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PSMI > SEC Filings for PSMI > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for PEREGRINE SEMICONDUCTOR CORP

Form 10-Q for PEREGRINE SEMICONDUCTOR CORP


7-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, "Risk Factors." The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 28, 2013 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in our Annual Report on Form 10-K filed with the SEC on February 19, 2014.
This Quarterly Report on Form 10-Q, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations", includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words "would," "could," "will," "may," "expect," "believe," "should," "anticipate," "outlook," "if," "future," "intend," "plan," "estimate," "predict," "potential," "targets," "seek" or "continue" and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Quarterly Report on Form 10-Q. These factors include, but are not limited to, the risks described under Item 1A of Part II - "Risk factors," Item 2 of Part I - "Management's Discussion and Analysis of Financial Condition and Results of Operations," elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. We make these forward-looking statements based upon information available on the date of this Quarterly Report on Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations.
Overview
We are a fabless provider of high performance radio frequency integrated circuits, or RFICs. Our solutions leverage our proprietary UltraCMOS technology, which enables the design, manufacture, and integration of multiple radio frequency, or RF, mixed signal, and digital functions on a single chip. We believe our products deliver an industry leading combination of performance and monolithic integration. Our solutions target a broad range of applications in the space and military, broadband, industrial, mobile device, test and measurement equipment, and wireless infrastructure markets. We have shipped over two billion RFICs based on our UltraCMOS technology.

Our UltraCMOS technology combines the ability to achieve the high levels of performance of traditional specialty processes, with the fundamental benefits of standard complementary metal oxide semiconductor, or CMOS, the most widely used semiconductor process technology. UltraCMOS technology utilizes an insulating substrate to provide greatly reduced unwanted electrical interaction between the RFIC and the substrate (referred to as parasitic capacitance), which enables high signal isolation and excellent signal fidelity with low distortion over a broad frequency range (referred to as broadband linearity). These technical attributes result in RF devices with excellent high-frequency and power handling performance, as well as, reduced crosstalk between frequencies. In addition, increased broadband linearity enables faster data throughput and greater subscriber capacity over a wireless network, resulting in enhanced network efficiency. UltraCMOS technology also provides the benefits of standard CMOS, such as high levels of integration, low power consumption, reusable circuit libraries, widely available design tools and outsourced manufacturing capacity, and the ability to scale to smaller geometries. We own fundamental intellectual property, or IP, in UltraCMOS technology consisting of more than 180 U.S. and international issued and pending patents, and over 300 documented trade secrets covering basic circuit elements, RF circuit designs, manufacturing processes, and design know-how.
We leverage our extensive RF design expertise and systems knowledge to develop RFIC solutions that meet the stringent performance, integration, and reliability requirements of the rapidly evolving wireless markets. As of March 29, 2014, we offer a broad portfolio of more than 215 high performance RFICs including switches, digital attenuators, mixers / upconverters, prescalers, digitally tunable capacitors, or DTCs, and DC-DC converters, and we are currently developing power amplifiers, or PAs. During the year ended December 28, 2013, our products were sold to more than 1,600 module manufacturers, original equipment manufacturers, or OEMs, contract manufacturers, and other customers. We believe our RFICs are included in products sold by many of the leading mobile handset OEMs. Our net revenue was $41.3 million and $46.6 million for the three months ended March 29, 2014 and March 30, 2013, respectively. As of March 29, 2014, we had an accumulated deficit of $235.0 million.


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Under Jumpstart Our Business Startups Act of 2012, or the JOBS Act, "emerging growth companies" can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourself of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not "emerging growth companies."
Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation, providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and complying with any requirements that may be adopted regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of up to five years following the completion of our IPO, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
Key Financial Measures
Net Revenue. Our net revenue is comprised of product net revenue and other net revenue and is derived primarily from the sale of our products, which include both our application specific standard products and customer specific standard products. We develop application specific standard products from our own specifications, and we sell these products using our direct sales force, our network of sales representatives, and our distributors. For higher volume markets, we also develop customer specific standard products to meet the specialized requirements of individual customers, and we sell these products using our direct and indirect sales organization. We sell our products worldwide through our direct sales force and field applications engineering staff, our network of domestic and international independent sales representatives, and both worldwide and regional distribution partners. Each of these channels is supported by our customer service and marketing organizations. Prior to a customer's selection and purchase of our products, our direct sales force and field applications engineers provide our customers technical assistance in the use of our RFICs for the design of their products. Our network of sales representatives and distributors have been selected based on their focus on and knowledge of RFICs, their ability to provide a high level of field application engineering support or their regional logistical support capabilities. We provide ongoing technical training for new products to our sales representatives and distributors to keep them informed of product enhancements and new product releases. We share product information and technical specifications with our customers using web-based tools. We plan to expand our direct sales and support capabilities and our network of independent sales representatives in key regions domestically and internationally.
To sell our products, we use various sales channels depending on the type of customer (module manufacturer, OEM, or contract manufacturer), the volume and types of products purchased by the customer, and the location of the customer. For larger module manufacturer and OEM customers, we sell our products through both our direct sales force and our sales representatives. For sale of products to Asia-based customers, we use a logistics provider and distributor to facilitate local stocking of our products to meet changes in demand, and to facilitate the billing, customs, and duties administration for these transactions. For customers that order less frequently, we use distributors on a worldwide basis as our sales channel. We monitor the purchase levels of the end customers of our distributors, and from time-to-time we may convert these end customers to direct customers to the extent that their unit volume and sales support requirements justify selling to them directly.
Our net revenue has grown rapidly in previous years, but this growth has slowed and our net revenue remained flat in fiscal 2013 compared to fiscal 2012. Our net revenue for the three months ended March 29, 2014 decreased by 11%, compared to the corresponding period in 2013. The principal driver of our net revenue growth has been the increased volume of sales of our products, which is attributable to the increasing breadth and diversity of our product offerings, the growing market demand of products we introduced in prior periods, and the expansion of our domestic and international sales efforts. More recently, our net revenue declined due to changes in the mix of products sold, resulting in reductions in our average selling prices. Our customers generally do not enter into long-term contracts with us. Our commercial relationships with our customers vary from single small low volume purchases of our products through a distributor to large volume purchases of our products directly from us. Large volume customers typically provide longer term forecasts of their expected needs. These forecasts do not commit the customer to minimum purchases, and generally may be revised without penalty.
A significant portion of our net revenue in each quarter is attributable to purchase orders for products that are received and fulfilled within the same quarter, often including a large number of orders from diverse customers and end markets. Our forecasting of sales of products takes into account a number of factors, including historical sales patterns for each individual product, our assessment of overall market conditions, and our knowledge of the current requirements and purchasing practices of our larger customers.


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Although we believe we have multiple opportunities for additional net revenue growth and are planning our business accordingly, our future net revenue levels will be impacted by our ability to achieve design wins with module manufacturers and OEMs, as well as the success of OEM devices that incorporate our products. A large portion of our shipments are made to intermediary manufacturers, such as module manufacturers and contract manufacturers, who incorporate our product into their products, which are in turn sold to OEMs. OEMs have a variety of alternative solutions available to meet their needs, and often diversify their supply chain by ordering products from more than one module or contract manufacturer, and shifting demand between them to achieve cost reductions and performance improvements. As the end markets where our products are used are very competitive, we expect to experience shifts in our net revenue between customers and regions where we ship products, and changes in demand for our products as a result of module manufacturer or OEM changes in designs and supply chain decisions.
Although we have shipped our products to a large number of customers, we have historically depended on a small number of customers for a significant percentage of our annual net revenue. The composition of this group can change from year-to-year. Net revenue derived from our three largest direct customers as a percentage of our annual net revenue was 78% and 82% for the three months ended March 29, 2014 and March 30, 2013, respectively. Included in these percentages for our three largest direct customers are sales to two of our distributors. Based on records from our distributors of shipments to their customers, net revenue derived from our three largest end customers as a percentage of annual net revenue was 66% for the three months ended March 29, 2014 and March 30, 2013. While the composition of our top customers varies from year-to-year, we expect that shipments to a limited number of customers will continue to account for a significant percentage of our net revenue for the foreseeable future. Our largest customers typically use our products in multiple systems or programs for different OEM end customers, each having differing product life cycles, end users, and market dynamics.
Cost of Net Revenue. Cost of net revenue consists primarily of the cost of purchasing substrates, wafer processing, and testing and packaging. Cost of net revenue also includes manufacturing related personnel costs, which include stock-based compensation expenses, facilities, supplies and equipment costs, and quality assurance costs.
One of our most important objectives is maintaining and improving our gross margin, which we define as gross profit expressed as a percentage of our net revenue. Our total gross margin in any period can be materially affected by product mix, that is, the percentage of our net revenue in that period that is attributable to higher or lower margin products, and by other factors, some of which are not under our control. Due to these factors, our gross margins have fluctuated from quarter-to-quarter. For example, gross margin was negatively impacted during the quarter due to a reduction in the carrying value of inventory as a result of a lower of cost or market valuation.
The factors that can influence the gross margins of any individual product, include the following:
the pricing that the features and performance of our products can command;

               the volume of products produced using the same manufacturing
                overhead structure for procurement, test, and quality support,
                and their related costs;

write-downs of inventory;

               the competitive pressures on the pricing of our products from
                similar product offerings from other semiconductor manufacturers;
                and


               the costs and yields of semiconductor wafers, packages, and other
                materials used in manufacturing our products; fabrication costs;
                assembly and test costs; factory equipment utilization; warranty
                costs; and operating efficiencies.

Research and Development. Research and development expense consists primarily of personnel-related expenses of our research and development organization, which include stock-based compensation expense, and costs for development wafers and mask sets, license fees for computer-aided design software, costs of development testing and evaluation, and allocated facilities costs. We incur research and development costs for the development of our products and for improvements of our UltraCMOS technology.
Selling, General and Administrative. Selling, general and administrative expense includes personnel related costs, which include stock-based compensation expense, and sales commissions paid to our independent sales representatives, costs of advertising and corporate marketing promotions, travel costs, professional and consulting fees, legal fees, allocated facilities costs and other corporate expenses.
Interest Expense. Interest expense is associated with our borrowings and imputed interest on capital leases and customer deposit financing arrangement.


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Other Income (Expense). Other income (expense) consists of currency gains (losses) on conversion of non-U.S. dollar transactions into U.S. dollars and other income (expense) generated from minor non-operating transactions. Provision for Income Taxes. The provision for income taxes consists of our estimated federal, state and foreign income taxes based on our pre-tax income. We have recorded a valuation allowance for the full amount of our domestic net deferred tax assets, as the realization of our domestic net deferred tax assets is uncertain. At December 28, 2013, the Company had U.S. federal and state net operating loss (NOL) carryforwards of approximately $147.5 million and $102.5 million, respectively, after taking into consideration the impact of Internal Revenue Code section 382 as discussed below. The federal net loss carryforwards will expire between 2018 and 2031, unless previously utilized. The state net loss carryforwards will expire between 2014 and 2031, unless previously utilized.
Pursuant to Code Sections 382 and 383, annual use of our NOL and research and development tax credit carryforwards may be limited in the event a cumulative change in ownership of 50% of certain stockholders occurs within a three year period. An ownership change may limit the amount of NOL and research tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an "ownership change" as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. We completed a study to assess whether an ownership change has occurred since our formation through December 28, 2013. There were no significant transactions that would be expected to effect ownership changes from December 28, 2013 through our quarter ended March 29, 2014. Based upon this study, we believe that several ownership changes have occurred. We have reduced our deferred tax assets related to the NOL and research tax credit carryovers that are anticipated to expire unused as a result of the ownership changes. These tax attributes have been excluded from deferred tax assets with a corresponding reduction of the valuation allowance with no net effect on income tax expense or the effective tax rate. Future ownership changes may further limit our ability to utilize our remaining tax attributes.


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Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 28, 2013.
Results of Operations
Comparison of the three months ended March 29, 2014 and March 30, 2013 The following table sets forth our operating results for the three months ended March 29, 2014 and March 30, 2013.

                                                             Three Months Ended
                               March 29,      % of Net      March 30,      % of Net       Change
                                  2014         revenue         2013         revenue       amount     Change %
                                                         (in thousands)
Net revenue                   $   41,317        100  %     $   46,625        100  %     $ (5,308 )      (11 )%
Cost of net revenue               26,575         64            26,808         57            (233 )       (1 )
Gross profit                      14,742         36            19,817         43          (5,075 )      (26 )
Operating expense:
Research and development          11,384         28            10,164         22           1,220         12
Selling, general and
administrative                    13,361         32            10,720         23           2,641         25
Total operating expense           24,745         60            20,884         45           3,861         18
Loss from operations             (10,003 )      (24 )          (1,067 )       (2 )        (8,936 )        *
Interest income (expense),
net                                   35          -               (79 )       (1 )           114       (144 )
Other income (expense), net           19          -               (34 )        -              53       (156 )
Loss before income taxes          (9,949 )      (24 )          (1,180 )       (3 )        (8,769 )        *
Income tax expense                    44          -                28          -              16         57
Net loss                      $   (9,993 )      (24 )%     $   (1,208 )       (3 )%     $ (8,785 )        *

* Not meaningful Net Revenue A significant portion of our net revenue results from the sale of our antenna and broadband switches used in mobile wireless device, wireless infrastructure, broadband, industrial and other markets. The remainder of our product sales being derived from digital attenuators, phase-locked loops (PLL), mixers / upconverters, and prescalers used in broadband, industrial, wireless infrastructure, test and measurement equipment, and space and military markets. For the three months ended March 29, 2014, our product net revenue decreased by $5.3 million, or 11%, from $46.6 million to $41.3 million compared to the same quarter in fiscal 2013. Net revenue consists of product and other net revenue. Product net revenue from switches used in handset antenna applications decreased $5.1 million compared to the same quarter in fiscal 2013. In addition, product net revenue decreased by $0.6 million due to a reduction in PLLs sold into our space and commercial satellite market, partially offset by an increase of $0.4 million in product revenues from digital attenuators used in the wireless infrastructure and test and measurement markets. We market and sell our products worldwide. We attribute net revenue to the geographic region where the customer, or its business unit that makes the purchase, is based. Our net revenue by geographic region for the periods indicated was as follows:

Three Months Ended

                  March 29,           March 30,
                    2014                2013
                         (in thousands)
Japan         $ 25,483     62 %   $ 29,945     64 %
United States    9,059     22        9,719     21
All other        6,775     16        6,961     15
              $ 41,317    100 %   $ 46,625    100 %


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Cost of Net Revenue and Gross Profit
Cost of net revenue for the three months ended March 29, 2014 decreased by $0.2 million compared to the same quarter in fiscal 2013, primarily due to our lower net revenues. Gross margin for the three months ended March 29, 2014 decreased to 36% from 43% compared to the same quarter in fiscal 2013. The gross margin reduction of 7% was due to a reduction in product revenues from switches used in handset antenna applications, changes in the product mix sold, and reductions in the carrying value of certain inventories. During the three months ended March 29, 2014, our product costs were negatively impacted by a $2.2 million write-downs of inventory, mainly due to changes in customer forecasted demand from one of our distributors, as well as additional reductions to carrying value of inventories necessary to answer competitive pricing pressures for certain products. We expect our gross margin will fluctuate from quarter to quarter in the future based on changes in the mix of products we sell, the impact of competitive pricing pressure, variations in our manufacturing costs, write-down of inventory, or market volatility leading to fluctuations in the volumes we ship.

Restructuring
During December 2013 and January 2014, we approved a restructuring plan. The plan consists of a reduction in force of approximately 60 employees and a consolidation of office locations, which will be substantially completed by the end of the second quarter of 2014. During the three months ended March 29, 2014, we recorded restructuring expense of $2.0 million. Research and Development
Research and development expense for the three months ended March 29, 2014 increased by $1.2 million compared to the same quarter in fiscal 2013. The increase was in part due to increased compensation expense as a result of higher headcount and due to the number of new product development and existing product enhancement initiatives undertaken during the three months ended March 29, 2014. Included in the research and development expenses for the three months ended March 29, 2014 are $1.1 million associated with our corporate restructuring. We expect our research and development expense to remain materially consistent as a percentage of net revenue.
Selling, General and Administrative
Selling, general and administrative expense for the three months ended March 29, 2014 increased by $2.6 million compared to the same quarter in fiscal 2013 and was mainly due to increased legal fees of $2.6 million related to both litigation and our export compliance investigations, and $0.8 million associated with our corporate restructuring. These increases were partially offset by reductions in other professional fees and training costs of $0.8 million. We expect our selling, general and administrative expense to decrease as a result of decreases in compensation costs.
Other Income (Expense)
Interest income (expense), net for the three months ended March 29, 2014 decreased by $0.1 million for the same quarter in fiscal 2013. This decrease was primarily due to repayment of deposits received under the Murata agreement from $10.2 million as of March 30, 2013 to $0.9 million as of March 29, 2014. Other income (expense), net consists primarily of realized foreign exchange gains and losses. Other expense, net for the three months ended March 29, 2014 decreased $0.1 million compared to the same quarter in fiscal 2013, primarily due to higher realized foreign exchange gains. Liquidity and Capital Resources
Our principal source of liquidity as of March 29, 2014 consisted of our cash, cash equivalents, and both short-term and long-term marketable securities of $58.9 million compared to $63.2 million as of December 28, 2013. We continue to focus on monitoring our cash usage, controlling operating expense growth, and . . .

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