estimates were made, materially affect our reported results of operations.

Revenue recognition. We recognize revenue for the majority of our business when the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Effective January 1, 2010 we adopted new guidance for arrangements that involve multiple elements, which is applicable to arrangements originating or materially modified after such date. This guidance eliminates the residual method of revenue allocation, and requires that we use our best estimate of selling price to allocate arrangement consideration between the deliverables in cases where neither vendor-specific objective evidence nor third-party evidence is available. For multiple element arrangements not subject to the new guidance we allocate arrangement consideration among the

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elements based on the relative fair values of those elements as determined using objective and reliable evidence of fair value. If the fair value of an undelivered element cannot be established, the arrangement is accounted for as a single unit of accounting and revenue is recognized when all performance obligations are met. We maintain a reserve for potential sales returns and allowances. Returns and customer credits, which historically have been immaterial, are recorded as a reduction to revenue. Rights of return are generally not included in sales arrangements. However, a portion of our sales are made to two distributors under agreements that provide for product return privileges. As a result, we defer recognition of revenue from sales to these distributors until the product is resold by the distributors.

Revenue from contracts with the United States government, government prime contractors and some commercial customers, under which we may design, develop, manufacture, or modify complex aerospace or electronic equipment or provide related services, is generally recorded on a percentage of completion basis using either units delivered or costs incurred as the measurement basis for progress toward completion. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontract costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance and estimated gross margin, including the impact of final contract settlements, are recognized in the period in which the changes are determined. Estimated losses on a contract are recognized in full in the period when they become known.

Allowance for doubtful accounts. We perform ongoing credit evaluations of our customers and adjust credit limits, as determined by our review of current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience, our anticipation of uncollectible accounts receivable and any specific customer collection issues that we have identified. While our credit losses have historically been within our expectations and the allowance established, we may not continue to experience the same credit loss rates that we have in the past.

Inventory. Inventory is stated at the lower of cost (first-in, first-out method) or market. We review the inventory and compare product costs with current market value, and write down any inventory with costs in excess of current market value to its net realizable value. Estimating demand is inherently difficult, particularly given the cyclical nature of the semiconductor industry, which can result in excess or obsolete inventory. This difficulty has increased as we transition from one of our principal foundries. This transition has resulted in increased purchases of raw materials in order to ensure adequate supplies of affected products. Because these products have long lives, our estimates of future demand must cover longer than usual periods, which increases the risk that if actual demand is less than forecast, we may need to write off some or all of these advance purchases as excess or obsolete. At December 31, 2012 and 2011, our raw material inventory includes $33.1 million and $12.9 million, respectively, of advance purchases of wafers from this foundry.

We recorded expense of $2.3 million, $2.0 million and $1.5 million in 2012, 2011 and 2010, respectively, to reduce inventory to its net realizable value. Once we have written down inventory to its estimated net realizable value, we establish a new cost basis for that inventory and do not increase its carrying value due to subsequent changes in demand forecasts. Accordingly, if inventory previously written down is subsequently sold, we may realize improved gross profit margins on these transactions.

Goodwill. We test goodwill for impairment at least annually at the reporting unit level. In September 2011, the FASB issued new guidance which provides an entity the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is

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the case, the two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a reporting is greater than its carrying amount, the two-step goodwill impairment test is not required. We adopted this guidance as of the fourth quarter of 2011.

If the two-step goodwill impairment test is required, first, the fair value of each reporting unit is compared to its book value. If the fair value of the reporting unit is less than its book value, we perform a hypothetical purchase price allocation based on the reporting unit's fair value to determine the fair value of the reporting unit's goodwill. Fair value is determined using a combination of present value techniques and market prices of comparable businesses.

Long-lived assets. We evaluate our long-lived assets for potential impairment whenever events or circumstances suggest that the carrying amount of an asset or group of assets is not recoverable. Our judgments regarding the existence of impairment indicators are based on market and operational performance. Indicators of potential impairment include:

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º a significant change in the manner in which an asset is used;

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º a significant decrease in the market value of an asset;

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º a significant adverse change in the business or industry in which the asset is used or sold;

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º a current period operating cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the asset; and

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º significant advances in our technologies that require changes in one or more of our manufacturing processes.

If we believe that an indicator of potential impairment exists, we test to determine whether the impairment recognition criteria have been met. To analyze a potential impairment, we project undiscounted future cash flows over the remaining life of the asset or the primary asset in the asset group, using a probability-weighted multiple scenario approach, reflecting a range of possible outcomes. If these projected cash flows are less than the carrying amount, an impairment loss is recognized based on the fair value of the asset or asset group less any costs of disposition. Evaluating the impairment requires judgment by our management to estimate future operating results and cash flows. If different estimates were used, the amount and timing of asset impairments could be affected. We charge impairments of the long-lived assets to operations if our evaluations indicate that the carrying values of these assets are not fully recoverable.

Stock-based compensation. We measure compensation cost related to stock-based awards at fair value on the date of grant, and recognize this cost as expense over the service period the awards are expected to vest, net of estimated forfeitures. The fair value of restricted stock and restricted stock units is determined based on the price of our common stock on the date of grant. We did not grant any stock options in 2012, 2011 or 2010. Estimating the amount of share-based payments that will ultimately either vest or be forfeited requires judgment. We consider many factors when estimating expected forfeitures, including the type of the award, vesting terms, employee group, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates. See Note 14 to the Consolidated Financial Statements included in this Form 10-K for further disclosure regarding our stock-based compensation.

Income taxes. We determine deferred tax assets and liabilities based upon the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year's financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenue, expenses, gains and losses,

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differences arise between the amount of taxable income and pretax financial income for a year and the tax basis of assets or liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related assets or liabilities are settled or the reported amount of the assets are recovered, hence giving rise to a deferred tax asset or liability. We must then periodically assess the likelihood that our deferred tax assets will be recovered from our future taxable income, and, to the extent we believe that it is more likely than not our deferred tax assets will not be recovered, we must establish a valuation allowance against our deferred tax assets. We recognize in our financial statements the tax benefit from an uncertain tax position taken or expected to be taken in an income tax return only if it is more likely than not that such benefit would be sustained on its technical merits in the event of a tax audit. The assessment of each tax position requires significant judgment. All tax positions are periodically analyzed and adjusted as a result of events, such as the resolution of tax audits or the expiration of statutes of limitations, which may result in charges or credits to the provision for income taxes. See Note 15 to the Consolidated Financial Statements included in this Form 10-K for further disclosure regarding income taxes.

Factors and Trends That Affect Our Results of Operations

In reading our financial statements, you should be aware of the following factors and trends that our management believes are important in understanding our financial performance.

Revenue. We operate in a cyclical industry, and growth in our revenue is highly dependent on conditions in the global economy. From 2003 to 2008, our revenue grew from $42.0 million to $180.3 million, representing a compound annual growth rate of 33.8%. In 2009, our revenue decreased 9.6% to $163.0 million, due to the global economic downturn and related credit crisis that affected us along with the entire semiconductor industry. In 2010, our revenue increased 49.9% to $244.3 million and in 2011 increased 8.1% to $264.1 million. In 2012, our revenue was essentially flat, growing 0.1% to $264.4 million. There is no certainty that our business will continue to grow. Generally, our revenue growth results from growing market acceptance of standard products we introduced in prior periods, increased sales of our standard products, derived from the introduction of new products, which expands the breadth and diversity of our standard product offerings, and the expansion of our domestic and international sales efforts.

In establishing current and future planned levels of operating expenses, we seek to balance near-term financial goals with our longer term strategic objectives. Accordingly, we took steps early in 2009 to reduce expenses across our business, and maintained certain of these measures throughout the year. During 2010, 2011 and 2012, we increased spending to support our growth. Going forward, we expect to increase spending in research and development in order to remain competitive, and our plans for growth also require increased spending to support our operations, sales, marketing and administrative functions.

Gross margin. One of our objectives is to maximize our gross margin, which is our gross profit expressed as a percentage of our revenue. Our gross margins were 73.7% in 2012, 73.5% in 2011 and 74.4% in 2010. In general, we seek to introduce high performance products that are valued by our customers for their ability to address technically challenging applications, rather than commodity ICs for use in high volume applications where cost, rather than performance, is the highest priority. We also seek continuously to reduce our costs and to improve the efficiency of our manufacturing operations.

Our gross margin in any period is significantly affected by industry demand and the intensity of competition in the markets into which we sell our products and by pricing, including fluctuations in the relative proportion of high volume orders, on which we offer higher discounts. Gross margins are also

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significantly affected by product mix, that is, the percentage of our revenue in that period that is attributable to higher or lower margin products. Additional factors affecting our gross margins include changes in the cost of wafers and materials, the timing of indirect costs for pre-production masks and evaluation materials, changes in estimates for contracts recognized on a percentage of completion basis, variations in overhead absorption, charges for excess or obsolescent inventory, and other manufacturing efficiencies, and numerous other factors, some of which are not under our control. Our margins can be substantially affected by changes in our manufacturing yields. Our yields depend on many factors that we control, such as product design and the effectiveness of our own assembly and test operations, but they are also affected by the activities of third parties, such as the foundries and packaging subcontractors that supply us with critical materials and services, that are beyond our control. As a result of these or other factors, we may be unable to maintain or increase our gross margin in future periods.

Purchasing patterns of our standard products. A majority of our revenue in each quarter is typically derived from sales of our standard products. Purchasers of our standard products generally do not enter into long-term contracts with us. Customers that purchase large volumes of our standard products generally provide us with periodic forecasts of their requirements for those products, but these forecasts do not commit the customer to minimum purchases, and customers generally may revise these forecasts without penalty. A significant portion of our revenue in each quarter is attributable to purchase orders for standard products that are received and fulfilled in that quarter, often including a large number of orders from diverse customers and markets. Our customers' requested lead times in general have become shorter. The price list for our standard products includes discounts based on purchase order volume, and, as a result, the revenue we receive from sales of a particular product in any period is influenced by the average order size for that product during that period. Our forecasting of sales of standard products takes into account a number of factors, including historical sales patterns for each individual . . .