| • FORM 10-Q • AUTOMATIC STOCK OPTION GRANT PROGRAM • CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A • CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A • CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ FORM 10-Q _____________________
For the Quarterly Period Ended June 30, 2012 OR
For the Transition Period from to Commission File Number 0-22660 _____________________ TRIQUINT SEMICONDUCTOR, INC. (Exact name of registrant as specified in its charter) _____________________
2300 N.E. Brookwood Parkway, Hillsboro, Oregon 97124 (Address of principal executive offices) (Zip code) (503) 615-9000 (Registrant’s telephone number, including area code) _____________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x As of August 6, 2012, there were 163,737,845 shares of the Registrant’s Common Stock outstanding. TRIQUINT SEMICONDUCTOR, INC. INDEX
TRIQUINT SEMICONDUCTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (Unaudited) (In thousands, except per share data)
The accompanying notes are an integral part of these financial statements. 1 TRIQUINT SEMICONDUCTOR, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
The accompanying notes are an integral part of these financial statements. 2 TRIQUINT SEMICONDUCTOR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
The accompanying notes are an integral part of these financial statements. 3 TRIQUINT SEMICONDUCTOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) (Unaudited)
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In addition, the preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. For TriQuint Semiconductor, Inc. (the “Company”), the accounting estimates requiring management’s most difficult and subjective judgments include revenue recognition, the valuation of inventory, the accounting for income taxes, the accounting for stock-based compensation and the accounting for litigation and settlement costs. In the opinion of management, the condensed consolidated financial statements include all material adjustments, consisting only of normal, recurring adjustments, necessary for the fair presentation of the results of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company as of and for the fiscal year ended December 31, 2011, included in the Company’s 2011 Annual Report on Form 10-K filed with the SEC on February 27, 2012.
In September 2011, the FASB issued an ASU with regard to "Testing for Goodwill Impairment." The update is intended to simplify how entities test goodwill for impairment. The amendments in the ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described under current guidance. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. The Company has not performed an annual or interim goodwill impairment test during 2012 as of June 30, 2012. The Company will apply this guidance when the goodwill impairment test is performed. The Company does not expect the adoption of this guidance to have a material impact on the condensed consolidated financial statements or the notes thereto.
The Company accounts for its assets utilizing a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair-value hierarchy:
4 Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The instruments classified as Level 1 are measured at fair value using quoted market prices. The investments classified as Level 2 were valued using quoted prices for similar instruments in markets that are not active since identical instruments were not available. The Company determines the hierarchy levels at the end of each quarter. The non-qualified deferred compensation plan provides eligible employees and members of the Board of Directors with the opportunity to defer a specified percentage of their cash compensation. The Company includes the asset deferred by the participants in the “Other noncurrent assets, net” line item of its consolidated balance sheets and the Company’s obligation to deliver the deferred compensation in the “Other long-term liabilities” line item on its consolidated balance sheets. The earnout payment liability resulted from the acquisition of TriAccess Technologies, Inc. ("TA") on September 3, 2009 and represents an initial obligation to pay up to $5,000 to the former TA shareholders over three years upon TA product sales meeting certain revenue thresholds. No earnout payments have been made since acquisition and during the six months ended June 30, 2012, the Company changed its estimate and determined there would be no further obligation to the former TA shareholders.
5 Financial Instruments Not Recorded at Fair Value on a Recurring Basis The fair value of the cross-licensing liability was estimated using a discounted cash flow model which discounts future cash flows using an incremental borrowing rate of 9%. The ending fair value of the cross-licensing liability at June 30, 2012 was $15,716. In conjunction with the cross-licensing agreement, we recognized a prepaid cross-licensing asset of $20,716. In determining the estimated fair value of the prepaid cross-licensing asset, we used a relief from royalties valuation methodology. The inputs and assumptions used in our valuation included projected revenue, royalty rates, discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model required a significant amount of management judgment and is based upon a number of factors, including the selection of royalty rates, market growth rates and other relevant factors. Both the asset and liability were categorized as Level 3 in the fair value hierarchy.
As of June 30, 2012 all short-term investments are classified as available-for-sale and have maturity dates of less than one year. All unrealized gains and losses on available-for-sale investments are included in other comprehensive (loss) income. The cost, net unrealized holding gains, net unrealized holding losses and fair value of available-for-sale investments by types and classes of security at June 30, 2012 consisted of the following:
The cost, net unrealized holding gains, net unrealized holding losses and fair value of available-for-sale investments by types and classes of security at December 31, 2011 consisted of the following:
6 The contractual maturities of investments as of June 30, 2012 and December 31, 2011 were all due or callable in one year or less. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The Company employs a methodology that reviews specific securities in evaluating potential impairment of its investments. In the event that the cost of an investment exceeds its fair value, the Company evaluates, among other factors, the Company’s intent and ability to hold the investment and extent to which the fair value is less than cost; the financial health of and business outlook for the issuer; and operating and financing cash flow factors. At June 30, 2012, all unrealized holding losses were considered to be temporary as the Company has the ability and intent to hold the investments until a recovery of fair value. During the six months ended June 30, 2012 the Company did not record any other-than-temporary impairments on its marketable securities.
Net (loss) income per share is presented as basic and diluted net (loss) income per share. Basic net (loss) income per share is net (loss) income applicable to common stockholders divided by the weighted-average number of common shares outstanding. Diluted net loss per share is net loss applicable to common stockholders divided by the weighted-average number of common shares outstanding. Diluted net income per share is similar to basic net income per share, except that the denominator includes potential common shares that, had they been issued, would have had a dilutive effect. The following is a reconciliation of the basic and diluted shares:
For the three and six months ended June 30, 2012, all outstanding options were excluded from the calculation as their effect would have been antidilutive. For the three and six months ended July 2, 2011, 5,663 and 3,524 options, respectively, were excluded from the calculation as their effect would have been antidilutive.
Inventories, stated at the lower of cost or market, consisted of the following:
7
Property, plant and equipment consisted of the following:
The Company reported depreciation expense as follows:
The Company is required to perform an impairment analysis on its goodwill at least annually, or when events and circumstances warrant. Conditions that would trigger an impairment assessment, include, but are not limited to, a significant adverse change in legal factors or in the business climate that could affect the value of an asset or an adverse action or assessment by a regulator. The Company is considered one reporting unit. As a result, to determine whether goodwill may be impaired, the Company compares its book value to its market capitalization. If the trading price of the Company’s common stock, as adjusted for factors such as a control premium, is below the book value per share at the date of the annual impairment test or if the average trading price of the Company’s common stock is below book value per share for a sustained period, a goodwill impairment test will be performed by comparing book value to estimated market value. If the comparison of book value to estimated market value indicates impairment, then the Company compares the implied fair value of goodwill to its carrying amount in a manner similar to a purchase price allocation for a business combination. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. Unless indicators warrant testing at an earlier date, the Company performs its annual goodwill impairment test in the fourth quarter of each year. During the six months ended June 30, 2012, there were no impairments recorded or impairment indicators present. 8 Information regarding the Company’s acquisition-related intangible assets is as follows:
Amortization expense related to intangible assets is as follows:
The changes in the gross carrying amount of goodwill and intangible assets are as follows:
During the three months ended March 31, 2012 and April 2, 2011 product lines that were included in non-amortizing in process research and development ("IPR&D") reached technological feasibility. As a result, the Company transferred $929 and $250, respectively, to amortizing IPR&D and began amortizing these amounts over periods of 5 and 3 years, respectively. During the six months ended June 30, 2012 and July 2, 2011, no other product lines reached technological feasibility.
On September 30, 2010, the Company, the domestic subsidiaries of the Company (the “Guarantors”), Bank of America, N.A., as administrative agent and lender, and Union Bank, N.A., Wells Fargo Bank, N.A., Bank of the West, BBVA Compass Bank and US Bank, as lenders (together with the administrative agent, the “Lenders”), entered into a Credit Agreement (the “Agreement”). The Agreement provides the Company with a three-year unsecured revolving syndicated credit facility of $200,000 maturing on September 30, 2013. On August 24, 2011, the Company extended, with Lender's consent, the maturity date to September 30, 2014. The Company’s obligations under the Agreement are jointly and severally guaranteed by the Guarantors. Upon the occurrence of certain events of default specified in the Agreement, amounts due under the Agreement may be declared immediately due and payable. The Company may elect to borrow at either a Eurodollar Rate or a Base Rate (each as defined in the Agreement). 9 Eurodollar Rate loans bear interest at an amount equal to the sum of a rate per annum calculated from the British Bankers Association London Interbank Offered Rate ("LIBOR") plus a designated percentage per annum (the “Applicable Rate”). The Applicable Rate for Eurodollar Rate loans is based on the Company’s consolidated total leverage ratio (as defined in the Agreement) and is subject to a floor of 2.50% per annum and a cap of 3.00% per annum. Base Rate loans bear interest at a rate equal to the higher of the federal funds rate plus 0.50%, the prime rate of Bank of America, N.A. plus the Applicable Rate or the Eurodollar Base Rate plus 1.0%. The Applicable Rate for Base Rate loans is subject to a floor of 1.50% per annum and a cap of 2.00% per annum. The interest payment date (as defined in the Agreement) will vary based on the type of loan but generally will be quarterly. The Company paid commitment fees, an arrangement fee, upfront fees and a renewal fee pursuant to the terms of the Agreement. The Company will also pay a quarterly fee for any letters of credit issued under the Agreement. The initial fees associated with the Agreement were capitalized and are being amortized to interest expense using the straight-line method over the remaining term to maturity. The Agreement contains non-financial covenants of the Company and the Guarantors, including restrictions on the ability to create, incur or assume liens and other debt, make certain investments, dispositions and restricted payments, change the nature of the business, and merge with other entities subject to certain caps as defined in the agreement. The Agreement requires the Company to maintain ratios defined in the Agreement, which include a consolidated total leverage ratio as of the end of any fiscal quarter not in excess of 2.50 to 1.00, a consolidated liquidity ratio of at least 1.25 to 1.00 and a consolidated interest coverage ratio at a minimum of 3.00 to 1.00. The Company was in compliance with these covenants as of June 30, 2012. At June 30, 2012 and December 31, 2011, there were no amounts outstanding under the Agreement. Because there were no borrowings during the period, no interest cost was incurred during the six months ended June 30, 2012 or July 2, 2011.
Stock-based compensation expense consists of vesting grants of employee and director stock options and the employee stock purchase program ("ESPP"). The table below summarizes the stock-based compensation expense for the three and six months ended June 30, 2012 and July 2, 2011:
Stock Option Plans The following table summarizes the Company’s stock option transactions for the six months ended June 30, 2012:
10 ESPP Employees participating in the ESPP authorize the Company to withhold compensation and to use the withheld amounts to purchase shares of the Company's common stock at a discount. The table below summarizes the ESPP common stock purchases for the three and six months ended June 30, 2012 and July 2, 2011.
The Company recorded a tax benefit of $11,551 and $10,243 for the three and six months ended June 30, 2012, respectively, and tax expense of $4,990 and $12,676 for the three and six months ended July 2, 2011, respectively. The tax benefit for the three and six months ended June 30, 2012 was primarily associated with the Company's pre-tax loss offset by an accrual for unrecognized tax benefits. The tax expense for the three and six months ended July 2, 2011 was primarily associated with U.S. federal and state income taxes. As of June 30, 2012, the U.S. Congress has not extended the general business credit for research and experimentation. The Company has not estimated the effect of the expiration of this credit, nor does the income tax expense for the three months ended June 30, 2012 reflect a benefit for the credit. No provision has been made for U.S., state or additional foreign income taxes related to approximately $114,396 of undistributed earnings of foreign subsidiaries which have been permanently reinvested outside of the U.S., except for liquidated foreign entities and existing earnings that have been previously taxed. It is not practicable to determine the U.S. federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested outside of the U.S. In the event the foreign subsidiaries repatriate these earnings, the earnings may be subject to U.S. federal and state income taxes and foreign withholding taxes. Due to agreements with the Costa Rican and Singaporean governments, the Company was granted income tax holidays of varying rates through March 2017 and December 2019, respectively. Incentives from these countries are subject to the Company meeting certain employment and investment requirements. The Company was in compliance with these requirements as of June 30, 2012. Deferred Income Taxes As of June 30, 2012, deferred tax assets of $73,442, net of a $10,808 valuation allowance, were recorded on the balance sheet. As of December 31, 2011, the Company recorded deferred tax assets of $60,814, net of a $11,522 valuation allowance. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more-likely-than-not to be realized. The Company maintains a valuation allowance against the tax effect of all capital loss carryforwards, certain state and foreign net operating loss carryforwards, and certain state credit carryforwards, as management does not believe it is more likely than not that these benefits will be realized in future periods. Unrecognized Tax Benefits In the six months ended June 30, 2012, net unrecognized tax benefits increased $1,884 primarily as a result of an additional liability recorded to address potential exposures involving positions that could be challenged by taxing authorities. The Company does not anticipate any additional unrecognized tax benefits to be released due to the expiration of statutes of limitations on or before December 31, 2012. Interest and penalties associated with unrecognized tax benefits are accrued and classified as a component of tax expense in the statement of operations and comprehensive (loss) income. No other changes to the unrecognized tax benefits are anticipated within the next twelve months. Net unrecognized tax benefits at June 30, 2012 and December 31, 2011 were as follows:
11
Legal Matters The Company is from time to time involved in litigation, certain other claims and arbitration matters arising in the ordinary course of its business. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. These accruals are reviewed at least quarterly and adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility (within the meaning of ASC 450) that losses could exceed amounts already accrued, if any, and the additional loss or range of loss is able to be estimated, management discloses the additional loss or range of loss. In some instances, the Company is unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have on the Company. There are many reasons that the Company cannot make these assessments, including, among others, one or more of the following: the early stages of a proceeding; damages sought that are unspecified, unsupportable, unexplained or uncertain; discovery not having been started or incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation. On July 23, 2009, the Company filed a complaint in the United States District Court for the District of Arizona against Avago Technologies Limited, Avago Technologies U.S., and Avago Technologies Wireless IP (collectively, “Avago”). The Company's complaint seeks a declaration that four of the Avago patents are invalid and that none of TriQuint products infringe upon them. The Company's complaint also alleges that three Avago products infringed upon certain of TriQuint's U.S. patents. Avago filed an answer and counterclaims on September 17, 2009 denying the patent infringement allegations made by the Company in its complaint, and asserting that the Company's products infringed upon ten of Avago's U.S. patents. Avago's counterclaim asserted that the Company's alleged infringement was willful and sought unspecified compensatory and enhanced damages and injunctive relief. On October 16, 2009, the Company filed an answer and counterclaims denying Avago's patent infringement allegations and alleged that Avago engaged in anti competitive conduct in violation of U.S. antitrust laws through its acquisition of the bulk acoustic wave BAW business of Infineon Technologies, Inc. (“Infineon”) and a series of acquisitions of BAW-related patents from Infineon and other companies, and through other anticompetitive conduct in the market. On March 5, 2010, Avago filed an amended answer and counterclaims asserting violation of the California Uniform Trade Secret Act and, per the court's order, the Company simultaneously filed an amended complaint, answer and counter-claim. Avago's trade secret allegations related to Infineon information included in Avago's acquisition of Infineon's BAW division and TriQuint's employment of two former Infineon employees. On April 5, 2010, the Company filed an answer to Avago's amended answer and counterclaims, in which the Company denied Avago's allegations regarding violation of the California Uniform Trade Secret Act. Following further motion practice, on August 4, 2010 the Company filed its First Amended complaint and on August 26, 2010, Avago filed its answer and counterclaims expanding its patent and trade secret claims to include copyright infringement. On September 16, 2010, TriQuint submitted its answer, in which the Company denied Avago's allegations. On December 14, 2010, the Court held a claim construction hearing and on January 12, 2011, the Court issued its claim construction ruling. Fact and expert discovery closed and summary judgment and several ancillary motions were decided by order dated February 24, 2012 (the "Summary Judgment Order"). The Summary Judgment Order denied Avago's Motion for Summary Judgment in its entirety and granted TriQuint's motion in part by dismissing four of Avago's patent claims, the copyright, tort and unfair competition claims and certain of Avago's trade secret claims. The Court denied Avago's motion for spoliation sanctions without prejudice. The remaining case, including TriQuint's patent and antitrust claims against Avago and Avago's remaining patent and trade secret claims against TriQuint was scheduled to proceed to trial. On May 15th, 2012, TriQuint and Avago entered into a confidential agreement to end all outstanding legal disputes related to the pending litigation between the Company and Avago. Pursuant to the confidential agreement, the Company and Avago entered into a patent cross-licensing agreement. 12
In previous years, the Company made a number of investments in small, privately held technology companies in which the Company has held less than 20% of the capital stock or held notes receivable. As a result of the sale of the Company's former optoelectronics operations, the Company received as partial consideration $4,500 of preferred stock and an unsecured promissory note from CyOptics Inc. ("CyOptics") for $5,633. In years prior to 2011, the carrying amount of the CyOptics investment was fully impaired and written down to $0. During the six months ended June 30, 2012, the remaining amount due on the promissory note was settled in full and the preferred stock was sold in exchange for a total liquidation payment of $6,957. The transaction was recorded as a gain/recovery of investment in the statement of operations and in the operating activities section of the statement of cash flows. The proceeds from the liquidation were received in cash during the six months ended June 30, 2012 and are included in the investing activities section of the statement of cash flows.
As part of a transition in filter packaging technology and due to a change in product mix, the Company restructured its filter related operations during the three months ended June 30, 2012. The Company recorded and paid a restructuring charge of $1,763 primarily related to severance costs. These costs were recorded to cost of goods sold in the statement of operations.
On May 2, 2012, the Company's Board of Directors approved a stock repurchase program authorizing the purchase, at the discretion of management, of up to $50,000 of the Company's outstanding common stock. Common stock repurchases may be made from time to time in the open market at prevailing market prices or through privately negotiated transactions. The timing of open market and privately negotiated purchases will be dependent upon market conditions and other corporate considerations, including price, corporate and regulatory requirements and alternative investment opportunities. The Company expects to use cash from operations to fund the repurchase program, which is authorized through May 2, 2013. Shares of common stock repurchased by the Company through the repurchase program will be retired and will have no impact on total shares authorized. During the three and six months ended June 30, 2012, the Company repurchased 4,876 shares for $25,000 using cash from operations. 13
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, 2011. The discussion in this Report contains forward-looking statements, including statements regarding key advantages of our products and the benefits to our customers, participation in government programs and expansion of programs in the future, projected working capital and capital expenditures, potential investment needs, ongoing litigation, 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 expected demand and growth in the wireless mobile devices, networks and defense & aerospace markets; changes in our critical accounting estimates and the reasonableness of those estimates; the ability to enter into defense & aerospace contracts; department of defense spending levels and the degree to which we may benefit from particular defense spending; base station infrastructure expansion and our ability to take advantage of future market growth; reinvestment of all our foreign earnings except existing earnings that have previously been taxed; the ability to diversify our customer base; transitions in the mobile devices market including concentration of revenue in the handset market and continued growth of smartphones: 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, 2011 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 We are a supplier of high performance modules and components for communications applications. We design, develop and manufacture advanced high-performance radio frequency ("RF") solutions with gallium arsenide ("GaAs"), gallium nitride ("GaN"), surface acoustic wave ("SAW") and bulk acoustic wave ("BAW") technologies for customers worldwide. We serve growing markets and a diverse customer base of manufacturers building connected mobile devices, second, third and fourth generation cellular wireless standards ("2G/3G/4G") cellular base stations, triple-play cable solutions, fiber optic networks, wireless local area networks ("WLAN"), worldwide interoperability for microwave access/long-term evolution and defense & aerospace applications. We provide our customers with high-performance, low-cost RF solutions in the mobile devices, networks, and defense & aerospace end markets. Our mission is to deliver RF solutions that improve performance and lower the overall cost of our customer's applications and we accomplish this through a diversified product portfolio within these markets. In the mobile devices end market, we provide high performance devices such as integrated modules, duplexers and other filters, 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 cost 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, there was increased demand for our products. In response, we increased capital expenditures in order to add capacity to our factories. Now with the increased capacity installed and demand for our products lower than originally anticipated, higher fixed manufacturing costs adversely affect operating results because factories are not fully utilized. 14 Highlights for the Six Months Ended June 30, 2012 Revenue decreased 13% for the six months ended June 30, 2012 compared to the six months ended July 2, 2011. 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 six months ended June 30, 2012 decreased 19% compared to the six months ended July 2, 2011. The decrease is due to a decline in revenue from our largest customer during the six months ended June 30, 2012 and reduced revenue from some customers as end demand shifts away from them to top smartphone suppliers. Revenue from our connectivity products, largely Wireless LAN, was about $21.1 million, up 7% sequentially due to the uptake of new products. Revenue from sales of our products in the networks end market increased 1% for the six months ended June 30, 2012 compared to the six months ended July 2, 2011. Increasing wireless traffic, streaming video and social networking will continue to drive investment by carriers to improve mobile wireless coverage and fund the transition to LTE. These drivers create demand for TriQuint's products. Revenue from sales of our products in the defense & aerospace end market increased 2% for the six months ended June 30, 2012 compared to the six months ended July 2, 2011 due to growth in contract-based revenue. Our revenue in this market is dependent on program timing, which can result in swings from quarter to quarter. We have continued to win significant production orders during the six months ended July 2, 2011 for the latest generation of radar systems such as the F-35 Lightning II Joint Strike Fighter, and the Army's TPQ-53 Counter Fire Target Acquisition Radar. Additionally, as defense spending tightens, we anticipate increased spending for the retrofit of existing radar systems. 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, which affects our tax provision; 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, reserves for sales returns and allowances and our accounting for litigation and settlement costs; 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. There was one addition to our critical accounting policies during the three and six months ended June 30, 2012 related to our accounting for litigation and settlement costs. Refer to our most recent Annual Report on Form 10-K for a description of the remaining policies. Litigation and settlement costs From time to time, we are involved in legal actions. There are many uncertainties associated with any litigation or investigation, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with GAAP. However, the actual liability in any such litigation or investigations may be materially different from our estimates, which could require us to record additional costs. In addition, settlement agreements can be complex and involve multiple elements. Determining the fair value of elements within a multiple element settlement arrangement involves estimates and assumptions determined by management, which if different estimates had been used, could materially change the determination of fair value of the elements. Additionally, certain elements of an arrangement may not be reliably determinable and in these cases, the Company uses a residual approach to value these elements. 15 Results of Operations The following table sets forth the results of our operations expressed as a percentage of revenue for the three and six months ended June 30, 2012 and July 2, 2011:
Three Months Ended June 30, 2012 and July 2, 2011 Revenue from Operations Revenue decreased $50.8 million, or 22%, for the three months ended June 30, 2012 compared to the three months ended July 2, 2011. Revenue by end market for the three months ended June 30, 2012 and July 2, 2011, was as follows:
Mobile Devices Revenue from the sales of our products in the mobile devices market decreased approximately 30% for the three months ended June 30, 2012 compared to the three months ended July 2, 2011. The revenue decrease resulted primarily from declines in the sales of our 3G/4G, 2G and connectivity products, which experienced revenue decreases of approximately 25%, 30% and 44%, respectively. 3G/4G revenue declined primarily as a result of decreased demand from our largest customer. 2G revenue declined as we shifted focus away from this product area. Connectivity revenue declined primarily as a result of the end of a relationship with a WLAN foundry customer. Sales of these products collectively accounted for the following percentages of total mobile devices revenue: 16
Networks Revenue from the sales of our products in the networks market decreased approximately 2% for the three months ended June 30, 2012 compared to the three months ended July 2, 2011. The decrease was primarily driven by a 27% decline in the sales of our radio access products. The decline in radio access product sales compared to the same period of the prior year was primarily due to lower capital investment in the expansion of base station capacity by telecommunications companies. The decrease in revenue from sales of our products in the radio access submarket was offset by an increase of product sales in the transport submarket of 15% that was primarily driven by strong growth in the demand for our optical products. Sales of our products in the multi-market category were flat when comparing the three months ended June 30, 2012 and July 2, 2011. Sales of these products collectively accounted for the following percentages of total networks revenues:
Defense & Aerospace Revenue from the sales of our products in the defense & aerospace market decreased approximately 10% for the three months ended June 30, 2012 compared to the three months ended July 2, 2011, due primarily to the timing of programs. Significant Customers For the three months ended June 30, 2012 and July 2, 2011, sales to Foxconn Technology Group accounted for 24% and 32% of our revenue, respectively. In 2011, as a result of allocating sales of available products to certain customers, including Foxconn Technology Group, and the customers' success, revenue resulting from sales to Foxconn Technology Group constituted a larger portion of our total revenue. While we strive to maintain a strong relationship with our customers, our customers' product life cycles are short as 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 or our other customers. Any significant loss of, or a significant reduction in purchases by this, 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 decreased to 25.2% for the three months ended June 30, 2012, from 40.3% for the three months ended July 2, 2011. The decrease in gross profit was primarily the result of increased capacity placed into service during the year coupled with lower demand driving a lower factory utilization rate in the quarter. 17 Operating expenses Research, development and engineering Our research, development and engineering expenses for the three months ended June 30, 2012 compared to the three months ended July 2, 2011 were relatively flat, with an increase of $0.1 million, or less than 1%. Selling, general and administrative Selling, general and administrative expenses for the three months ended June 30, 2012 increased $2.2 million, or 9% compared to the three months ended July 2, 2011. The increase in selling, general and administrative expenses primarily resulted from more medical and dental claims submitted under our self-insurance program during the three months ended June 30, 2012 compared to the three months ended July 2, 2011. Litigation expense Litigation expense for the three months ended June 30, 2012 decreased $3.8 million, or 51% compared to the three months ended July 2, 2011 as a result of settling the Avago litigation. Details regarding this matter are more fully described in Part II, Item 1 - Legal Proceedings. Other (expense) income, net Net other (expense) income was relatively flat for the three months ended June 30, 2012 compared to the three months ended July 2, 2011 with net other expense of $0.2 million and net other income of $0.3 million, respectively. Income tax (benefit) expense We recorded an income tax benefit of $11.6 million for the three months ended June 30, 2012 and income tax expense of $5.0 million for the three months ended July 2, 2011. The income tax benefit for the three months ended June 30, 2012 was primarily associated with our pre-tax loss, offset by an accrual for unrecognized tax benefits. The income tax expense for the three months ended July 2, 2011 primarily resulted from United States ("U.S.") federal and state income taxes. Six Months Ended June 30, 2012 and July 2, 2011 Revenue from Operations Revenue decreased $58.4 million, or 13%, for the six months ended June 30, 2012 compared to the six months ended July 2, 2011. Revenue by end market for the six months ended June 30, 2012 and July 2, 2011, was as follows:
Mobile Devices Revenue from the sales of our products in the mobile devices market decreased approximately 19% for the six months ended June 30, 2012 compared to the six months ended July 2, 2011. The revenue decrease resulted primarily from declines in the sales of our 3G/4G, 2G and connectivity products which experienced revenue decreases of approximately 9%, 42% and 43%, respectively. 3G/4G revenue declined primarily as a result of reduced demand from our largest customer. 2G revenue declined as we shifted focus away from this product area. Connectivity revenue declined as a result of the end of a foundry program for WLAN products. Sales of these products collectively accounted for the following percentages of total mobile devices revenue: 18
Networks Revenue from the sales of our products in the networks market was relatively flat, with an increase of approximately 1% for the six months ended June 30, 2012 compared to the six months ended July 2, 2011. The slight increase was primarily driven by a 3% increase in sales of our radio access products resulting from a significant last-time buy placed by a customer for our products in the radio access submarket during the first three months of the year which was offset by lower capital investment in the expansion of base station capacity by telecommunications companies. Transport and multi-market revenue was flat. Sales of these products collectively accounted for the following percentages of total networks revenues:
Defense & Aerospace Revenue from the sales of our products in the defense & aerospace market was relatively flat, with an increase of approximately 2% for the six months ended June 30, 2012 compared to the six months ended July 2, 2011. Significant Customers For the six months ended June 30, 2012 and July 2, 2011, Foxconn Technology Group accounted for 31% and 33% of our revenue, respectively. Gross Profit Our gross profit as a percentage of revenue decreased to 27.2% for the six months ended June 30, 2012, from 39.6% for the six months ended July 2, 2011. The decrease in gross profit was primarily the result of increased capacity put in place during 2012, coupled with lower demand, thereby resulting in a lower factory utilization rate. Operating expenses Research, development and engineering Our research, development and engineering expenses for the six months ended June 30, 2012 compared to the six months ended July 2, 2011 were relatively flat, with an increase of $0.7 million, or less than 1%. Selling, general and administrative Selling, general and administrative expenses for the six months ended June 30, 2012 increased $2.2 million, or 4% compared to the six months ended July 2, 2011. The increase in selling, general and administrative expenses primarily resulted from more medical and dental claims submitted under our self-insurance program during the six months ended June 30, 2012 compared to the six months ended July 2, 2011. Litigation expense Litigation expense for the six months ended June 30, 2012 decreased $5.4 million, or 42% compared to the six months ended July 2, 2011 as a result of settling the Avago litigation in May 2012. Details regarding this matter are more fully 19 described in Part II, Item 1 - Legal Proceedings. Other income, net Net other income for the six months ended June 30, 2012 was $6.6 million, compared to $0.1 million for the six months ended July 2, 2011. The increase in net other income was primarily due to the gain/recovery related to the sale of a previously impaired investment. Income tax (benefit) expense We recorded income tax benefit of $10.2 million for the six months ended June 30, 2012 and income tax expense of $12.7 million for the six months ended July 2, 2011. The income tax benefit for the six months ended June 30, 2012 was primarily associated with our pre-tax loss, offset by an accrual for unrecognized tax benefits. The income tax expense for the six months ended July 2, 2011 primarily resulted from U.S. federal and state income taxes. Liquidity and Capital Resources Liquidity As of June 30, 2012, our cash, cash equivalents and short-term marketable securities increased $0.1 million, or less than 1%, from December 31, 2011. Other related changes at June 30, 2012 compared to December 31, 2011 were:
Sources of Liquidity Our current cash, cash equivalents and short-term investments balances, ($97.3 million domestic and $65.1 million foreign) together with cash anticipated to be generated from operations and the balance available on our $200 million syndicated credit facility, constitute our principal sources of liquidity. We believe these sources will satisfy our projected expenditures through the next twelve months. We intend to permanently reinvest all foreign earnings except for liquidated foreign entities and existing earnings that have been previously taxed. We are not presently aware of any restrictions on the repatriation of these funds. If these funds were needed to fund our operations in the U.S., they could be repatriated. Repatriation of our foreign funds would require board approval and could result in additional U.S. income taxes and foreign withholding taxes which could be partially offset by net operating losses and/or foreign tax credits. Determining the amount of possible future taxes is not practicable. At this time, we believe our domestic funds, along with the syndicated credit facility, are sufficient to meet our net domestic cash requirements for the next twelve months. The principal risks to these sources of liquidity are lower than expected earnings or capital expenditures in excess of our expectations, in which case we may be required to finance any shortfall through additional equity offerings, debt financing or credit facilities. We may not be able to obtain additional financing or credit facilities, or if these funds are available, they may not be available on satisfactory terms. On May 2, 2012, our Board of Directors approved a stock repurchase program authorizing the purchase, at the discretion of management, of up to $50 million of the Company's outstanding common stock. We expect to use cash from operations to fund the repurchase program, which is authorized through May 2, 2013. During the three and six months ended June 30, 2012, we made the following repurchases of our common stock (in millions except per share data):
20 The following table summarizes our scheduled contractual commitments as of June 30, 2012 that will affect our future liquidity (in millions):
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As of June 30, 2012, we had approximately $2.6 million of net tax liabilities, which are included as “Long term income tax liability” in our consolidated balance sheets. We do not anticipate that settlement of the liabilities will require payment of cash within the next twelve months. Further, we are not able to reasonably estimate the timing of any cash payments required to settle these liabilities and do not believe that the ultimate settlement of these obligations will materially affect our liquidity. Recent Accounting Pronouncements See Note 2 of the Notes to Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements. Off Balance Sheet Arrangements As of June 30, 2012, we did not have any off balance sheet arrangements, as defined in Regulation S-K Item 303(a)(4). We did not have any relationships with unconsolidated entities or financial partnerships such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Our investments in cash equivalents are classified as available-for-sale securities and consist of highly-rated, short-term investments, such as money market funds, in accordance with an investment policy approved by our board of directors. All of these investments are held at fair value. We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. The following table shows the fair value of our investments as of June 30, 2012 (in millions): 21
Foreign Currency Risk We are exposed to currency exchange rate fluctuations because we sell our products internationally and have operations in Costa Rica and Germany. We manage the foreign currency risk of our international sales, purchases of raw materials and equipment by denominating most transactions in U.S. dollars.
Evaluation of disclosure controls and procedures. We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”)), under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 22
We are from time to time involved in litigation, certain other claims and arbitration matters arising in the ordinary course of our business. We accrue for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. These accruals are reviewed at least quarterly and adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility (within the meaning of Accounting Standards Codification ("ASC") 450) that losses could exceed amounts already accrued, if any, and the additional loss or range of loss is able to be estimated, we disclose the additional loss or range of loss. In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have on our business. There are many reasons that we cannot make these assessments, including, among others, one or more of the following: the early stages of a proceeding; damages sought that are unspecified, unsupportable, unexplained or uncertain; discovery not having been started or incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation. On July 23, 2009, we filed a complaint in the United States District Court for the District of Arizona ("the Court") against Avago Technologies Limited, Avago Technologies U.S., and Avago Technologies Wireless IP (collectively, “Avago”) seeking a declaratory judgment that four U.S. patents owned by Avago, which Avago had asserted in letters to our customers were infringed by our products, are not infringed upon by any of our products and are invalid. Our complaint further alleged that certain Avago products infringed upon our U.S. Patent Nos. 6,114,635, 5,231,327 and 5,894,647. Avago filed an answer and counterclaims on September 17, 2009 denying the patent infringement allegations made by us in our complaint, and asserting that our products infringed upon ten of Avago's U.S. patents. The patents asserted by Avago are: 6,262,637, 6,377,137, 6,841,922, 6,864,619, 6,909,340, 6,933,807, 7,268,436, 7,365,619, 6,051,907 and 6,812,619. Avago's counterclaim asserted that our alleged infringement was willful and sought unspecified compensatory and enhanced damages and injunctive relief. On October 16, 2009, we filed an answer and counterclaims denying Avago's patent infringement allegations, and asserted antitrust claims under Section 7 of the Clayton Act and Section 2 of the Sherman Act. As stated in the counterclaim, the antitrust claims related to Avago's anticompetitive conduct through its acquisition of the BAW business of Infineon Technologies, Inc. (“Infineon”) and a series of acquisitions of BAW-related patents from Infineon and other companies, and through other anticompetitive conduct in the market. On March 5, 2010, Avago filed an amended answer and counterclaims asserting violation of the California Uniform Trade Secret Act and, per the court's order, we simultaneously filed an amended complaint, answer and counter-claim. Avago's trade secret allegations related to Infineon information included in Avago's acquisition of Infineon's BAW division and our employment of two former Infineon employees. On April 5, 2010, we filed an answer to Avago's amended answer and counterclaims, in which we denied Avago's allegations regarding violation of the California Uniform Trade Secret Act. Following further motion practice, on August 4, 2010, we filed our First Amended Complaint and on August 26, 2010, Avago filed its answer and counterclaims expanding its patent and trade secret claims to include copyright infringement. On September 16, 2010, we submitted our answer, in which we denied Avago's allegations. On December 14, 2010, the Court held a claim construction hearing and on January 12, 2011, the Court issued its claim construction ruling. Fact and expert discovery closed and summary judgment and several ancillary motions were decided by order dated February 24, 2012 (the "Summary Judgment Order"). The Summary Judgment Order denied Avago's Motion for Summary Judgment in its entirety and granted TriQuint's motion in part by dismissing four of Avago's patent claims, the copyright, tort and unfair competition claims and certain of Avago's trade secret claims. The Court denied Avago's motion for spoliation sanctions without prejudice. The remaining case, including TriQuint's patent and antitrust claims against Avago and Avago's remaining patent and trade secret claims against TriQuint was scheduled to proceed to trial. On May 15th, 2012, we entered into a confidential agreement with Avago to end all outstanding legal disputes related to the pending litigation. In addition, pursuant to the confidential agreement, we entered into a patent cross-licensing agreement.
There have been no material changes to our market risk exposures from the risk factors previously disclosed in our 2011 Annual Report on Form 10-K for the year ended December 31, 2011. For a discussion on our exposure to market risk, refer to Item 1A, Risk Factors, contained in our 2011 Annual Report on Form 10-K as filed with the SEC on February 27, 2012. 23
24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
25 INDEX TO EXHIBITS
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