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TQNT > SEC Filings for TQNT > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for TRIQUINT SEMICONDUCTOR INC

Form 10-Q for TRIQUINT SEMICONDUCTOR INC


6-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 2012. The discussion in this Report contains forward-looking statements, including statements regarding projected working capital and capital expenditures, potential investment needs, our expectations about reinvestment of foreign earnings, settlement of long-term income tax liability, funding of our stock repurchase program, anticipated customer needs, our expectation regarding delays in customer spending, 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 enter into defense & aerospace contracts; department of defense spending levels and the degree to which we may be affected by particular defense spending; uncertainty in federal defense budgets; the pace at which we release new products to support the defense & aerospace end market; 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; expected operating expenses, gross margins, and per share earnings; transactions affecting liquidity and our ability to satisfy our projected expenditures through the next twelve months; factory utilization levels; 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, 2012 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 these 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, RF filters, 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 and SAW and BAW filter components. We provide the defense & aerospace end market with phased-array radar, communications and electronic warfare components and have been recognized as a leader in GaN development.
Wafer and semiconductor manufacturing facilities require a significant level of fixed 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 continuing desire for content expansion in smartphones, demand increased for our products. In response, we increased capital


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expenditures in order to add capacity to our factories. Now with the increased capacity installed, higher fixed manufacturing costs adversely affect operating results when factories are not fully utilized. Highlights for the Nine Months Ended September 28, 2013 Revenue increased 5% for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012.
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 28, 2013 increased 4% compared to the nine months ended September 29, 2012. The increase was primarily due to an increase in sales to our largest customer. We have strategically invested in premium filters, wafer level packaging and copper flip. We believe our investments will be critical to solve 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 decreased 4% for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012. This decrease was driven by a reduction in non-strategic foundry revenue and a decrease in sales of optical 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. The proliferation of these connections requires billions of terabytes of electronic data to move around the globe and traffic continues to expand at an unprecedented rate. This creates demand for TriQuint products to support the continuing evolution of new frequency spectrum allocations, relieve the issues seen with spectrum interference and enable higher throughput networks for upgrade and build-out of the worldwide wireless and fiber networks. Revenue from sales of our products in the defense & aerospace end market increased 28% for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012 due to growth in revenue from increased content in radar systems and sale of more radar products. Our revenue in this market is dependent on 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 do not anticipate these delays to impact the larger programs we support, such as the Joint Strike Fighter, TPQ-53 and radar upgrade programs targeting the large domestic and international fleets of F16s and F/A18s. We continue to accelerate the release of new products to support this market.
Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. 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.
We updated our critical accounting policy for stock-based compensation during the nine months ended September 28, 2013 to include our accounting for restricted stock units ("RSUs") and market-based restricted stock units ("MSUs"), which is described below. For further discussion of our remaining 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, 2012.
Restricted Stock Units


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During the three and nine months ended September 28, 2013, we granted RSUs to non-executive employees under our stockholder approved 2013 Incentive Plan. RSUs are converted into shares of TriQuint common stock upon vesting on a one-for-one basis. The awards typically vest over four years and vesting is usually subject to the grantee's continued service with us. In the event of a change in control, all outstanding RSUs will become fully vested. The compensation expense related to the service-based RSU awards is determined using the fair market value of TriQuint common stock on the date of the grant, and the compensation expense, reduced by estimated forfeitures, is recognized over the vesting period. Market-Based Restricted Stock Units
During the nine months ended September 28, 2013, we granted MSUs to certain members of executive management. The number of shares of common stock to be awarded will range from zero percent to 150 percent of the target number of stock units based on our total stockholder return ("TSR") relative to the performance of companies in the SPDR S&P Semiconductor Index ("SPDR") for each measurement period. TSR is calculated based on market performance between the beginning and end of the award period, generally over three years. The fair value of the MSUs was determined using a Monte Carlo simulation model. Key assumptions for the Monte Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient. The determination of the fair value of MSUs is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. Employee stock-based compensation expense for MSUs is calculated based on the target number of shares ultimately expected to be awarded and is recognized using a straight-line approach over the service period.


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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 28, 2013 and
September 29, 2012:

                                                Three Months Ended                    Nine Months Ended
                                         September 28,       September 29,     September 28,      September 29,
                                              2013               2012               2013              2012
Revenue                                      100.0  %            100.0  %          100.0  %           100.0  %
Cost of goods sold                            63.2                69.3              70.0               71.6
Gross profit                                  36.8                30.7              30.0               28.4
Operating expenses:
Research, development and engineering         18.7                20.3              22.4               19.4
Selling, general and administrative           10.6                13.1              12.7               14.6
Total operating expenses                      29.3                33.4              35.1               34.0
Income (loss) from operations                  7.5                (2.7 )            (5.1 )             (5.6 )
Other (expense) income:
Interest income                                0.0                 0.0               0.0                0.0
Interest expense                              (0.5 )              (0.3 )            (0.6 )             (0.2 )
Recovery of investment                           -                   -               0.1                1.2
Other, net                                     0.0                 0.0              (0.1 )              0.0
Total other (expense) income, net             (0.5 )              (0.3 )            (0.6 )              1.0
Income (loss) before income tax                7.0                (3.0 )            (5.7 )             (4.6 )
Income tax expense (benefit)                   1.6                 2.6              (1.0 )             (0.8 )
Net income (loss)                              5.4  %             (5.6 )%           (4.7 )%            (3.8 )%

Three Months Ended September 28, 2013 and September 29, 2012
Revenue from Operations
Revenue increased $50.0 million, or 25%, for the three months ended
September 28, 2013 compared to the three months ended September 29, 2012.
Revenue by end market for the three months ended September 28, 2013 and
September 29, 2012, was as follows:
                              Three Months Ended
                       September 28,      September 29,
(in millions)               2013               2012
Mobile Devices        $    180.8         $         127.0
Networks                    40.4                    49.8
Defense & Aerospace         29.6                    24.0
Total                 $    250.8         $         200.8

Mobile Devices
Revenue from the sales of our products in the mobile devices end market increased approximately 42% for the three months ended September 28, 2013 compared to the three months ended September 29, 2012 primarily as a result of increased revenue from sales of our 3G/4G and wireless local area networks ("WLAN") products, partially offset by decreased revenue from our 2G products. Revenue from the sales of our products in the three primary submarkets of the mobile devices end market was as follows:


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Three Months Ended
                 September 28,      September 29,
(in millions)         2013               2012
3G/4G           $    148.6         $         102.8
2G                     3.1                     4.7
WLAN                  29.1                    19.5
Total           $    180.8         $         127.0

Networks
Revenue from the sales of our products in the networks end market decreased
approximately 19% for the three months ended September 28, 2013 compared to the
three months ended September 29, 2012. The decrease was primarily due to
decreased sales of our radio access and transport products, partially offset by
increased 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:
                         Three Months Ended
                  September 28,       September 29,
(in millions)          2013                2012
Radio Access    $     16.7           $          17.8
Transport             16.1                      25.0
Multi-market           7.6                       7.0
Total           $     40.4           $          49.8

Defense & Aerospace
Revenue from the sales of our products in the defense & aerospace end market increased approximately 23% for the three months ended September 28, 2013 compared to the three months ended September 29, 2012, due primarily to the timing of programs and increased content for some programs. Significant Customers
For the three months ended September 28, 2013 and September 29, 2012, sales to Foxconn Technology Group accounted for 35% and 31% of our revenue, respectively. For the three months ended September 28, 2013, sales to Protek (Shanghai) Limited accounted for 13% of our revenue. While we strive to maintain a strong relationship with our customers, 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. There are no guarantees that our products will be included in the next generation of products introduced by Foxconn Technology Group, Protek or our other customers. Any significant loss of, or a significant reduction in purchases by these, or other significant customers, could have an adverse affect on our financial condition and results of operations.
Some of our mobile devices end customers use multiple subcontractors for product assembly and test and some of those subcontractors have multiple customers. Therefore, revenues from our customers may not necessarily equal the business of a single mobile devices end customer.
Gross Profit
Our gross profit as a percentage of revenue increased to 36.8% for the three months ended September 28, 2013, from 30.7% for the three months ended September 29, 2012. The increase in gross profit was primarily the result of higher revenue and higher factory utilization. Operating expenses
Research, development and engineering
Our research, development and engineering expenses for the three months ended September 28, 2013 increased $6.2 million, or 15% compared to the three months ended September 29, 2012. The increase was primarily the result of higher salary and related expenses associated with a higher headcount and increased spending on material to develop new products.
Selling, general and administrative
Selling, general and administrative expenses were relatively flat for the three months ended September 28, 2013 compared to the three months ended September 29, 2012 with an increase of $0.2 million, or 1%.


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Other (expense) income, net
Other expense, net for the three months ended September 28, 2013 increased $0.5 million, or 84%, compared to the three months ended September 29, 2012. The increase was primarily the result of higher interest expense charges incurred for borrowings on our credit facility and accretion on contingent consideration. Income tax benefit
We incurred income tax expense of $4.1 million and $5.1 million for the three months ended September 28, 2013 and September 29, 2012, respectively. The income tax expense for the three months ended September 28, 2013 was primarily the result of U.S. federal and state income taxes due to the mix of profits and losses between jurisdictions. The income tax expense for the three months ended September 29, 2012 was primarily associated with U.S. federal and state income taxes due to the mix of profits and losses between jurisdictions and the recognition of additional valuation allowance.
Nine Months Ended September 28, 2013 and September 29, 2012 Revenue from Operations
Revenue increased $29.5 million, or 5%, for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012. Revenue by end market for the nine months ended September 28, 2013 and September 29, 2012, was as follows:

                              Nine Months Ended
                       September 28,     September 29,
(in millions)              2013               2012
Mobile Devices        $    404.2        $         387.7
Networks                   137.2                  142.3
Defense & Aerospace         83.7                   65.6
Total                 $    625.1        $         595.6

Mobile Devices
Revenue from the sales of our products in the mobile devices end market
increased approximately 4% for the nine months ended September 28, 2013 compared
to the nine months ended September 29, 2012 primarily as a result of increased
revenue from sales of our 3G/4G and wireless local area networks ("WLAN")
products, partially offset by decreased revenue from our 2G products. Revenue
from the sales of our products in the three primary submarkets of the mobile
devices end market was as follows:
                        Nine Months Ended
                 September 28,     September 29,
(in millions)        2013               2012
3G/4G           $    315.6        $         309.2
2G                     8.7                   18.3
WLAN                  79.9                   60.2
Total           $    404.2        $         387.7

Networks
Revenue from the sales of our products in the networks end market decreased approximately 4% for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012. The decrease was primarily due to lower sales of our transports products. Revenue from the sales of our products in the three primary submarkets of the networks end market was as follows:


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Nine Months Ended
                 September 28,     September 29,
(in millions)        2013               2012
Radio Access    $     49.8        $          47.9
Transport             62.8                   72.5
Multi-market          24.6                   21.9
Total           $    137.2        $         142.3

Defense & Aerospace
Revenue from the sales of our products in the defense & aerospace end market increased approximately 28% for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012, due primarily to the timing of programs and increased content for some programs. Significant Customers
For the nine months ended September 28, 2013 and September 29, 2012, sales to Foxconn Technology Group accounted for 28% and 31% of our revenue, respectively. Gross Profit
Our gross profit as a percentage of revenue increased to 30.0% for the nine months ended September 28, 2013, from 28.4% for the nine months ended September 29, 2012. The increase in gross profit was primarily the result of higher revenue, coupled with higher factory utilization and better yields. Operating expenses
Research, development and engineering
Our research, development and engineering expenses for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012 increased $24.2 million, or 21%. The increase was primarily the result of higher salary and related expenses associated with a higher headcount and increased spending on material to develop new products. Selling, general and administrative
Selling, general and administrative expenses decreased $7.0 million, or 8%, for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012 due primarily to lower litigation costs. Other (expense) income, net
Other expense, net was $3.2 million for the nine months ended September 28, 2013 compared to other income, net of $6.0 million for the nine months ended September 29, 2012. This fluctuation was primarily the result of the $7.0 million gain/recovery on the sale of a previously impaired investment recorded in the nine months ended September 29, 2012. Income tax expense
We recorded an income tax benefit of $6.1 million and $5.1 million for the nine months ended September 28, 2013 and September 29, 2012, respectively. 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. The income tax benefit for the nine months ended September 29, 2012 was primarily associated with our pre-tax loss, offset by an accrual for unrecognized tax benefits and the recognition of additional valuation allowance.

Liquidity and Capital Resources
Liquidity
As of September 28, 2013, our cash, cash equivalents and short-term marketable
securities decreased $112.1 million, or 81%, from December 31, 2012, primarily
as a result of repurchasing 7.7 million shares of our common stock for $51.1
million and capital expenditures of $78.0 million. Other related changes at
September 28, 2013 compared to December 31, 2012 were:
         Our accounts receivable balance increased $41.3 million, or 31%,
          primarily due to increased shipment activity late in the period.


         Our inventories balance increased by $37.3 million, or 27%, in
          anticipation of increased demand.


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