Item 1.
Business
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 serve customers worldwide in mobile device, networks infrastructure and defense & aerospace markets. 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 were incorporated in California in 1981 and reincorporated in Delaware on February 12, 1997. Our principal executive offices are located at 2300 NE Brookwood Parkway, Hillsboro, Oregon 97124 and our telephone number at that location is (503) 615-9000. We operate worldwide with our design, sales and manufacturing facilities located throughout Asia, Europe and North America. Our primary design and manufacturing facilities are located in Oregon, Texas and Florida. Information about our company is also available at our website, www.triquint.com, which includes links, free of charge, to reports and amendments to those reports we have filed with the Securities and Exchange Commission ("SEC"). The contents of our website are not incorporated by reference in this Annual Report on Form 10-K. The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports can also be accessed at the SEC website, www.sec.gov.
Industry Background
Ever growing demand for always-on connectivity drives the entire wired and wireless communications ecosystem. Today's sophisticated mobile devices support simultaneous voice, data, video, location services and wireless connectivity options. As advanced fourth generation ("4G") networks are deployed around the world, third generation ("3G") high-speed, data-centric service continues to expand in most global wireless markets. The cellular and WiFi radios in mobile devices provide connectivity across a proliferating range of mobile devices. As long-term evolution ("LTE") networks roll out and RF complexity increases, device manufacturers are turning to highly integrated modules to simplify design and boost performance for radio front-ends. TriQuint was a pioneer in producing the integrated module and continues to drive integration advancements. In addition to widely adopted smartphones, highly integrated devices are now being leveraged within new data-centric devices, such as data cards for laptops and tablets, and a whole new genre of infotainment appliances, such as e-readers, gaming consoles, digital television and navigation devices.
To support these feature-rich mobile devices, network infrastructure operators are expanding capacity, re-architecting designs, increasing 3G base station deployments, accelerating 4G deployments and upgrading transport capacity through microwave point-to-point ("PtP") radio and optical network links. In addition, many are turning to WiFi offload strategies and small cell base stations to ease the strain from skyrocketing mobile data traffic on congested cellular networks. The RF content in premises-based devices and distribution networks is increasing due to higher frequency systems and the need to accommodate more content over existing infrastructure. TriQuint offers a broad product portfolio that serves these growing markets, including packaged radio amplifiers for transmit and receive systems and standard-setting optical modulator drivers.
Defense & aerospace markets rely on dependable microwave monolithic integrated circuits ("MMICs") in die-level and packaged forms, as well as SAW and BAW filters. Today's global defense & aerospace industry looks for commercial off-the-shelf ("COTS") convenience, balanced against the rigorous performance standards that typify microwave products for advanced communications, radar and national security use. Defense & aerospace applications require extreme precision, reliability, durability and supply assurance. For example, the combination of SpatiumTM power combining technology with solid state GaN MMICs will create an opportunity to address the Traveling Wave Tube Amplifier ("TWTA") market with solutions that deliver new levels of efficiency, power density, frequency coverage and output power. TriQuint products include high power amplifiers, low noise amplifiers, switches, fixed frequency and voltage controlled oscillators, filters and attenuators for use in a variety of advanced systems, such as active phased array radar, guidance, missiles, electronic warfare and counter measures and space communications systems.
To address market demand for higher levels of performance, electronic communications systems manufacturers have relied heavily on advances in high-performance components and modules such as those that we produce. For example, GaAs
has inherent physical properties that allow its electrons to move up to five times faster than those of silicon. This higher electron mobility permits the manufacture of GaAs integrated circuits that operate at higher levels of performance than silicon devices. Similarly, GaN advancements by TriQuint have shown that GaN devices now in production can be smaller than GaAs-based products and operate at even wider bandwidths and frequencies, making GaN ideal as a high-frequency/high-power RF solution that can reduce bills of materials while shrinking RF circuit sizes. TriQuint has also achieved record-setting reliability with its second generation GaN on silicon carbide ("SiC") process, which reduces long-term maintenance and expands the lifetime of components in critical systems. GaAs and GaN semiconductor technologies are generally better alternatives to silicon solutions in almost all high-performance RF, microwave and millimeter wave applications. The higher electron mobility of GaAs and GaN enables the integrated circuits to operate at higher speeds or power than silicon devices, with lower current consumption. Lower current consumption is important in mobile devices and a wide range of network infrastructure; it dramatically increases operational time in mobile devices while lowering electricity cost and overall operating expense in base stations and similar RF applications. In addition, SAW and BAW technologies offer a number of advantages over traditional filter technologies, including precise frequency control and selectivity, minimal distortion, reduced size and weight, high reliability and environmental stability. In general, SAW technology has a cost/performance advantage from low frequencies to approximately 2 gigahertz. BAW technology has a cost/performance advantage from approximately 2 to 10 gigahertz.
TriQuint Mission and Strategy
Our mission is to deliver complete RF solutions that improve the 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 and achieve scale through targeted growth.
We continue to invest in research and development ("R&D"), capacity expansion and hiring the best and brightest talent. These tactics are enabling us to serve an array of growing markets with a diversified product portfolio within the communications and defense industries.
Total RF front-end solutions
In the mobile devices end market, we utilize our broad technology portfolio to simplify increasing RF complexity and enable a faster time to market for our customers. We create integrated RF front-end solutions that include multiple bands, frequencies and communication standards into small, high-performance modules. Moreover, we are strategically focused on taking integration even further by combining high-performance filters, power amplifiers and switches into complete RF front-ends. By integrating discrete components into space-saving modules, we deliver greater functionality and higher performance in smaller form factors, thus providing greater value for cellular and WiFi devices worldwide.
Trusted partner for advanced RF solutions
TriQuint is a trusted resource and strategic partner for customers through integrated RF solutions and services that enable growth and profitability. TriQuint provides R&D leadership backed by decades of product and service innovation. These qualities have collectively made us a provider of choice for advanced network infrastructure and defense & aerospace RF systems. TriQuint is also a Microelectronics Trusted Source accredited by the United States ("U.S.") Department of Defense (“DoD”) for foundry, post-processing, packaging/assembly and test services (Category 1A). We deliver highly integrated products, discrete solutions, trusted applications support, foundry services and personal customer service. We offer a variety of packaging, assembly and test options to meet our customers' performance needs. Our growing team of applications engineers and designers at our U.S.-based manufacturing and design centers, as well as our international offices, are focused on meeting our customers' global requirements. Our global sales and distribution teams offer local support to help ensure on-going customer satisfaction.
Technology leadership and relationships
We enjoy long-standing institutional relationships with leading smartphone and tablet manufacturers that have built and are expanding the world's broadband communications networks. Customers of our defense & aerospace end market include key defense subcontractors to the U.S. government. Our advanced technology is sought after in the industry and we continue to focus internal and external R&D resources on the development and maturity of GaN solutions. We have secured numerous contract awards, including the Microscale Power Conversion ("MPC") and Near Junction Thermal Transport ("NJTT") GaN programs. Our work supporting the Defense Production Act Title III manufacturing contract and the Nitride Electronic Generation Technology ("NeXt") GaN programs are on-going. TriQuint R&D endeavors are the foundation for product and service innovations that reach across all of our end markets and applications. Additionally, we continue to push the limits of GaAs, SAW and BAW filter technologies, wafer-level packaging ("WLP"), copper flip-chip interconnects (Cu-FlipTM), as well as temperature-compensated SAW ("TC-SAW") and advanced BAW used to address challenging new bands worldwide. Our talented design engineers use these core competencies in addition to technologies such as silicon on insulator ("SOI") and complementary metal-oxide-semiconductor ("CMOS") within our highly integrated products.
Market diversity
We offer a broad range of RF products and services that address numerous end-user applications in synergistic mobile device, networks infrastructure and defense & aerospace end markets. This balanced portfolio includes foundry services, die level solutions, integrated MMICs, packaged components and modules, as well as integrated assemblies that combine multi-function semiconductor and filter chips in standard and custom packages. TriQuint products are designed and manufactured utilizing a variety of technologies and wafer substrates well suited for end-market application requirements.
Partnering with industry leaders
We plan to continue establishing and maintaining close working relationships with industry leaders in our target markets. We also intend to maintain existing connections, and establish new, strategic relationships with companies that provide access to new technologies, products and markets. These relationships are critical to providing us with insights into future customer requirements, which facilitate the timely development of new products to meet the changing needs of the marketplace.
Markets, Products and Applications
We offer a broad array of filtering, switching and amplification products for RF, microwave and millimeter-wave applications. We utilize specialized substrate materials and high-performance process technologies such as GaAs, GaN, pseudomorphic high electron mobility transistors ("pHEMT"), GaN high electron mobility transistor, heterojunction bipolar transistors ("HBT"), metal-semiconductor field effect transistor ("MESFET"), bipolar high electron mobility transistor ("BiHEMT"), WLP, CuFlipTM, SAW, TC-SAW and BAW to design and manufacture products which are intended to improve the performance and lower the overall cost of our customers' applications. We believe our products offer other key advantages relative to competing devices, including steeper selectivity, improved linearity, lower distortion, higher output power and power-added efficiency, as well as reduced size and weight, and more precise frequency control. Our broad range of standard and customer-specific integrated circuits, components and modules, in addition to SAW and BAW duplexers and filters, combined with our manufacturing and design capabilities, allow customers to select the specific product solution that best fulfills their technical and time-to-market requirements.
We focus on three end markets in the electronic communications system industry: mobile devices, networks infrastructure and defense & aerospace.
Mobile Devices
The demand in the mobile devices end market has evolved over the past several years as a result of increased demand for enhanced voice and data communication capabilities. Users want mobile devices to provide signal quality similar to wired communication systems, to be smaller and lighter, to accommodate longer talk and standby time and to contain complex functionality such as digital cameras, video recorders, music players, global positioning systems ("GPS"), Bluetooth®, and internet access. The most significant trend today in the mobile devices market is the growth of smartphones and tablets. These devices contain application processing capability that allows the device to be a platform for a wide variety of software applications, including e-mail, calendar, location-based services, web-based services, music, video, travel aids and a multitude of games. Smartphones typically have power amplifiers, filtering and switches for voice and data communications. Additionally, they typically have multiple bands enabling multi-region access and coverage - i.e. some smartphones can be used almost anywhere in the world. The increased number of RF bands has increased the overall dollar content in an average smartphone by two to four times compared to a traditional voice-only phone. Likewise, tablets drive additional demand for wireless local area networks ("WLAN") and cellular bands in order to support data communication. The increase in wireless communication traffic has resulted in congestion of the assigned frequency bands, creating capacity issues for network operators. As a consequence, wireless communications standards are evolving to more efficiently utilize the available spectrum. Demand has increased for mobile devices that work across multiple standards and frequency bands. Mobile devices of this complexity provide new technical challenges that our products are well suited to address, and we believe our mobile device strategy will meet the needs of this evolving market.
We sell electronic components for mobile phones, including RF filters, duplexers, power amplifiers (“PAs”) and power amplifier modules (“PAMs”), switches, transmit modules (“TXMs”), power amplifier + duplexer (“PAD”) modules, multi-mode, multi-band power amplifiers ("MMPA"), single and dual band WLAN modules and other advanced products to meet the changing needs of the global communications marketplace. Our products support 2G, 3G and 4G standards, global system for mobile communication ("GSM"), general packet radio service ("GPRS"), enhanced data rates for GSM evolution ("EDGE"), code division multiple access ("CDMA"), evolution-data optimized ("EV-DO"), wideband code division multiple access ("WCDMA"), high speed packet access ("HSPA"), WEDGE, WGPRS, LTE, WLAN, Bluetooth® and others and can be found across this wide frequency spectrum. Our compact, highly integrated modules and components enable quick design turns, higher performance, lower part count and reduced overall solution costs.
We sell our products to mobile device manufacturers worldwide. Historically, the demand for RF components and modules has been driven by the increasing usage of mobile devices across the globe and the increasing complexity of those
mobile devices, which utilize features such as multi-band radios, GPS and Wi-Fi. The market for these devices is largely driven by two key product manufacturers. The total number of handset subscribers continues to grow, with China and India growing at the fastest rates. We categorize the mobile devices end market into three primary submarkets: 3G/4G, 2G and connectivity.
Our access to various technologies such as GaAs, lithium niobate ("LiNbO3") and silicon materials coupled with device design can provide key performance advantages, such as higher frequency operation, improved signal reception and transmission, better signal processing in congested bands and greater power efficiency for longer battery life, all important attributes of the mobile device experience. Further, our access to a broad range of process technologies enables us to integrate them in applications to optimize both product performance and cost, while providing mobile device designers with what we believe is the utmost flexibility while successfully addressing their requirements for low noise, efficient power amplification, low loss switching and efficient/accurate frequency conversion.
Historically, we have experienced seasonal fluctuations in our sales of mobile device components. Our revenue is generally the strongest in the third and fourth quarters in response to the holiday selling season, and weakest in the first quarter of each year.
Revenue from the mobile devices end market accounted for approximately 67% of our total revenue in 2013, compared to 65% of our revenue in 2012 and 71% of our revenue in 2011.
Networks Infrastructure
We sell products that support the transfer of voice, video and data across wireless and wired infrastructure. The increasing demand for applications, services and the associated high-speed data for smartphones, tablets, computers and TVs is driving a dramatic evolution in the infrastructure that carries this data. This translates to requirements for systems and components with higher frequency, broader bandwidth, greater linearity, lower power consumption and smaller size. To reduce operator complexity and capital investment, systems need to cover multiple bands and modulation standards, without increasing size or cost.
In this rapidly changing landscape, our goal is to “Simplify RF” for our customers through innovative device, filtering and packaging technologies, integration and our long history of quality, reliability and customer support. Our products for the networks infrastructure end market target three main applications:
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Transport, which includes wireless and wired broadband networks infrastructure for CATV, fiber-to-the-home ("FTTH"), PtP radio, Very-Small Aperture Terminals ("VSAT") and optical transport networks infrastructure ("OTN");
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Base Station, which comprises 2G, 3G, 4G / LTE and multi-carrier, multi-standard base stations, small cells; and
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Multi-markets, such as automotive radar, telematics and advanced metering infrastructure ("AMI").
TriQuint offers a broad range of products for these applications, including low-noise, variable-gain, driver and power amplifiers, digital and analog attenuators, frequency converters, voltage-controlled oscillators, switches, SAW filters, BAW filters, and multi-chip modules ("MCMs") that integrate multiple functions.
TriQuint products are differentiated by high performance, reflecting our unique GaAs, GaN, SAW and BAW processes combined with innovative design and packaging. For example, in base station applications, our amplifiers offer high linearity and efficiency with high output power and low power consumption. In optical transport networks infrastructure, our modulator drivers provide a wide output voltage swing, low jitter and high fidelity electrical “eye” performance for 40 and 100 gigabits per second ("Gb/s") networks.
We utilize our process and assembly technologies to achieve superior performance and integrate RF functionality at both the integrated circuit and multi-chip module levels. The range of process technologies we can draw upon spans from 100 megahertz ("MHz") to 100 gigahertz ("GHz"), low noise to high power. As an example, our high-voltage HBT ("HVHBT") and GaN processes provide two options for addressing very high power, high efficiency and high linearity applications. Our multi-chip modules utilize our high-volume assembly capabilities used in the manufacturing of our products for the mobile devices end market, to achieve low cost and high quality for infrastructure applications.
To assist our customers in using our products, we use a global network of sales representatives and distributors. We maintain an extensive web site containing product information and publish a comprehensive product selection guide annually. This is supplemented by our global team of application engineers, who provide both pre and post-sale technical support.
Revenue from the networks infrastructure end market accounted for approximately 21% of our total revenue in 2013, compared to 23% in 2012 and 20% in 2011.
Defense & Aerospace
Our largest customers in the defense & aerospace end markets are military contractors serving the U.S. government. These prime contractors and subcontractors use our die-level integrated circuits ("ICs"), MMICs and multi-chip modules for radar electronic warfare and communications systems. These programs include major shipboard, airborne and battlefield radar systems as well as satellite communications and guidance applications. Our products are used in large scale programs with long lead-times. Once a component has been designed into an end-use product for a military application, the same component is generally used during the entire production life of the end-use product.
Our products utilized in ground-based radars are bringing new capabilities to detect and neutralize threats against infantry defense forces around the globe. We are actively engaged with existing customers while seeking greater emerging application opportunities. For example, our airborne radar experience with and systems has led to ongoing work in the multi-national Lightning/Joint Strike Fighter (“JSF”) program as well as one of the newest anti-missile phased array radar systems. In addition, we expect our products to be used in retrofits that upgrade the radars and other systems for the existing, and fleets.
The capability to track multiple targets simultaneously is one of the key enhancements found in the new generation of fighters such as the JSF. We are teamed with contractors in this program as well as engaged in retrofits of other tactical fighter jet programs. TriQuint microwave PAs provide the capability to transmit the power that is at the heart of phased array radar operation. These radars consist of large element arrays composed of many individual integrated circuits. In addition to supplying components for airborne and ground-based phased array radars, TriQuint is engaged with prime defense contractors in the continuing development and production of radars for shipboard applications. In the military communications field, we supply filters, amplifiers and other components for hand-held and satellite communications systems. TriQuint is using its packaging and integrated assembly expertise to speed designs, facilitate multi-chip package evolution and deliver cost-effective solutions for all types of customer needs.
Our DoD accreditation as a Microelectronics Trusted Source is an assurance that our processes and procedures meet stringent quality and security controls, which can permit increased levels of high security / classified application specific integrated circuit (“ASIC”) foundry services. Through accreditation, we join a small group of GaAs suppliers certified by the DoD as able to fabricate and deliver devices for applications using standards approved and monitored by the Defense MicroElectonics Activity ("DMEA").
TriQuint is also directly engaged with the U.S. government, primarily through contracts with the Defense Advanced Research Project Agency ("DARPA"), the Air Force Research Laboratory ("AFRL"), and the Office of Naval Research ("ONR") to develop the next generation of RF components in GaN and GaAs. GaN high electron mobility transistor devices provide the higher power density and efficiency required for future high-power phased array radar, electronic warfare, missile seekers and communications systems. Through these programs and other ongoing efforts, we continue to enhance the reliability and manufacturability of our GaN processes. In 2013, we continued work on the GaN manufacturing development contract we received from AFRL (Defense Production Act Title III) in 2010. In addition, we demonstrate our leadership through selection by many agencies for high-frequency / high-reliability research and development.
Revenue from the defense & aerospace end market accounted for approximately 13% of our total revenue in 2013, compared to 12% in 2012 and 9% in 2011. In general, revenue from the sales of our products in the defense & aerospace end market can fluctuate significantly from year to year due to the timing of programs.
Design and Process Technology
We have developed our broad technology portfolio to support our product innovation in RF applications. These technologies include a variety of semiconductor processes in GaAs and GaN for power and switching applications and SAW and BAW structures for filter applications. In order to effectively utilize these technologies in developing advanced products, we have also created an infrastructure supporting these processes that includes software tools for circuit simulation and physical modeling as well as extensive component cell libraries and characterization databases. These tools supporting our advanced process capabilities enable us to efficiently develop high-performance products for customers in our RF end markets. Additionally, we make these tools available to customers utilizing our strategic foundry services to develop their own products.
Our manufacturing strategy is to use high-volume process technologies when possible that enable us to provide cost-effective, stable, uniform and repeatable solutions for our customers. We achieve this by developing process modules, which, when combined together, allow for the rapid development of new processes. As a result, we are able to enjoy the cost advantages associated with standard high-volume semiconductor manufacturing practices. The core process technology in our Hillsboro, Oregon wafer fabrication operation employs both implanted and epitaxial structures, 4 micron metal pitch, typically 0.35 or greater micron geometries, 10 to 21 mask steps, and is scalable. Additionally, an optical process for 0.25 and 0.13 micron gates provides a significant advantage in cost, with a small degradation in performance, over the typical electron-beam
process required to achieve those types of gate structures. Our BiHEMT process allows for the monolithic integration of our separate HBT and pHEMT capabilities on one chip. In our Apopka, Florida wafer fabrication operation, we use manufacturing techniques that are very similar to those for integrated circuits to produce our SAW devices. The process technology employed in our Richardson, Texas wafer fabrication operation includes additional advanced performance production processes. We use manufacturing techniques in our Texas operations that are very similar to those for integrated circuits to produce our BAW devices.
Customers
We have a broad customer base of leading systems manufacturers. Revenue from our sole customer representing 10% or more of total revenue for each period is as follows (as a percentage of total revenue):
Some of our mobile devices customers use multiple subcontractors for product assembly and test. Therefore, revenue for our customers may not necessarily represent the entire business of a single mobile devices manufacturer. Any significant loss of, or a significant reduction in purchases by, one or more of these customers could have an adverse effect on our financial condition and results of operations.
Our sales to customers outside the U.S. accounted for approximately 82%, 76% and 73% of revenue in 2013, 2012 and 2011, respectively. Sales to our customers outside the U.S. representing approximately 10% or more of total revenue for each period are as follows (as a percentage of revenue):
Some of our sales to overseas customers are made under export licenses that must be obtained from the U.S. Department of Commerce.
Manufacturing
We currently utilize seven manufacturing centers located in Oregon, Texas, Florida, California, the Philippines and Costa Rica as follows:
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A 260,000 square foot Hillsboro, Oregon facility located on 50 acres of land. This facility houses our 82,000 square foot wafer fabrication facility as well as executive, administrative, engineering, test and technical offices. The fabrication facility includes 31,700 square feet of Class 100 clean room space.
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A 14,100 square foot Bend, Oregon facility, of which approximately 4,600 is fabrication space. This facility is under an operating lease expiring in June 2016.
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A 540,000 square foot Richardson, Texas facility on approximately 38 acres of land. The Richardson facility has 48,000 square feet of Class 10 clean room space.
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A 119,000 square foot wafer fabrication, assembly and test facility located in Apopka, Florida on approximately 16 acres of land. The Apopka wafer fabrication facility includes 41,600 square feet of manufacturing space and 36,000 square feet of clean room, of which 5,000 square feet is a Class 10 clean room.
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A 62,900 square foot assembly and test facility for the production of SAW filters in San Jose, Costa Rica on approximately 2 acres of land. The Costa Rican facility has over 19,000 square feet of clean room space. We use our Costa Rica facility to assemble, package, test and ship final product to customers. This facility is located in the Metro Free Trade Zone.
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A 51,500 square foot facility located in San Jose, California. This facility is under an operating lease expiring in June 2020.
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A 9,000 square foot facility located in Laguna Technopark, Philippines. This facility is under an operating lease that expires in July 2014.
The fabrication of integrated circuits and filter products in these facilities is highly complex and sensitive to particles and other contaminants, and requires production in a highly controlled, clean environment. Minute impurities, difficulties in the
fabrication process or defects in the masks used to transfer circuits onto the wafers can cause a substantial percentage of the wafers to be rejected or numerous die on each wafer to be nonfunctional. The more brittle nature of GaAs wafers can also lead to more wafer breakages than experienced with silicon wafers. To maximize wafer yield and quality, we test our products in various stages in the fabrication process, maintain continuous reliability monitoring and conduct numerous quality control inspections throughout the entire production flow. Our manufacturing yields vary significantly among our products, depending upon a given product’s complexity and our experience in manufacturing it.
We incur a high level of fixed costs to operate our own manufacturing facilities. These fixed costs consist primarily of facility occupancy costs, repair, maintenance and depreciation costs related to manufacturing equipment and fixed labor costs related to manufacturing and process engineering.
We generally use outside vendors who perform test and assembly services. The primary exceptions to this practice are the company-owned filter test and assembly operations in Costa Rica and the Philippines.
Raw Materials and Sources of Supply
We generally maintain alternative sources for our principal raw materials to reduce the risk of supply interruptions or price increases. The raw materials for our integrated circuit, module and component manufacturing operations are available from several suppliers. For our GaAs integrated circuit manufacturing operations, we currently have multiple qualified wafer vendors and mask set vendors.
For our acoustic filter manufacturing operations, we use several raw materials, including wafers made from quartz, silicon, LiNbO3 or lithium tantalite (“LiTaO3”), as well as ceramic or metal packages. Relatively few companies produce these raw materials. Our most significant suppliers of ceramic surface mount packages are based in Japan. For our SAW operations, we also utilize multiple qualified wafer vendors and qualified mask set vendors.
The average selling prices of our products used by customers in the mobile devices end market typically decrease 10-15% per year. We expect our suppliers to reduce their prices at a similar rate.
Marketing, Sales and Distribution
We sell our products through independent manufacturers’ representatives, independent distributors and our direct sales staff.
Backlog
As of December 31, 2013, we had unfulfilled orders, referred to as our backlog, of approximately $143.1 million, compared to approximately $144.2 million as of December 31, 2012. We include in our backlog all purchase orders and contracts for products requested by the customer for delivery within twelve months. We do not have long-term agreements with any of our customers, except for certain defense & aerospace and contract based revenue. Customers generally purchase our products pursuant to cancelable short-term purchase orders. Our customers have canceled these purchase orders or rescheduled delivery dates in the past, and we expect that these events will occur in the future. Accordingly, backlog as of any particular date may not be predictive of sales for any future period.
Research and Development
Our R&D efforts are focused on improving the performance, size and cost of our products in our customer's systems. We focus on both continuous improvement in our processes for design and manufacture as well as innovation in fundamental research areas such as materials, simulation and modeling, circuit design, device packaging and test. We maintain an extensive patent portfolio and also protect much of our intellectual property in the form of trade secrets. Given the significant development cycle from product concept to production revenue, our R&D is conducted with a goal of improved time to market.
As of December 31, 2013, approximately 519 of our employees were engaged in activities related to process and product R&D, and our research, development and engineering expenses in 2013, 2012 and 2011 were approximately $190.0 million, $160.5 million and $146.9 million, respectively, which were 21%, 19% and 16% of total revenue, respectively. We expect to continue to spend substantial funds on R&D.
Competition
The markets for our products are characterized by price competition, rapid technological change and short product life cycles. While we strive to maintain a strong relationship with our customers, our customers' product life cycles are short and 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. Any significant loss of, or a significant reduction in purchases by any of our significant customers could have an adverse effect on our financial condition and results of operations. Due to the increasing requirements for lower cost, improved efficiency, reduced current consumption and smaller size, we expect to experience intense competition from existing competitors and potential new entrants that may develop a disruptive technology.
We compete primarily with the following companies: Anadigics Inc., Avago, Inc., Hittite Microwave Corporation, M/A-COM Technology Solutions, Inc., Murata Manufacturing Co., Ltd., Raytheon Company, RF Micro Devices, Inc., Skyworks Solutions, Inc., Sumitomo Electric Device Innovations, TDK-EPC Corporation and others. Competition could also come from companies developing new alternative technologies, such as CMOS power amplifiers and switches.
Our prospective customers are typically systems designers and manufacturers that are considering the use of our products for their high-performance communications systems. Competition is primarily based on performance elements such as linearity and efficiency, as well as price, product quality and ability to deliver products in a timely fashion. Due to the proprietary nature of our products, competition occurs almost exclusively at the system design stage. As a result, a design win by our competitors or by us often limits further competition with respect to manufacturing a given design.
Intellectual Property Matters
We rely on a combination of patents, trademarks, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We have patents granted and pending in the U.S. and elsewhere and intend to continue to apply for patents on our technology. In addition to having our own patents and patent applications, we have acquired U.S. and foreign patents and patent applications in connection with corporate mergers and acquisitions. We have approximately 370 patents that expire from 2014 to 2032.
Notwithstanding our active pursuit of patent protection, we believe that our future success will depend primarily upon the technical expertise, creative skills and management abilities of our officers and key employees rather than on patent ownership. We also rely substantially on trade secrets and proprietary technology, and actively work to foster continuing technological innovation to maintain and protect our competitive position.
Environmental Matters
Federal, state and local regulations impose various environmental controls on the storage, handling, discharge and disposal of chemicals and gases used in our manufacturing processes. We provide our own manufacturing waste water treatment and disposal for most of our manufacturing facilities and have contracted for the disposal of hazardous waste. State agencies require us to report usage of environmentally hazardous materials and we have retained appropriate personnel to help ensure compliance with all applicable environmental regulations. We believe that our activities conform to present environmental regulations.
Employees
As of December 31, 2013, we employed 3,109 people, including 2,182 in manufacturing and support related positions, 519 in process, product and development engineering, 224 in marketing and sales and 184 in general and administration functions. As of December 31, 2013, none of our employees were represented by a collective bargaining agreement, except for 63 employees in Germany. We consider our relations with employees to be good, and we have not experienced a work stoppage due to labor issues.
Item 1A.
Item 1A.
Risk Factors
Risk Factors
Our operating results may fluctuate substantially, which may cause our stock price to fall.
Our quarterly and annual results of operations have varied in the past and may vary significantly in the future due to a number of factors including the following:
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general economic conditions;
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disruptions to the global credit and financial markets (e.g. the European debt crisis, sequestration);
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cyclicality and seasonality, including industry downturns;
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inflation;
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customer concentration and gain or loss of significant customers;
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cancellation or delay of customer orders or shipments;
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market acceptance of our products and those of our customers;
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market acceptance of new/developing technologies that perform in a manner comparable to our products;
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variability of the life cycles of our customers’ products;
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variations in manufacturing capacity and yields, including additional costs or delays in increasing manufacturing capacity needed to support increasing customer demand;
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utilization levels of our manufacturing capacity;
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changes in the mix of products we sell;
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volatility in precious metal prices;
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variations in operating expenses;
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impairments of our assets;
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inventory scrap issues;
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the long sales cycles associated with our products;
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the timing and level of product and process development costs;
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variations in raw material availability, quality and costs;
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delays in new process qualification or delays in transferring processes;
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the timing and level of nonrecurring engineering revenue and expenses relating to customer-specific products;
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significant changes in our own inventory levels as well as our customers; and
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litigation costs and intellectual property disputes.
We expect that our operating results will continue to fluctuate in the future as a result of these and other factors. Unfavorable changes in these or other factors could cause our results of operations to materially suffer. Due to potential fluctuations, period-to-period comparisons of our results of operations are not necessarily indicative of our future performance.
Our business may be negatively affected by the volatility and disruption of the capital and credit markets, and adverse changes in the global economy.
Uncertainty in global economic and political conditions poses a risk to our business. If slowing economic growth or sovereign debt crises, such as instability in the Eurozone or U.S. budget debates, continue to be pervasive in the global economy, the following could result:
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product demand lower than expectations as customers delay or reduce technology purchases or marketing/advertising spending;
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reductions in the sales of our products and services;
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longer sales cycles;
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slower adoption of new technologies;
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increased price competition; or
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impairment of our vendors’ ability to support our production requirements, resulting in delay or non-delivery of inventory shipments.
In addition, our ability to find investments that are both safe and liquid and that provide a reasonable return may be impaired. In recent years, our invested cash balances have accrued low rates of interest.
New competitive products and technologies brought into the market could reduce demand for our current product offerings. Our business may be adversely affected if we fail to successfully introduce new products or to gain our customers’ acceptance of those new products.
The markets for electronic communications applications in which we participate are characterized by the following:
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intense competition;
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rapid technological change;
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cyclical demand; and
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short product life cycles.
We compete with U.S. and international semiconductor manufacturers, including Skyworks, RF Micro Devices, Avago and Anadigics. Some of our competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. We expect intensified competition from existing integrated circuit, SAW and BAW device suppliers, and from the potential entry of new competitors into our target markets. The operations of some companies producing products similar to ours for their internal requirements also contribute to a competitive environment.
Competition is primarily based on performance characteristics such as linearity, device size and efficiency. Other principal competitive factors include:
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prices of competitors’ products;
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the timeliness of adoption of new technology;
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market acceptance of varying technologies;
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impact of new technologies on the demand for our existing products;
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product quality; and
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strategic customer relationships.
Competition from existing or potential competitors may increase due to a number of factors, including:
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new or emerging technologies in integrated circuit design using alternative materials;
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mergers and acquisitions among our customers and our competitors, with one another or other entities;
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longer operating histories and presence in key markets;
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strategic relationships between our competitors;
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the ability to obtain raw materials at lower costs due to larger purchasing volumes or other advantageous supply relationships;
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access to a wider customer base; and
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access to greater financial, technical, manufacturing and marketing resources.
Due to the proprietary nature of our products, competition occurs almost exclusively at the system design stage. As a result, a design win by our competitors or by us typically limits further competition with respect to a given design. Additionally, compared to GaAs, manufacturers of high performance silicon integrated circuits have achieved greater market acceptance of their existing products and technologies in some applications. Further, we compete with both GaAs and silicon suppliers in all of our target markets. If we are unable to effectively compete in these markets, our results of operations may be adversely affected.
It is critical for us to continually and quickly develop new products to meet the changing needs of these markets. If we fail to develop new products to meet our customers’ needs on a timely basis, we will not be able to effectively compete in these markets. Further, new products could be introduced by competitors that have competitive and technological advantages over our current products.
Our future success will depend, in part, upon our ability to successfully develop and introduce new products based on emerging industry standards. We have performed and must continue to perform significant research and development of advanced materials such as GaN to compete with future technologies of our competitors. These research and development efforts may not be accepted by our customers, and therefore may not achieve sustained production in the future. Further, we may not be able to improve our existing products and process technologies, or be able to develop new technologies in a timely manner or effectively support industry standards. If we fail to design and produce these products in a manner acceptable to our customers, or have incorrectly anticipated our customers’ demand for these types of products, our business, financial condition and results of operations could suffer.
A limited number of customers represent a significant portion of our revenue. If we were to lose any of these customers, our revenue could decrease significantly.
We typically have end customers who generate more than 10% of our revenue for a given period. For each of 2013, 2012 and 2011, Foxconn Technology Group accounted for more than 10% of our revenue. While we strive to maintain a strong relationship with our customers, our customers' product life cycles are short and 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 effect 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.
If we build products to support high volume forecasts that never materialize into orders, we may have to write off excess and obsolete inventory or reduce our prices.
We typically increase our inventory levels to meet forecasted future demand. If the forecasted demand does not materialize into purchase orders for these products, we may be required to write off our inventory balances or reduce the value of our inventory to fair value, based on a reduced sales price. A write off of the inventory, or a reduction in the inventory value due to a sales price reduction, could have an adverse effect on our financial condition and operating results.
Our revenue is at risk if we do not introduce new products and/or decrease costs.
The production of GaAs integrated circuits has been and continues to be more costly than the production of silicon devices. Although we have reduced production costs through decreasing raw wafer costs, increasing wafer size and fabrication
yields, decreasing die size and achieving higher volumes, we might not be able to do so in the future. Further, the average selling prices of our products have historically decreased over the products’ lives and we expect them to continue to do so. To offset these decreases, we must achieve yield improvements and other cost reductions for existing products, and introduce new products that can be manufactured at lower costs.
Silicon semiconductor technologies are the dominant process technologies for integrated circuits and the performance of silicon integrated circuits continues to improve. If we do not continue to identify markets that require performance superior to that offered by silicon solutions or if we do not continue to offer products that provide sufficiently superior performance to offset the cost differentials, our operating results could be adversely affected.
We cannot be certain that additional systems manufacturers will design our products into their systems or that the companies that have utilized our products will continue to do so in the future. If our products fail to achieve market acceptance, our results of operations would suffer. Our future success depends, in part, on our timely development and introduction of new products that compete effectively on the basis of price and performance and adequately address customer requirements. The success of new product and process introductions depends on several factors, including:
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proper selection of products and processes;
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successful and timely completion of product and process development and commercialization;
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market acceptance of our own new products, or of our customers’ new products;
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achievement of acceptable manufacturing yields;
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our ability to offer new products at competitive prices; and
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managing the cost of raw materials and manufacturing services.
We may be unable to achieve expected yields on new products prior to experiencing selling price pressures on them. If our cost reductions and new product introductions do not occur in a timely manner or do not achieve market acceptance, our results of operations could suffer.
If we underutilize our manufacturing facilities our operating results could be affected.
Because portions of our manufacturing costs are relatively fixed, high utilization rates are critical to our operating results. If we fail to achieve acceptable manufacturing volumes or experience product shipment delays, our results of operations could be negatively affected. During periods of decreased demand, we have underutilized our manufacturing lines. This excess capacity means we incur increased fixed costs relative to the revenue we generate, which has an adverse effect on our results of operations, particularly during economic downturns. If we are unable to improve utilization levels at these facilities during those times and correctly manage capacity, the increased expense levels will have an adverse effect on our business, financial condition and results of operations. During the fourth quarter of 2013, due to changing industry demand, we reduced our overall GaAs capacity resulting in charges for severance and impairment of assets.
If we receive fewer customer orders than expected or if our customers delay or cancel orders, we may not be able to reduce our manufacturing costs in the short-term and our operating results would be negatively affected. In addition, lead times required by our customers are shrinking which reduces our ability to forecast revenue and adjust our costs in the short-term.
In some areas of our business, particularly in mobile devices, we have customers who ship their products in very large unit volumes. If we do not correctly manage capacity we may be unable to support our customers when their production volume increases and, therefore, we may be considered to be an unreliable supplier and our customers may seek alternate suppliers for products that we may have anticipated producing over an extended period of time and in large quantities, which could adversely affect our results of operations. In addition, if we experience delays in completing designs, fail to obtain development contracts from customers whose products are successful, or fail to have our product designed into the next generation product of existing volume production customers, our revenue could be negatively affected.
We face risks of a loss of revenue if contracts with the U.S. government or defense & aerospace contractors are canceled or delayed.
We receive a portion of our revenue from the U.S. government or from prime contractors on U.S. government sponsored programs, principally for defense & aerospace applications. These defense & aerospace programs with the U.S. government generally have long lead times, such as the DARPA contract to develop high power, wide band amplifiers in GaN, the NeXt program to explore advanced and promising new GaN technology and the Lightning JSF aircraft programs. These defense & aerospace programs are also subject to delays or cancellation. Further, spending on defense & aerospace contracts can vary significantly depending on funding from the U.S. government. We believe our government and defense & aerospace contracts in the recent past have been negatively affected by defense & aerospace operations such as sequestration and political pressure to reduce federal defense spending. Reductions in defense & aerospace funding or the loss of a significant defense & aerospace program or contract would have a material adverse effect on our operating results.
We face risks from failures in our manufacturing processes, the maintenance of our fabrication facilities and the processes of our vendors.
The fabrication of integrated circuits, particularly those made of GaAs, is a highly complex and precise process. Our integrated circuits are primarily manufactured on wafers made of GaAs while our SAW filters are currently manufactured primarily on LiNbO3, LiTaO3 and quartz wafers and our BAW wafers are currently manufactured on sapphire or silicon wafers. We refer to the proportion of final components that have been processed, assembled and tested relative to the gross number of components that could be constructed from the raw materials as our manufacturing yield. Compared to the manufacturing of silicon integrated circuits, GaAs technology is less mature and more difficult to design and manufacture within specifications in large volume. In addition, the more brittle nature of GaAs wafers can result in lower manufacturing yields than with silicon wafers. Further, during manufacturing, each wafer is processed to contain numerous integrated circuits or SAW/BAW filters which may also result in lower manufacturing yields. As a result, we may reject or be unable to sell a substantial percentage of wafers or the die on a given wafer because of, among other factors:
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minute impurities;
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difficulties in the fabrication process, such as failure of special equipment, operator error or power outages;
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defects in the masks used to print circuits on a wafer;
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unacceptable electrical and/or optical performance; or
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wafer breakage.
In the past, we have experienced lower than expected manufacturing yields, which have delayed product shipments and negatively affected our results of operations. We may experience similar difficulty in maintaining acceptable manufacturing yields in the future.
In addition, the maintenance of our fabrication facilities and our assembly facilities is subject to risks, including:
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the demands of managing and coordinating workflow between geographically separate production facilities;
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disruption of production in one of our facilities as a result of a slowdown or shutdown in one of our other facilities; and
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higher operating costs from managing geographically separate manufacturing facilities.
The transfer of production of a product to a different facility often requires the qualification of the facility by certain customers. If transfers or qualifications are not implemented on a cost-effective basis or cause delays or disruption in our production, our results of operations could be adversely affected. We also depend on certain vendors for components, equipment and services. We maintain stringent policies regarding qualification of these vendors. However, if these vendors’ processes vary in reliability or quality, they could negatively affect our products, and thereby, our results of operations.
Some of our manufacturing facilities and capital assets located at subcontractor manufacturing facilities are located in areas prone to natural disasters.
We have a SAW manufacturing and assembly facility located in Apopka, Florida, assembly facilities in San Jose, Costa Rica and the Philippines, and capital assets located at subcontractor manufacturing facilities in Paju, South Korea, and Zhongshan, China. Hurricanes, tropical storms, flooding, tornadoes, and other natural disasters are common events for Florida, Asia and Central America that could affect our facilities and subcontractor operations in these areas. Other natural disasters such as earthquakes, volcanic eruptions, tornadoes and flooding could also affect our facilities and subcontractor operations in California, Oregon, Texas and Asia. The following table indicates the approximate exposure we believe we have with respect to natural disasters:
______________
E-Earthquake/mudslide
V-Volcanic eruption
H-Hurricane, tornado, typhoon, and/or flooding
*Figures are based on net fixed assets as of December 31, 2013.
(1)Fixed assets at our Laguna Technopark, Philippines, Paju, South Korea and Bend, Oregon locations represent less than 1% of fixed assets.
Annually, we purchase commercial property damage and business interruption insurance against various risks, including earthquake, mudslide, volcanic eruption, hurricane, tornado, typhoon, and/or flooding, with limits deemed adequate for reimbursement for damage to our fixed assets and resulting disruption of operations. Any disruptions from these or other natural disasters could have a material adverse effect on our operations and financial results to the extent that losses exceed insurance recoveries.
Our operating results could be harmed if we lose access to sole or limited sources of materials, equipment or services or if our third party providers are unable to fulfill our requirements.
We currently obtain a portion of the components, equipment and services for our products from limited or single sources, such as certain ceramic packages and chemicals. We purchase these components, supplies and services and this equipment on a purchase order basis, do not carry significant inventories and generally do not have long-term supply contracts with these vendors. Our requirements are relatively small compared to silicon semiconductor manufacturers. Because we often do not account for a significant part of our vendors’ business, we may not have access to sufficient capacity from these vendors in periods of high demand. We currently use subcontractors for the majority of our integrated circuit and module assemblies, as well as final product testing. Further, we expect our utilization of subcontractors to grow as module products become a larger portion of our product revenue. If these subcontractors are unable to meet our needs, it could prevent or delay production shipments and negatively affect our results of operations and our customer relationships. If we were to change any of our sole or limited source vendors or subcontractors, we would be required to requalify each new vendor and subcontractor. Requalification, which can take up to twelve months, could prevent or delay product shipments, negatively affecting our results of operations. In some cases, it would be difficult to replace these suppliers.
There are certain risks associated with dependence on third party providers, such as minimal control over delivery scheduling, adequate capacity during demand peaks, warranty issues and protection of intellectual property. Our reliance on a limited number of suppliers for certain raw materials and parts may impair our ability to produce our products on time and with acceptable yields. At times in the past, we have experienced difficulties in obtaining ceramic packages and lids used in the production of filters. At other times, the acquisition of relatively simple devices, such as capacitors, has been problematic because of the large demand swings that can occur in the handset market for such components. Supply can also be affected by natural disasters such as the recent tsunamis in the Asian Pacific. Our success in obtaining these products is critical to the overall success of our business. If our suppliers were unable to meet our delivery schedules or went out of business, we could have difficulty locating an alternative source, harming our business. In addition, our reliance on third-party vendors and subcontractors may negatively affect our production if the services vary in reliability or quality. If we are unable to obtain timely deliveries of our source materials in sufficient quantities and of acceptable quality or if the prices increase, our results of operations could be harmed.
Significant fluctuations in the price of precious metals, primarily gold, could adversely affect our operating results
Our products contain trace amounts of precious metals including, but not limited to, gold, platinum and copper. Of all the metals used in our manufacturing process, gold is the most costly. We recapture the majority of the cost of precious metals purchases through reclaim vendors. However, either temporary or permanent significant fluctuations in the price of precious metals could result in losses that adversely affect our results from operations.
If our products fail to perform or meet customer requirements, we could incur significant additional costs.
The fabrication of integrated circuits and SAW/BAW filters from substrate materials and the modules containing these components is a highly complex and precise process. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to rework or replace the products. Our products may contain undetected defects or failures that only become evident after we commence volume shipments. If such failures or defects occur, we could:
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lose revenue;
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incur increased costs such as warranty expense and costs associated with customer support;
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experience delays, cancellations or rescheduling of orders for our products; or
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experience increased product returns or discounts;
all of which could negatively affect our customer relationships, financial condition and results of operations.
If we fail to comply with environmental regulations we could be subject to substantial fines, and required to suspend production, alter manufacturing processes or cease operations.
Federal, state and local regulations impose various environmental controls on the storage, handling, discharge and disposal of chemicals and gases used in our manufacturing processes. For our manufacturing facilities, we generally provide our own manufacturing waste treatment and contract for disposal of some materials. We are required to report usage of environmentally hazardous materials. The failure to comply with present or future regulations could result in our having to pay a fine, suspend production, or cease our operations. These regulations could require us to acquire significant equipment or to incur other substantial expenses to comply with environmental regulations. Further, new environmental initiatives could affect the materials we currently use in production. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances could subject us to future liabilities and harm our financial condition and results of operations.
Two former production facilities at Scotts Valley and Palo Alto, California from our acquisition of WJ Communications, Inc. have significant environmental liabilities for which we have entered into and funded fixed price remediation agreements and obtained cost-overrun and unknown pollution insurance coverage. These arrangements may not be sufficient to cover all liabilities related to these two sites.
Product related environmental regulations may require us to redesign our products and to develop compliance administration systems.
Increasing public attention has been focused on the environmental impact of semiconductor operations, and these regulations may require us to fund remedial action regardless of fault. If we were found to be non-compliant with any rule or regulation, we could be subject to fines, penalties and/or restrictions imposed by government agencies that could adversely affect our operating results.
Various countries have begun to adopt regulations related to the use and disposal of electronics such as the European Union’s Waste Electrical and Electronic Equipment (“WEEE”) and the Reduction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) directives, which could require us both to redesign our products to comply with the standards and develop compliance administration systems. For example, RoHS requires that certain substances be removed from all electronic components. We have already invested significant resources into developing compliance tracking systems, and further investments may be required. Additionally, we may incur significant costs to redesign our products and to develop compliance administration systems; however, alternative designs may have an adverse effect on our gross profit margin. If we cannot develop compliant products timely or properly administer our compliance programs, our revenue may also decline due to lower sales, which would adversely affect our operating results.
New climate change laws and regulations could require us to change our manufacturing processes or obtain substitute materials that may cost more or be less available for our manufacturing operations. In addition, new restrictions on emissions of carbon dioxide or other greenhouse gases could result in significant costs for us. The Commonwealth of Massachusetts has adopted greenhouse gas regulations, and the U.S. Congress may pass federal greenhouse gas legislation in the future. The U.S. Environmental Protection Agency ("EPA") has issued greenhouse gas reporting regulations that may apply to certain of our operations. The EPA is developing other climate change-based regulations, as are certain states, that also may increase our expenses and adversely affect our operating results. We expect increased worldwide regulatory activity relating to climate change in the future. Compliance with these laws and regulations has not had a material impact on our capital expenditures, earnings, financial condition or competitive position.
The SEC recently adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These new rules and verification requirements, which apply to our activities in 2013, will impose additional costs on us and on our suppliers, and may limit the sources or increase the prices of materials used in our products. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage, and our reputation may be harmed. We are currently members of the Electronic Industry Citizenship Coalition ("EICC") and are participating in the Organisation for Economic Co-operation and Development ("OECD") pilot project for conflict minerals due diligence with the goal of creating a comprehensive, reportable and verifiable process for determining the sourcing of minerals covered under this legislation.
We expect additional countries and locations to adopt similar regulations in the future that may be more stringent than the current regulations.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act ("FCPA"), The U.K. Bribery Act of 2010 and similar worldwide anti-bribery laws.
We operate in several foreign countries. The FCPA and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. The U.K Bribery Act of 2010 prohibits both domestic and international bribery, as well as bribery across both private and public sectors. In addition, an organization that "fails to prevent bribery" by anyone associated with the organization can be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented "adequate procedures" to prevent bribery. Practices in the local business communities of many countries outside the U.S. have a level of government corruption that is greater than that found in the developed world. Our policies mandate compliance with these anti-bribery laws and we have established policies and procedures designed to monitor compliance with these anti-bribery law requirements; however, we cannot assure that our policies and procedures will protect us from potential reckless or criminal acts committed by individual employees or agents. If we are found to be liable for anti-bribery law violations we could suffer from criminal or civil penalties or other sanctions that could have a material adverse effect on our business.
If we fail to manage our growth effectively or to successfully integrate any future acquisition, our business could be harmed.
On an ongoing basis, we review acquisition and investment opportunities that could strengthen our product line, expand market presence and complement our technologies. We face risks from our recent and any future acquisitions or investments, including the following:
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we may fail to retain the key employees of newly acquired companies required to make the operation successful or successfully integrate personnel of those companies;
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we may experience difficulties integrating our financial and operating systems and maintaining effective internal control over financial reporting;
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we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, financial reporting and risk management;
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our ongoing business and operations, particularly our manufacturing yields, may be disrupted or receive insufficient management attention;
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we may not cost-effectively and rapidly incorporate the technologies we acquire or recognize the cost savings or other financial benefits we anticipated;
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we may not be able to cost-effectively develop commercial products using newly acquired technology;
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we may not be able to meet the demands of and/or retain the existing customers of newly acquired operations;
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our corporate culture may clash with that of any acquired business; and
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we may incur unknown liabilities associated with acquired businesses.
Our business may be harmed if we do not successfully address these risks or any other problems that arise in connection with future acquisitions.
We could be negatively affected as a result of a threatened proxy contest and other actions of activist stockholders.
We have received notice from Starboard Value LP (together with its affiliates and related parties, “Starboard”) that it intends to nominate of a slate of directors for election at our 2014 annual shareholders meeting and to solicit proxies from stockholders in support of their nominees. Based on the information provided in a Schedule 13D amendment filed by Starboard on December 2, 2013, Starboard is the beneficial owner of 12,607,000 shares of our common stock, or approximately 7.8% of the total number of outstanding shares of our common stock. If Starboard carries through with its intention and launches a proxy contest, our business and our stock price could be adversely affected because, among other things:
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responding to the proxy contest, including issues related to the qualifications of our Board and management, can be disruptive, costly and time-consuming, and divert the attention of our management and employees;
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perceived uncertainties as to our future direction, including uncertainties related to our Board and management, may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel or other business partners; and
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if individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders.
If we do not hire and retain key employees, our business will suffer.
Our future success depends in large part on the continued service of our key technical, marketing and management personnel. We also depend on our ability to continue to identify, attract and retain qualified technical employees, particularly highly skilled design, process and test engineers involved in the manufacture and development of our products and processes.
We must also recruit and train employees to manufacture our products without a substantial reduction in manufacturing yields. Many other semiconductor companies are located in the communities near our facilities and it may become increasingly difficult for us to attract and retain key personnel. The competition for key employees is intense, and the loss of key employees could negatively affect our business.
Our business may be harmed if we fail to protect our proprietary technology.
We rely on a combination of patents, trademarks, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We cannot be certain that patents will be issued from any of our pending applications or that patents will be issued in all countries where our products can be sold. Further, we cannot be certain that any claims allowed from pending applications will be of sufficient scope or strength to provide meaningful protection from or any commercial advantage over, our competitors. Our competitors may also be able to design around our patents. The laws of some countries in which our products are or may be developed, manufactured or sold may not protect our products or intellectual property rights to the same extent as do U.S. laws, increasing the possibility of piracy of our technology and products. Although we intend to vigorously defend our intellectual property rights, we may not be able to prevent misappropriation of our technology. Our competitors may also independently develop technologies that are substantially equivalent or superior to our technology.
We may need to engage in legal actions to enforce our intellectual property rights, which could require the expenditure of a significant amount of resources and the attention and efforts of our management and technical personnel. Accordingly, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Such litigation has occurred in the past and could occur again in the future. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could have a material adverse effect on our business. Adverse determinations in any litigation could subject us to significant liabilities to third parties, require us to seek licenses from third parties and prevent us from manufacturing and selling our products. Any of these situations could have a material adverse effect on our business.
Our ability to produce our products may suffer if someone claims we infringe on their intellectual property.
The integrated circuit, SAW and BAW device industries are characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. Such litigation has occurred in the past and could occur again in the future. If it is necessary or desirable, we may seek licenses under patents or other intellectual property rights. However, we cannot be certain that licenses will be offered or that we would find the terms of licenses that are offered acceptable or commercially reasonable. Our failure to obtain a license from a third party for technology used by us could cause us to incur substantial liabilities and to suspend the manufacture of products. We have in the past paid substantial legal fees in defending ourselves against patent infringement claims and may be required to do so again in future claims. Litigation by or against us could result in significant expense and divert the efforts of our technical personnel and management, whether or not the litigation results in a favorable determination. In the event of an adverse result in any litigation, we could be required to:
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pay substantial damages;
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indemnify our customers;
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stop the manufacture, use and sale of the infringing products;
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expend significant resources to develop non-infringing technology;
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discontinue the use of certain processes; or
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purchase licenses to the technology and/or pay royalties.
We may be unsuccessful in developing non-infringing products or negotiating licenses upon reasonable terms, as the case may be, which could harm our results of operations. Further, if any third party makes a successful claim against our customers or us and a license is not made available to us on commercially reasonable terms, our business could be harmed.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our security controls and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our systems and/or products. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.
We manage and store various proprietary information and sensitive or confidential data relating to our business and our customers'/suppliers' businesses. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our suppliers or customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our suppliers and customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Portions of our information technology infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systemic failures, systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions could adversely affect, our financial results, stock price and reputation.
We may be subject to other lawsuits and claims relating to our products.
We cannot be sure that third parties will not assert product liability or other claims against us, our customers or our licensors with respect to existing and future products. Any litigation to determine the validity of any third party’s claims could result in significant expense and liability to us and divert the efforts of our technical and management personnel, whether or not the litigation is determined in our favor or covered by insurance.
Our business may suffer due to risks associated with our operations and employees located outside of the U.S.
A number of our employees and operations are located in countries other than the U.S. We also employ contractors in other countries to perform certain packaging and test operations for us. The laws and operating conditions of these countries may differ substantially from that of the U.S. As a result of having a significant amount of sales outside of the U.S., we face inherent risks from these operations, including:
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imposition of restrictive government actions, including controls, expropriations and interventions;
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currency exchange rate fluctuations;
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ability to repatriate cash from our foreign subsidiaries;
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longer payment cycles and difficulties related to the collection of receivables from international customers;
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reduced protection for intellectual property rights in some countries;
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unfavorable tax laws;
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difficulty obtaining distribution and support;
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political instability;
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tariffs and other trade barriers;
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labor shortages and disputes;
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financial institution failure;
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widespread illness, acts of terrorism or war;
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disruption of production processes;
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power interruptions;
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interruption of freight channels and delivery schedules; and
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fraud.
In addition, due to the technological advantages provided by GaAs integrated circuits in many defense & aerospace applications, the Office of Export Administration of the U.S. Department of Commerce must license all of our sales outside of the U.S. We are also required to obtain licenses from that agency for sales of our SAW products to customers in certain countries. If we fail to obtain these licenses or experience delays in obtaining these licenses in the future, our results of operations could be harmed. Also, because a majority of our foreign sales are denominated in U.S. dollars, increases in the value of the dollar would increase the price in local currencies of our products and make our products less price competitive.
We may have exposure to income tax rate fluctuations as well as to additional tax liabilities, which would affect our financial position.
We are subject to income taxes in both the U.S. and various foreign jurisdictions. Our effective tax rate is subject to fluctuations because the income tax rates for each year are a function of the following factors, among others:
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the mix of profits earned or losses incurred by us and our subsidiaries in numerous foreign tax jurisdictions with a broad range of income tax rates;
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changes in contingency related taxes, interest or penalties resulting from internal and governmental tax reviews and audits;
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tax holidays; and
•
changes in tax laws or the interpretation of such laws, specifically related to transfer pricing, permanent establishment and other intercompany transactions.
Changes in the mix of these and other items may cause our effective tax rate to fluctuate between periods, which could have an adverse effect on our financial position.
Changes in tax regulations and/or changes in the favorable tax status of our subsidiaries in Costa Rica and Singapore would have an adverse impact on our operating results.
We are subject to taxation in many different countries and localities worldwide. In some jurisdictions, we have employed specific business strategies to minimize our tax exposure. To the extent the tax laws and regulations in these various countries and localities could change, our tax liability in general could increase or our tax saving strategies could be threatened. Such changes could have an adverse effect on our operations and financial results. For example, our subsidiary in Costa Rica receives a tax holiday that is expected to be effective through March 2017. We received a 100% exemption from Costa Rican income taxes for 2013. The Costa Rican government continues to review its policy on granting tax exemptions to companies located in free trade zones and it may change our tax status or minimize our benefit at any time. Any adverse change in the tax structure for our Costa Rican subsidiary by the Costa Rican government would have a negative effect on our net income. In addition, we were granted a holiday on our operations in Singapore that will expire in December 2019. Changes in the status of this tax holiday could have a negative effect on our net income in future year.
The U.S. Internal Revenue Service and several foreign tax authorities also could assert additional taxes associated with our foreign subsidiaries’ activities.
Our stock is subject to substantial price and volume fluctuations due to a number of factors, many of which are beyond our control and may prevent our stockholders from reselling our common stock at a profit.
The securities markets have experienced significant price and volume fluctuations and the market prices of the securities of semiconductor companies have been especially volatile. The market price of our common stock may experience significant fluctuations in the future. For example, our common stock price has fluctuated from a high of $8.98 to a low of $4.31 for the 52 weeks ended December 31, 2013. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and, in response, the market price of our common stock could decrease significantly. Further, high stock price volatility could result in higher stock-based compensation expense.
A default under our line of credit could adversely affect our financial health, limit our ability to finance future acquisitions and capital expenditures, and prevent us from fulfilling our financial obligations.
Our line of credit contains numerous covenants that restrict our ability to create, incur or assume liens and indebtedness, make certain investments and dispositions, change the nature of the business, and merge with other entities without permission. Other covenants are financial in nature, including leverage and liquidity ratios. A breach of any of these covenants could result in a default under the applicable agreement or indenture. If a default were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with the covenants in these agreements and indentures.
Our certificate of incorporation and bylaws include anti-takeover provisions, which may deter or prevent a takeover attempt.
Some provisions of our certificate of incorporation and amended and restated bylaws and the provisions of Delaware General Corporation Law may deter or prevent a takeover attempt, including a takeover that might result in a premium over the market price for our common stock. Our certificate of incorporation and amended and restated bylaws include provisions such as:
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Stockholder proposals and nominations. Our stockholders must give advance notice, generally 120 days prior to the relevant meeting, to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action.
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Preferred stock. Our certificate of incorporation authorizes our board of directors to issue up to five million shares of preferred stock and to determine what rights, preferences and privileges such shares have. No action by our stockholders is necessary before our board of directors can issue the preferred stock. Our board of directors could use the preferred stock to make it more difficult and costly to acquire our company.
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In addition, Delaware General Corporation Law restricts business combinations with some stockholders once the stockholder acquires 15% or more of our common stock. The Delaware statute makes it more difficult for our company to be acquired without the consent of our board of directors and management.
Item 1B.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Item 2.
Properties
We believe these properties are suitable for our current operations.
Item 3.
Item 3.
Legal Proceedings
From time to time we are involved in litigation, certain other claims and arbitration matters arising in the ordinary course of our business. We do not believe the ultimate resolution of any such pending proceedings will have a material adverse effect on our financial position, results of operations or cash flows.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NASDAQ Stock Market under the symbol “TQNT”. As of February 18, 2014, there were 163,762,526 shares of common stock outstanding held by approximately 401 stockholders of record. Many stockholders hold their shares in street name. We believe that there are approximately 62,000 beneficial owners of our common stock. The following table sets forth the high and low sale price per share of our common stock for the periods indicated as reported on the NASDAQ Stock Market:
We have never declared or paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions and other factors that our Board of Directors deem relevant. The closing price of our common stock on the NASDAQ Stock Market on February 18, 2014 was $9.33 per share.
Issuer Purchase of Equity Securities
On May 14, 2013, our Board of Directors approved a stock repurchase program authorizing the purchase, at the discretion of management, of up to $75.0 million of our outstanding common stock. During 2013, we repurchased 7,670,100 shares of our stock at an average cost per share of $6.65. The following schedule summarizes the purchases we made of our common stock from May 1, 2013 to December 31, 2013 (in millions except per share data):
In addition, on January 30, 2014, our Board of Directors authorized an increase in the stock repurchase program from the then-remaining balance of $23.9 million to $75 million. Under the program, repurchases of our outstanding common stock may be made in the open market at the discretion of management.
Stock Price Performance Graph
The following stock performance graph compares the performance of our common stock to the NASDAQ U.S. Index and to our peer group index, SIC Code 3674-Semiconductors and Related Devices. The graph assumes that the initial value of the investments was $100 at the close of business on December 31, 2008 and that all dividends were reinvested. Performance is provided as of the close of business on the last day of the last five calendar years.
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* No cash dividends have been declared or paid on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. The peer group index used, SIC Code 3674-Semiconductors and Related Devices, utilizes the same methods of presentation and assumptions for the total return calculation as our company and the NASDAQ U.S. Index. All companies in the peer group index are weighted in accordance with their market capitalizations.
Item 6.
Item 6. Selected Financial Data
The following statements of operations data and balance sheet data for the five years ended December 31, 2013 were derived from our audited consolidated financial statements. Audited consolidated balance sheets at December 31, 2013 and 2012 and the related audited consolidated statements of operations and of cash flows for each of the three years in the period ended December 31, 2013 and notes thereto appear elsewhere in this Annual Report on Form 10-K. Audited consolidated balance sheets at December 31, 2011, 2010 and 2009 and consolidated statements of operations for the years ended December 2010 and 2009 are not included elsewhere in this Annual Report on Form 10-K.
This data should be read in conjunction with the annual consolidated financial statements, related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes and the “Important Notice to Stockholders” that appear elsewhere in this report.
Overview
We are a supplier of high performance modules and components for wireless communications applications. We design, develop and manufacture advanced high-performance RF solutions with GaAs, GaN, SAW and BAW technologies for customers worldwide. We serve growing markets and a diverse customer base of manufacturers building connected mobile devices, 2G/3G/4G cellular base stations, triple-play cable solutions, fiber optic 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 customers' 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 infrastructure 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.
We have invested in high value product lines to support the growing LTE market. During 2013, we experienced a favorable mix of product sales largely driven by increased demand for BAW filter components. In response to an overall market shift towards discrete filters we have taken steps to appropriately align our resources. During the fourth quarter of 2013, we incurred restructuring, impairment and other charges related to the disposal of assets, totaling $27.1 million, in relation to actions taken to reduce GaAs capacity and associated costs. As a result, our gross margin slightly increased to 28.9% in 2013 from 28.7% in 2012.
We experienced an overall increase in revenue of 8% for 2013 compared to 2012, following a 7% overall revenue decline in 2012 compared to 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 2013 increased 10% compared to 2012. The increase was primarily attributed to increased sales of our higher value products such as BAW, TC-SAW, MMPA's and integrated PA/duplexer modules. Demand for these products has increased due to growing LTE capabilities.
Revenue from sales of our products in the networks infrastructure end market decreased 4% for 2013 compared to 2012. This decrease was primarily due to discontinuation of the sale of non-strategic foundry products, partially offset by an increase in demand for our base station products largely driven by the launch of TD-LTE in China.
Revenue from sales of our products in the defense & aerospace end market increased 15% in 2013 compared to 2012 primarily due to 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. These 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; impairments of long-lived assets; 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.
Revenue Recognition
We derive revenue primarily from the sale of products in the mobile devices, networks, and defense & aerospace end markets. We also receive revenue from foundry services, non-recurring engineering fees and cost-plus contracts for research and development work, which collectively comprised less than 10% of consolidated revenue for any period. Our distribution channels include our direct sales staff, manufacturers’ representatives and independent distributors. The majority of our shipments are made directly to our customers. Revenue from the sale of products is recognized when title passes to the buyer. Our product sales include warranty provisions that provide that the products will be free of faulty workmanship or defective materials and that the products will conform to our published specifications or other specifications mutually agreed upon with the customer. If we are unable to repair or replace products returned under warranty, we will issue a credit for a warranty return. Our historical warranty claims experience, and our warranty liability, have not been material.
Revenue from our distributors is recognized when the product is sold to the distributors. Sales to our distributors were between 9% and 12% of our total revenue for 2013, 2012 and 2011. Our distributor agreements provide selling prices that are fixed at the date of sale, although in certain circumstances we offer specific price protection credits of a fixed duration and for which we reserve when offered. Further, the distributor’s payment obligation is not contingent on reselling the product. The distributors take title to the product and bear the risks of ownership, the sales to distributors have economic substance and we can reasonably estimate the amount of future returns. We reduce revenue and record reserves for product returns and allowances for price protection and stock rotation based on historical experience or specific identification depending on the contractual terms of the arrangement. We have visibility into the distributors' inventory levels and qualifying sales, and are, therefore, able to reasonably estimate the revenue reserves. The revenue reserves have remained relatively consistent as a percentage of revenue.
We receive periodic reports from customers who utilize inventory hubs and recognize revenue when customers acknowledge they have pulled inventory from our hub, which is the point at which title to the product passes to the customer.
Revenue from non-recurring engineering fees is recorded when the service is completed. Revenue from cost plus contracts is recognized as costs are incurred.
Inventories
We state our inventories at the lower of cost or market. We use standard cost methodology to determine our cost basis for our inventories. This methodology approximates actual cost on a first-in, first-out basis. In addition to stating our inventory at the lower of cost or market, we also evaluate it each period for excess quantities and obsolescence. This evaluation, based on historical experience and our judgment of economic conditions, includes identifying those parts specifically identified as obsolete and writing them down, analyzing historical usage as well as forecasted demand versus quantities on hand and writing down the excess, and identifying and recording other specific write-downs.
Precious Metals Reclaim
We use historical experience to estimate the amount of reclaim on precious metals used in manufacturing at the end of each period and state the reclaim value at the lower of average cost or market. The estimated value to be received from precious metal reclaim is included in other current assets.
Income Taxes
We are subject to taxation from federal, state and international jurisdictions. A significant amount of judgment is involved in preparing our provision for income taxes and the calculation of resulting deferred tax assets and liabilities.
We follow the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between tax and financial reporting. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We use the with-and-without approach, disregarding indirect tax impacts, for determining the period in which tax benefits for excess share-based deductions are recognized. Net operating losses from prior years reduced federal and state income tax obligations to the extent that we did not have significant income taxes payable at December 31, 2013 or December 31, 2012.
We record a valuation allowance to reduce deferred tax assets to the amount that is believed more-likely-than-not to be realized in future tax returns. Significant management judgment is required in determining any valuation allowances that might be required against the deferred tax assets. Accounting Standards Codification ("ASC") 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with GAAP. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This statement also provides guidance on derecognition, classification, interest and penalties, accounting in the interim periods and disclosure.
We continue to maintain a valuation allowance against a portion of U.S., state and foreign deferred tax assets, as we do not believe it is more likely than not that these will be realized in future periods. Specifically, the statute of limitations may expire before certain state net operating loss and credit carryforwards are utilized.
The calculation of our tax liabilities is subject to legal and factual interpretation, judgment, and uncertainty in a multitude of jurisdictions. This includes addressing uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions in the U.S. and other tax jurisdictions based on recognition and measurement criteria prescribed by ASC 740. The liabilities are periodically reviewed for their adequacy and appropriateness. Changes to our assumptions could cause us to find a revision of estimates appropriate. Such a change in measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest will be due. We record an amount as an estimate of probable additional income tax liability at the largest amount that we determine is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority.
As of December 31, 2013, we were not under audit by any income tax authorities. Tax periods within the statutory period of limitations not previously audited are potentially open for examination by the tax authorities. Potential liabilities associated with these years will be resolved when an event occurs to warrant closure, primarily through the completion of audits by the tax jurisdictions and/or the expiration of the statutes of limitation. To the extent audits or other events result in a material adjustment to the accrued estimates, the effect would be recognized during the period of the event. We believe that an appropriate estimated liability has been established for potential exposures.
Our net unrecognized tax benefits are recorded as a liability, as well as offsetting amounts to our deferred tax assets, in the consolidated balance sheets. To the extent interest and penalties would be assessed by taxing authorities of any underpayment of income taxes, such amounts are accrued and classified as a component of income tax expense on the consolidated statement of operations. Realization of the unrecognized tax benefits results in a favorable impact to the effective tax rate.
No provision has been made for the U.S., state or additional foreign income taxes related to approximately $70.5 million of undistributed earnings of foreign subsidiaries which have been permanently reinvested outside the U.S. except 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 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.
Stock-Based Compensation
The table below summarizes the stock-based compensation expense for 2013, 2012 and 2011, included in our consolidated statements of income (in millions):
We estimate the fair value of option awards on the date of grant using the Black-Scholes option pricing model which requires a number of assumptions, including the expected lives of stock options, the volatility of the public market price for our common stock and interest rates. The determination of fair value of restricted stock units ("RSUs") is based on the value of the Company's stock on the date of grant. The fair value of market based restricted stock units ("MSUs") is determined using a Monte Carlo simulation model which is affected by assumptions regarding subjective and complex variables determined at the grant date based on the target number of awards ultimately expected to be awarded. The number of shares of common stock to be awarded will range from zero to 150 percent of the target number of stock units based on the Company's total stockholder return (“TSR”) relative to the performance of companies in the SPDR S&P Semiconductor Index ("SPDR") for the applicable measurement period. The value of all stock-based payment awards is recognized as stock-based compensation expense on a straight line basis over the award's vesting schedule.
Impairments of Long-lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset group exceeds its estimated future undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Depending on the asset, fair value is determined by reference to market prices or through discounted cash flow analysis. Assets to be disposed of are separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.
During the fourth quarter of 2013, we recorded impairment charges of $22,450 associated with management's plans to dispose of assets in connection with a reduction of GaAs capacity. The fair value of the impacted assets was determine using available market prices. The Company did not record an impairment charge on its long-lived assets for either of the years ended December 31, 2012 or 2011.
Results of Operations
The following discussion and analysis of operations addresses continuing operations only, unless otherwise noted. The table below sets forth the results of our operations expressed as a percentage of revenue. These historical operating results are not necessarily indicative of the results for any future period.
Years ended December 31, 2013 and 2012
Revenue
Revenue increased $63.7 million, or 8%, in 2013, compared to 2012.
Revenue by end market for 2013 and 2012, was as follows:
Mobile Devices
Revenue from sales of our products in the mobile devices end market increased approximately 10% in 2013 compared to 2012. Revenue from the sales of our products in the three primary submarkets of the mobile devices end market was as follows:
3G/4G revenue increased primarily as a result of increased sales to our largest customer. 2G revenue declined as we shifted focus away from this product area in support of 3G/4G capabilities. Revenue from the sales of our connectivity products increased as a result of an increased demand for WLAN products.
Networks
Revenue from the sales of our products in the networks infrastructure end market decreased approximately 4% for 2013 compared to 2012. The decrease was primarily due to a decrease in revenue in the transport submarket, driven largely by the weak growth in demand for our optical products. Revenue from the sales of our base station products increased as a result of LTE expansion in North America and China. Revenue from the sales of our products in the three primary submarkets of the networks infrastructure end market was as follows:
Defense & Aerospace
Revenue from the sales of our products in the defense & aerospace end market increased approximately 15% in 2013 compared to 2012. The increase was primarily the result of a 19% increase in the sales of our radar products due to the release and shipment of new products.
Significant Customers
Foxconn Technology Group accounted for 33% and 31% of our revenue for the years ended December 31, 2013 and 2012, respectively. 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 effect 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.
Domestic and International Revenue
Revenue from sales to our domestic customers was approximately $163.4 million in 2013, compared to approximately $201.2 million in 2012. Revenue from sales to our international customers was approximately $729.5 million in 2013, compared to approximately $628.0 million in 2012. As a percentage of total revenue, revenue from sales to our international customers was 82% in 2013, compared to 76% in 2012. Revenue from sales to our international customers increased primarily as a result of increased demand from Foxconn Technology Group which is included as an international customer.
Gross Profit
Our gross profit margin as a percentage of total revenue increased to 28.9% in 2013, compared to 28.7% from 2012. The increase in gross profit was primarily the result of a more favorable mix of product sales in 2013 compared to 2012, largely driven by increased demand for BAW filter components, partially offset by restructuring, impairment and other charges incurred during the fourth quarter of 2013 in relation to actions taken to reduce GaAs capacity and associated costs.
Research, development and engineering expenses
Our research, development and engineering expenses in 2013 increased $29.5 million, or 18%, from 2012. The increase was primarily the result of increased spending on material to develop new products, as well as an increase in employee salary and benefit costs due to higher headcount.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $1.8 million, or 2%, in 2013 compared to 2012. The increase in selling, general and administrative expenses primarily resulted from an increase in employee salary and benefit costs due to higher headcount in 2013 compared to 2012.
Other (expense) income , net
Other expense, net for 2013 was $4.4 million compared to other income, net of $5.2 million for 2012. The fluctuation in other income (expense), net was primarily due to a $0.4 million gain/recovery on the sale of a previously impaired investment in 2013 compared to $7.0 million in 2012, and accretion of our earnout payment and cross-licensing liabilities.
Income tax (benefit) expense
In 2013, we recorded an income tax benefit of $7.1 million, compared to income tax benefit of $5.7 million in 2012. The 2013 tax benefit was primarily associated with the recognition of R&D tax credits in 2013 for both 2012 and 2013 fiscal years, attributed to the American Taxpayer's Relief Act of 2012, which was extended retroactively on January 2, 2013. The 2012 benefit was primarily associated with our pre-tax loss offset by an accrual for unrecognized tax benefits and the recognition of additional valuation allowance.
Years ended December 31, 2012 and 2011
Revenue
Revenue decreased $66.9 million, or 7%, to $829.2 million in 2012, compared to $896.1 million in 2011.
Revenue by end market for 2012 and 2011 was as follows:
Mobile Devices
Revenue from sales of our products in the mobile devices end market decreased 15% in 2012 compared to 2011. Revenue from the sales of our products in the three primary submarkets of the mobile devices end market was as follows:
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. Revenue from the sales of our connectivity products declined as a result of a decline in sales to some of our smaller customers as demand shifted among the top smartphone suppliers.
Networks Infrastructure
Revenue from sales of our products in the networks infrastructure end market increased approximately 8% in 2012, compared to 2011. The increase was primarily due to an increase in revenue in the transport submarket, driven largely by the strong growth in demand for our optical products. Sales performance of our optical products benefited from the increasing need for faster data transfer rates and the evolution to 40 and 100 Gb/s standards. Revenue from the sales of our base station products increased as a result of LTE expansion in North America and China. Revenue from the sales of our products in the three primary submarkets of the networks infrastructure end market was as follows:
Defense & Aerospace
Revenue from sales of our products in the defense and aerospace end market increased approximately 18% in 2012, compared to 2011. The increase was primarily the result of 29% and 25% increases in the sales of our radar and communications products, respectively, due to the release and shipment of new products, specifically with one of our largest defense & aerospace customers.
Significant Customers
Foxconn Technology Group accounted for 31% and 35% of our revenue for the years ended December 31, 2012, and 2011, respectively.
Domestic and International Revenue
Revenue from sales to our domestic customers was approximately $201.2 million in 2012, compared to approximately $246.1 million in 2011. Revenue from sales to our international customers was approximately $628.0 million in 2012, compared to approximately $650.0 million in 2011. As a percentage of total revenue, revenue from sales to our international customers was 76% in 2012, compared to 73% in 2011. Revenue from sales to our international customers decreased primarily as a result of shifts in market share and consolidation among top smartphone suppliers and lower demand from Foxconn Technology Group which is included as an international customer.
Gross Profit
Our gross profit margin as a percentage of total revenue decreased to 28.7% in 2012, compared to 35.9% from 2011. The decrease in gross profit was primarily the result of increased capacity placed into service at the end of 2011 and during 2012 coupled with lower demand, thereby resulting in a lower factory utilization rate.
Research, development and engineering expenses
Our research, development and engineering expenses in 2012 increased $13.6 million, or 9%, from 2011. The increase was primarily the result of increased spending on material to develop new products, qualification costs and prototypes as well as an increase in employee salary and benefit costs due to higher headcount.
Selling, general and administrative expenses
Selling, general and administrative expenses in 2012 increased $9.9 million, or 10%, compared to 2011. The increase in selling, general and administrative expenses primarily resulted from more medical claims submitted under our self-insurance program and an increase in employee salary and benefit costs due to higher headcount.
Litigation expense
Litigation expense in 2012 decreased $11.7 million, or 61%, compared to 2011 as a result of settling the Avago litigation in May 2012.
Other income (expense), net
Other income (expense), net in 2012 was $5.2 million compared to other income, net of $0.1 million in 2011. The fluctuation in other income (expense), net was primarily due to the $7.0 million gain/recovery on the sale of a previously impaired investment in 2012.
Income tax (benefit) expense
In 2012, we recorded income tax benefit of $5.7 million, compared to income tax expense of $10.8 million in 2011. The 2012 tax benefit was primarily associated with our pre-tax loss offset by an accrual for unrecognized tax benefits and the recognition of additional valuation allowance. The 2011 tax expense primarily resulted from U.S. federal and state income tax expense, offset by benefits from the release of certain liabilities due to the expiration of the statute of limitations and the recognition of additional tax credits related to Research and Experimental ("R&E") spending.
Liquidity and Capital Resources
As of December 31, 2013, our cash, cash equivalents and marketable securities decreased $59.9 million, or 43% from December 31, 2012, primarily driven by:
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Capital expenditures of $87.0 million during 2013, which excludes the timing effect of capital expenditure payments in prepaid expenses and accounts payable of $8.0 million;
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The repurchase of approximately 7.7 million shares of our common stock for $51.1 million;
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An increase in our accounts receivable balance of $44.4 million, or 33%, primarily due to increased shipments during the fourth quarter of 2013 compared to 2012, and an increase in days sales outstanding to 60.2 during the fourth quarter of 2013 compared to 51.7 during the fourth quarter of 2012;
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An increase in our inventory balance of $21.2 million, or 15%, primarily due to an overall increase in production during the fourth quarter of 2013 to fulfill filter demand during the first quarter of 2014;
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A decrease in current and long term liabilities of $6.6 million, or 5%, primarily related to an decrease in accounts payable attributed to reduced purchasing activity during the last two weeks of 2013 compared to 2012, and a decrease in our earnout and milestone payment liability; and
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Proceeds from the subscription/issuance of common stock of $36.7 million primarily attributed to share based payment awards exercised by employees and shares purchased under our employee stock purchase plan.
Line of Credit
On August 24, 2011, we extended our Credit Agreement ("the Agreement") with a syndicated group of lenders, including Bank of America, N.A., as administrative agent and lender. The Agreement provided us with an unsecured revolving syndicated credit facility of $200.0 million. Our obligations under the Agreement are jointly and severally guaranteed by our domestic subsidiaries. Outstanding amounts are due in full on the maturity date of September 30, 2014. Upon the occurrence of certain events of default specified in the Agreement, amounts due under the Agreement may be declared immediately due and payable.
At December 31, 2013 and 2012, there were no amounts outstanding under the Agreement. During the year ended December 31, 2013 the average outstanding balance under the Agreement was $5.2 million, and interest cost of $0.2 million was incurred on borrowings. Since there were no borrowings under the Agreement during the year ended December 31, 2012, no interest cost was incurred on borrowings during 2012.
Sources of Liquidity
Our current cash, cash equivalent and short-term investment balances, together with cash anticipated to be generated from operations and the balance available on our $200.0 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. As of December 31, 2013, cash and cash equivalents held by our foreign entities amounted to $41.7 million. Management intends to utilize this balance to satisfy intercompany trade activity, which is entered into through the normal course of business and not subject to additional U.S. income taxes or foreign withholding taxes, between our foreign entities and the U.S. company. 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.
We continue to invest in expanding capacity, specifically for high performance filters and are expecting capital expenditures of approximately $65 million in 2014, depending upon business needs.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements, except for operating leases for various facilities as of December 31, 2013 and December 31, 2012. Total rent expense was $4.1 million, $4.0 million and $3.6 million for each of the years ended December 31, 2013, 2012 and 2011, respectively.
Contractual Obligations
The following table summarizes our scheduled contractual commitments as of December 31, 2013 that will affect our future liquidity (in millions):
______________
(1)
The amounts presented represent leases of certain equipment, office and manufacturing space under operating leases. The amounts presented in this line item represent commitments for minimum lease payments under non-cancelable operating leases.
(2)
The amount presented represents the liability for our Non-Qualified Deferred Compensation Plan (the “Plan”) established in October 2004. The Plan provides eligible employees and members of the Board of Directors with the opportunity to defer a specified percentage of their cash compensation. The deferred earnings are invested at the discretion of each participating employee or director and the deferred compensation we are obligated to deliver is adjusted for increases or decreases in the deferred amount due to such investment. We include the amounts deferred by the participants and held by us in the “Other noncurrent assets, net” line item of our consolidated balance sheets and our obligation to deliver the deferred compensation in the “Other long-term liabilities” line item on our consolidated balance sheets.
(3)
The cross-licensing liability represents a payable under a cross-licensing agreement.
(4)
The balance represents the estimated commitments for sabbatical payments for all eligible full time employees.
(5)
The balance represents the expected earnout and milestone payments related to acquisitions
(6)
The balance represents the estimated pension liability payable to the employees of our German subsidiary and the estimated obligation related to a lease agreement for assembly and test services in the Philippines. The pension liability becomes payable when the covered employees reach the age of 60 or 65. The liability was acquired through our purchase of the GaAs business of Infineon in 2002. We elected to secure the liability through a reinsurance program supported by us. We have included the reinsurance receivables of $3.9 million in the “Other noncurrent assets, net” line item on our consolidated balance sheets and our obligation to deliver the pension obligation in the “Other long-term liabilities” line item on our consolidated balance sheets.
As of December 31, 2013, we had approximately $2.1 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.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosure about Market Risk
Cash Equivalents
Our investments in cash equivalents, which are held at fair value, are classified as available-for-sale securities and consist primarily of highly rated money market funds, in accordance with an investment policy approved by our Board of Directors. We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe that our results of operations would be materially affected by an immediate 10% change in interest rates.
The following table shows the fair values of our investments as of December 31, 2013 (in millions):
Foreign Currency Risk
We are exposed to currency exchange rate fluctuations because we sell our products internationally and have operations in Costa Rica, Singapore, the Philippines and Germany. We manage the foreign currency risk of our international sales, purchases of raw materials and equipment and our Costa Rican, Singaporean, Philippine and German operations by denominating most transactions in U.S. dollars. We do not engage in foreign currency hedging.
Item 8.
Item 8.
Financial Statements and Supplementary Financial Data
Our consolidated financial statements at December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013, together with the report of our independent registered public accounting firm, are included in this Annual Report on Form 10-K on pages through.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Management has determined that there were no changes to our internal control over financial reporting during the quarter ended December 31, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting for us pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) and as implemented in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations. Internal control over financial reporting includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
We have adopted the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework (1992) to evaluate the effectiveness of our internal control over financial reporting. Management’s evaluation of the results of testing included consideration of susceptibility to loss or fraud, subjectivity, complexity, the extent of judgment, the amount and volume of transactions exposed to control deficiencies, the existence of mitigating controls, the cause of detected exceptions, how the exception was detected, the pervasiveness of the exception, the significance of the deviation from policy, and the frequency of exceptions relative to the frequency of operation.
As of December 31, 2013, management assessed the effectiveness of our internal control over financial reporting, and concluded that our internal control over financial reporting was effective. There were no material weaknesses in our internal control over financial reporting that have been identified by management. Our independent registered public accounting firm,
KPMG LLP, has issued an audit report on internal control over financial reporting. Their report on our internal control over financial reporting is included on page in this Annual Report on Form 10-K.
Item 9B.
Item 9B.
Other Information
None.
Part III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Executive Officers
The biographical information concerning our executive officers, including their ages as of February 21, 2014, is set forth below:
Ralph G. Quinsey joined TriQuint in July 2002 as President, Chief Executive Officer and Director. From September 1999 to January 2002, Mr. Quinsey was employed by ON Semiconductor, a manufacturer of semiconductors for a wide array of applications, as Vice President and General Manager of the Analog Division. From 1979 to September 1999, Mr. Quinsey was employed by Motorola, a manufacturer of semiconductors and communications equipment, holding various positions, including Vice President and General Manager of the RF/IF Circuits Division, which developed both silicon and GaAs technologies for wireless phone applications. Mr. Quinsey received a B.S. degree in Electrical Engineering from Marquette University.
Steven J. Buhaly joined TriQuint in September 2007 as Chief Financial Officer. Prior to joining TriQuint, Mr. Buhaly was Chief Financial Officer at Longview Fibre Company, a manufacturer of paper container products, from 2006 to 2007. He joined Planar Systems, Inc., a provider of specialty display solutions, in 1999 as Medical Business Vice President. From 2000 to 2006, while also at Planar Systems, he served first as Chief Financial Officer, then Chief Operating Officer. Prior to 1999, he held positions of increasing responsibility in finance and operations at Tektronix, Inc., a supplier of test, measurement, and monitoring products, solutions and services. Mr. Buhaly received B.S. and M.B.A. degrees from the University of Washington.
Deborah Burke joined TriQuint Semiconductor in May of 2007 as Vice President of Human Resources. From 2003 to 2007, Ms. Burke was Vice President of Human Resources for Merix Corporation, a provider of circuit boards used in the design and development of electronic applications. Before her Merix Corporation tenure, from 2001 to 2002, she was Vice President of Human Resources for Unicru Inc. in Beaverton, Oregon, a provider of workforce selection and optimization solutions, and, prior to that time, she worked at Intel Corporation from 1991 to 2001 in managerial and director positions. Ms. Burke holds a B.A. in economics from Smith College and received her M.B.A degree from the University of Vermont.
James L. Klein joined TriQuint in July 2011 as Vice President Defense Products and Foundry Services. Mr. Klein became Vice President and General Manager of Infrastructure & Defense Products in September of 2012. Mr. Klein joined TriQuint with more than 20 years of experience in the RF industry. Most recently, Mr. Klein was the General Manager of the Advanced Products Center at Raytheon in the Space and Airborne Systems division responsible for the design and manufacturing of advanced RF and microwave subsystems and components. Prior to Raytheon, Mr. Klein held various executive and managerial positions with Texas Instruments where he focused on MMIC and Transmit / Receive module engineering. Mr. Klein received both Bachelor and Master of Science degrees in Electrical Engineering from Texas A&M University.
Todd A. DeBonis joined TriQuint in April 2004 as Vice President, Worldwide Sales. He became Vice President, Worldwide Sales and Customer Service in 2006 and added Strategic Development to his list of responsibilities in 2010. From February 2002 to April 2004, Mr. DeBonis held the position of Vice President, Worldwide Sales and Marketing at Centillium Communications. Mr. DeBonis also served as the Vice President, Worldwide Sales for Ishoni Networks and Vice President, Sales & Marketing for the Communications Division of Infineon Technologies North America. Mr. DeBonis has a B.S. degree in Electrical Engineering from the University of Nevada.
Timothy A. Dunn joined TriQuint in July 2006 as Vice President, Mobile Devices. Prior to joining TriQuint, Mr. Dunn was Vice President and General Manager of Intel’s Platform Components Group. Mr. Dunn worked at Intel from 1988 to 1991, and again from 1994 to 2006, holding various executive and managerial positions. In addition to his Intel tenure, he has held marketing and product management positions with Hewlett-Packard and Cirrus Logic. Mr. Dunn holds an M.B.A. from the Amos Tuck School of Business at Dartmouth College and a B.S. degree in Electrical Engineering from Oregon State University.
Steven R. Grant joined TriQuint in June 2008 as Vice President, Worldwide Operations. Prior to joining TriQuint Mr. Grant spent 27 years at Intel and was most recently Vice President of Intel’s Technology and Manufacturing Group in Oregon from 2001 to 2008. During his Intel tenure, he managed the fabrication manufacturing network and was key to driving the manufacturing structure and efficiency improvements to record performance levels. Mr. Grant holds a B.S. degree in Material Science from the University of Illinois.
Additional information required by this item will be included in our definitive Proxy Statement under the captions Report of the Audit Committee, Election of Directors, Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance and Other Matters, to be filed with the Commission within 120 days after the conclusion of the fiscal year ended December 31, 2013 pursuant to General Instructions G(3) of Form 10-K and is incorporated herein by reference.
Item 11.
Item 11.
Executive Compensation
Information required by Item 11 will be included in our definitive Proxy Statement under the captions Executive Compensation, Director Compensation, Compensation Committee Interlocks and Insider Participation and Compensation Committee Report, to be filed with the Commission within 120 days after the conclusion of the year ended December 31, 2013 pursuant to General Instruction G(3) of Form 10-K and is incorporated herein by reference.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item will be included under the captions Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information contained in our definitive Proxy Statement to be filed with the Commission within 120 days after the conclusion of the year ended December 31, 2013 pursuant to General Instruction G(3) of Form 10-K and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item will be included under the captions Certain Relationships and Related Transactions and Corporate Governance and Other Matters contained in our definitive Proxy Statement to be filed with the Commission within 120 days after the conclusion of the year ended December 31, 2013 pursuant to General Instruction G(3) of Form 10-K and is incorporated herein by reference.
Item 14.
Item 14.
Principal Accountant Fees and Services
Information required by this item is included under the caption Ratify Independent Registered Public Accounting Firm contained in our definitive Proxy Statement to be filed with the Commission within 120 days after the conclusion of our fiscal year ended December 31, 2013 pursuant to General Instruction G(3) of Form 10-K and is incorporated herein by reference.
Part IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a)
Documents filed as part of this report:
1.Consolidated Financial Statements. The following consolidated financial statements of TriQuint Semiconductor, Inc. and its subsidiaries, together with the report thereon of KPMG LLP, required to be filed pursuant to Part II, Item 8 of this Form 10-K, are included in this Annual Report on Form 10-K on pages through:
Report of Independent Registered Public Accounting Firm;
Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended December 31, 2013, 2012 and 2011;
Consolidated Balance Sheets at December 31, 2013 and 2012;
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011;
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011; and
Notes to Consolidated Financial Statements.
2.Consolidated Financial Statement Schedules. All schedules pursuant to Part IV, Item 15 are omitted from this Annual Report on Form 10-K because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto.
3.Exhibits. In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about TriQuint or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other party or parties to the applicable agreement and:
•
should not in all instances be treated as categorical statements of fact, but rather as a means of allocating the risk to one of the parties if those statements prove to be inaccurate;
•
may have been qualified by disclosures that were made to the other party or parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•
may apply standards of materiality in a manner that is different from what may be viewed as material to you or other investors; and
•
were made only as of the date of the applicable agreement or other date or dates that may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about TriQuint may be found elsewhere in this Annual Report on Form 10-K and in TriQuint’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
______________
* Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.
± Included in this Report
+
Management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRIQUINT SEMICONDUCTOR, INC.
Dated: February 21, 2014
By:
/s/ RALPH G. QUINSEY
Ralph G. Quinsey
President and Chief Executive Officer
Dated: February 21, 2014
By:
/s/ STEVEN J. BUHALY
Steven J. Buhaly
Vice President of Finance and Administration,
Secretary and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ralph Quinsey and Steven Buhaly, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.
TRIQUINT SEMICONDUCTOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
TriQuint Semiconductor, Inc.:
We have audited the accompanying consolidated balance sheets of TriQuint Semiconductor, Inc. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive (loss) income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited the Company's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by COSO.
KPMG LLP
Portland, Oregon
February 21, 2014
TRIQUINT SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(In thousands, except per share data)
See accompanying notes to the consolidated financial statements.
TRIQUINT SEMICONDUCTOR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
See accompanying notes to the consolidated financial statements.
TRIQUINT SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
See accompanying notes to the consolidated financial statements.
TRIQUINT SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to the consolidated financial statements.
TRIQUINT SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands unless otherwise noted, except per share amounts)
Note 1. The Company
TriQuint Semiconductor, Inc. (collectively with its wholly owned subsidiaries, the “Company”) provides a comprehensive portfolio of advanced, high-performance radio frequency ("RF") solutions. The Company designs, develops and manufactures high-performance RF solutions with gallium arsenide ("GaAs"), gallium nitride ("GaN"), surface acoustic wave ("SAW") and bulk acoustic wave ("BAW") technologies. The Company serves customers worldwide in the mobile device, network infrastructure and defense & aerospace markets. The Company is a high-volume supplier of active and passive components and provides integrated solutions.
Note 2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements for the periods presented include the accounts of the Company and its wholly owned subsidiaries, including TriQuint Europe Holding Company, TriQuint TFR Inc., TriQuint, Inc., TriQuint S.R.L., TriQuint Semiconductor Texas LLC, TriQuint Sales and Design, Inc., TriQuint Semiconductor GmbH, TriQuint Asia Inc., TriQuint Asia LLC, TriQuint (Shanghai) Trading Co. Ltd., TriQuint Semiconductor Japan YK, TriQuint WJ, Inc., WJ Newco LLC, TriQuint International Pte. Ltd. Singapore and TriQuint Semiconductor Malaysia SDN BHD. The Company has no investments in which it exercises significant influence but which it does not control (20% to 50% ownership interest). All intercompany transactions and balances have been eliminated.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances. Examples of such estimates include, but are not limited to, revenue recognition, sales returns allowances, the valuation of inventory, the accounting for income taxes, impairments of investments, goodwill and long-lived assets, the accounting for precious metals reclaim, stock-based compensation, business acquisition earnout liabilities, the accounting for litigation and settlement costs and commitments and contingencies. On a regular basis, or as new information becomes available, the Company reviews its estimates to ensure the estimates appropriately reflect changes in its business. Management believes that these estimates are reasonable; however, actual results could materially differ from these estimates.
Revenue Recognition
The Company's revenue is primarily derived from the sale of products in the mobile devices, networks infrastructure and defense & aerospace end markets. The Company also receives revenue from foundry services, non-recurring engineering fees and cost-plus contracts for research and development work, which collectively has comprised less than 10% of consolidated revenue for any period. The Company’s distribution channels include direct sales staff, manufacturers’ representatives and independent distributors. The majority of the Company’s shipments are made directly to its customers. Revenue from the sale of the Company's products is recognized when title to the products passes to the buyer. The Company's product sales include warranty provisions that provide that the products will be free of faulty workmanship or defective materials and that the products will conform to the Company's published specifications or other specifications mutually agreed upon with the customer. The Company's historical warranty claims experience, and its warranty liability, have not been material.
Revenue from the Company’s distributors is recognized when the product is sold to the distributor and was as follows:
The Company’s distribution agreements provide for selling prices that are fixed at the date of sale, although the Company may elect after the sale to offer price protection credits which are specific, of a fixed duration and accounted for as a reduction to revenue when offered. Further, the payment obligation is not contingent on reselling the product or further action by the Company. The distributors take title to the product and bear the risks of ownership, the distributor has economic substance and the amount of future returns can be reasonably estimated. If the Company is unable to repair or replace products returned under warranty, the Company will issue a credit for a warranty return. The Company reduces revenue and records allowances for product returns, price protection credits and stock rotation credits based on historical experience or specific identification depending on the contractual terms of the arrangement. The revenue allowances have remained approximately consistent as a percentage of revenue and the Company has visibility into the distributors' inventory levels and qualifying sales, and is, therefore, able to reasonably estimate the revenue allowances.
The Company receives periodic reports from customers who use inventory hubs and recognizes revenue when customers acknowledge they have pulled inventory from its hub, the point at which title to the product passes to the customer.
Revenue from foundry services and non-recurring engineering fees is recorded when the service is completed. Revenue from cost-plus contracts is recognized as costs are incurred.
The Company recognizes amounts billed to a customer in a sale transaction related to shipping and handling as revenue. The costs incurred by the Company for shipping and handling are classified as costs of goods sold.
Cash Equivalents
The Company considers all highly liquid debt and other instruments purchased with an original maturity of three months or less to be cash equivalents. These investments include money market funds. Company’s cash equivalents were as follows:
Marketable Securities and Other Investments
The Company determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. The Company’s investment policy sets minimum credit quality criteria and maximum maturity limits on its investments to provide for safety of principal, liquidity and a reasonable rate of return. Investments for which maturity from the balance sheet date is greater than one year are classified as long-term investments in marketable securities. Available-for-sale securities are recorded at fair value, based on current market valuations. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized. Realized gains and losses are included in earnings in the period in which they are realized and are derived using the specific identification method for determining the cost of the securities sold.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company establishes an allowance for the trade accounts receivable which represents the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance by performing ongoing evaluations of its customers and their ability to make payments.
The Company determines the adequacy of the allowance based on length of time past due, historical experience and judgment of economic conditions. Additionally, the Company has a credit policy that is applied to potential customers. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.
Precious Metals Reclaim
The Company uses historical experience to estimate the amount of reclaim on precious metals used in manufacturing at the end of each period and states the reclaim value at the lower of average cost or market. The estimated value to be received from precious metal reclaim is included in other current assets.
Inventories
The Company states inventories at the lower of cost or market. The Company uses a standard cost methodology to determine the cost basis for inventories. This methodology approximates actual cost on a first-in, first-out basis. In addition to stating inventory at the lower of cost or market, the Company also evaluates inventory each period for excess quantities and obsolescence. This evaluation, based on historical experience and the Company’s judgment of economic conditions, includes identifying those parts specifically identified as obsolete and writing them down, analyzing historical usage as well as forecasted demand versus quantities on hand and writing down the excess, and identifying and recording other specific write-downs.
Property, Plant & Equipment
Property, plant and equipment is recorded at cost. Rent expense for operating leases is recorded on a straight-line basis over the lease term. If a lease contains an escalation clause, the difference between rent expense and rent paid is recorded as deferred rent and is included in accrued liabilities on the consolidated balance sheets.
Depreciation is recorded using the straight-line method over the estimated useful lives of the assets, which are generally as follows: 3 to 7 years for machinery and equipment, furniture and fixtures and computer equipment and software; 5 to 20 years for building improvements; and 39 years for buildings. Leasehold improvements are amortized over the shorter of the estimated life of the asset or the term of the related lease, generally 3 to 10 years. Asset lives are reviewed periodically to determine if they are appropriate and adjustments are made as necessary. Depreciation begins at the time assets are placed in service. Maintenance and repairs are expensed as incurred. The Company incurred depreciation expense as follows:
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over fair value of the net assets of businesses acquired. Other intangible assets consist primarily of patents, developed technology, customer relationships, in-process research and development, and other intangibles with estimable useful lives, ranging from 3 to 15 years at the time of acquisition. Goodwill and intangible assets acquired in a purchase business combination and determined to have indefinite useful lives are not amortized, but instead reviewed at least annually for impairment. In-process research and development ("IPR&D") is amortized or impaired upon completion or abandonment of specific projects. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives.
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. When the Company performed this test in 2013, the Company elected to use the two-step goodwill impairment test. 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. The Company performs this test in the fourth quarter of each year, unless indicators warrant testing at an earlier date.
Research and Development Costs
The Company expenses research and development costs associated with the development of new products and processes when incurred. Engineering and design costs related to revenue on nonrecurring engineering services billed to customers are classified as cost of goods sold.
Advertising Costs
The Company expenses advertising costs as incurred. For 2013, 2012 and 2011, advertising costs were immaterial.
Comprehensive (Loss) Income
The Company reports all changes in equity that result from transactions and economic events other than transactions with owners in comprehensive (loss) income . The components of comprehensive (loss) income include unrealized holding gains and losses on available-for-sale investments and unrealized gains and losses on pension obligations which are included as a separate component of stockholders’ equity until realized.
Net (Loss) Income Per Share
Basic net (loss) income per share is calculated by dividing the net (loss) income for the period by the weighted-average number of common shares outstanding during the period. 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 (“dilutive securities”). Dilutive securities include options granted pursuant to the Company’s stock option plans and potential shares related to the Company’s Employee Stock Purchase Plan ("ESPP"). A reconciliation of the numerators and denominators of the basic and diluted net (loss) income per share calculations for 2013, 2012 and 2011 is presented in Note 6.
Income Taxes
The Company is subject to taxation from federal, state and international jurisdictions. A significant amount of judgment is involved in preparing the provision for income taxes and the calculation of resulting deferred tax assets and liabilities.
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between tax and financial reporting. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company uses the with-and-without approach, disregarding indirect tax impacts, for determining the period in which tax benefits for excess share-based deductions are recognized. Net operating losses from prior years reduced federal and state income tax obligations such that the Company did not have significant income taxes payable at December 31, 2013 or December 31, 2012.
The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more-likely-than-not to be realized in future tax returns. Significant management judgment is required in determining any valuation allowances that might be required against the deferred tax assets. Accounting Standards Codification ("ASC") 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with GAAP. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This statement also provides guidance on derecognition, classification, interest and penalties, accounting in the interim periods and disclosure.
The calculation of the Company's tax liabilities is subject to legal and factual interpretation, judgment and uncertainty in a multitude of jurisdictions and includes addressing uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions in the U.S. and other tax jurisdictions based on recognition and measurement criteria prescribed by ASC 740. The liabilities are periodically reviewed for their adequacy and appropriateness. Changes to the Company's assumptions could cause the Company to find a revision of estimates appropriate. Such a change in measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. The Company recognizes potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on the Company's estimate of whether, and the extent to which, additional taxes and interest will be due. The Company records an amount as an estimate of probable additional income tax liability based on the largest amount that the Company determines is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority.
The Company's unrecognized tax benefits ("UTB") are recorded as a reduction to deferred tax assets when said UTBs relate to jurisdictions and tax years wherein a tax loss or credit is available. All remaining UTBs are recorded as a liability in the consolidated balance sheets. This treatment is consistent with the manner described in the recent Accounting Standards Update No. 2013-11. To the extent interest and penalties would be assessed by taxing authorities of any underpayment of income taxes, such amounts are accrued and classified as a component of income tax expense on the consolidated statement of operations. Realization of the UTBs results in a favorable impact to the effective tax rate. See Note 9 for additional information about the Company's income taxes.
As of December 31, 2013, the Company was not under audit by any income tax authorities. Tax periods within the statutory period of limitations not previously audited are potentially open for examination by the tax authorities. Potential liabilities associated with these years will be resolved when an event occurs to warrant closure, primarily through the completion of audits by the tax jurisdictions and/or the expiration of the statutes of limitation. To the extent audits or other events result in a material adjustment to the accrued estimates, the effect would be recognized during the period of the event. The Company believes that an appropriate estimated liability has been established for potential exposures.
Impairments of Long-lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset group exceeds its estimated future undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Depending on the asset, fair value is determined by reference to market prices or through discounted cash flow analysis. Assets to be disposed of are separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.
During the fourth quarter of 2013, the Company recorded impairment charges of $22,450 associated with management's plans to dispose of assets in connection with a reduction of GaAs capacity. The fair value of the impacted assets was determine using available market prices. The Company did not record an impairment charge on its long-lived assets for either of the years ended December 31, 2012 or 2011.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are described in Note 12. The Company records compensation expense for all stock-based payment awards made to employees and directors. Compensation expense for the Company’s stock-based payments, which includes employee stock options, restricted stock units ("RSUs"), market based restricted stock units ("MSUs") and the ESPP, is based on estimated fair values at the time of the grant or subscription period, respectively.
The Company estimates the fair value of option awards on the date of grant using the Black-Scholes option pricing model which requires a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company’s common stock and interest rates. The determination of fair value of RSU awards is based on the value of the Company's stock on the date of grant. The fair value of MSU awards is determined using a Monte Carlo simulation model which is affected by assumptions regarding subjective and complex variables determined at the grant date based on the target number of awards ultimately expected to be awarded.
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest. Stock-based compensation expense recognized during the years ended December 31, 2013, 2012 and 2011 included compensation expense for stock-based payment awards granted from 2007 through the current year. The compensation expense for these grants was based on the grant date estimated fair value. Compensation expense for all stock-based payment awards is recognized using the straight-line method over the vesting term of the award. As stock-based compensation expense recognized during 2013, 2012 and 2011 was based on awards ultimately expected to vest, the gross expense has been reduced for estimated forfeitures.
Reclassifications
Certain immaterial reclassifications have been made to disclosures of prior year intangible assets in Note 7 and other current assets in Note 4 to conform with the current year presentation.
Note 3. Fair Value of Financial Instruments
The Company’s financial instruments consist of cash equivalents, trade receivables, investments and payables. The financial instruments listed in the tables below are measured at fair value and the remaining financial instruments have carrying values that approximate their fair values. 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:
•
Level 1-Quoted prices for identical instruments in active markets;
•
Level 2-Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
•
Level 3-Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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 of its consolidated balance sheets.
The Company's earnout and milestone payment liability as of December 31, 2013 resulted from two acquisitions during 2012 and represents the fair value of the estimated payout to the former businesses contingent upon meeting certain
requirements. For the first acquisition, as of December 31, 2013, the Company estimated the fair value of the obligation as $1,420 using a cash flow based approach discounted with a market discount rate. For the second acquisition, as of December 31, 2013, the Company estimated the fair value of the obligation as $1,006 using a Monte Carlo simulation model discounted using the risk free rate adjusted for an applicable credit spread. During 2013, the Company remeasured the fair value of the obligation for the second acquisition based on a change in forecast related to the achievement of earnout targets. The change in estimate resulted in a reduction in the liability of $3,511 and was recorded to selling general and administrative expenses in the statement of operations. For both of the acquisitions, total accretion of $1,643 was recognized during 2013.
Details of the Level 3 fair value measurements are as follows:
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
The Company entered into a cross-licensing agreement in 2012. 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 cross-licensing liability was categorized as Level 3 in the fair value hierarchy and its ending fair value at December 31, 2013 and 2012 was $14,752 and $15,818, respectively. Of these amounts, $3,000 was current as of December 31, 2013 and 2012 and is included in other current liabilities in the balance sheet.
Note 4. Selected Financial Statement Information
The following schedule is a rollforward of our allowance for doubtful accounts:
Note 5. Investments in Marketable Securities
As of December 31, 2013 all cash equivalents are classified as available-for-sale and have maturity dates of less than 90 days. All unrealized gains and losses on available-for-sale investments are included in other comprehensive 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 December 31, 2013 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, 2012 consisted of the following:
The contractual maturities of investments as of December 31, 2013 and 2012 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 operational and financing cash flow factors. During 2013, 2012 and 2011, the Company did not record any other-than-temporary impairments on its marketable securities.
Note 6. Net (Loss) Income Per Share
The following summarizes the elements included in the calculation of basic and diluted net (loss) income per share for 2013, 2012 and 2011:
For 2013 and 2012, all outstanding stock options, RSUs and MSUs, included in Note 12, were excluded from the calculation as their effect would have been antidilutive. For 2011, 6,174 stock options were excluded from the calculation as their effect would have been antidilutive.
Note 7. Goodwill and Other Acquisition-Related Intangible Assets
The Company performs its annual goodwill impairment test in the fourth quarter of each year, unless indicators warrant testing at an earlier date. During its annual impairment test in the fourth quarter of 2013, the price of the Company’s common stock adjusted for a control premium was above its book value and the Company concluded its goodwill was not impaired. In 2012 and 2011, no impairment of goodwill was recorded since the Company’s fair value substantially exceeded its carrying value. Information regarding the Company’s other acquisition-related intangible assets is as follows:
Amortization expense of intangible assets was approximately as follows:
The changes in the gross carrying amount of goodwill and intangible assets are as follows:
During the third quarter of 2013, the Company completed the acquisition of CAP Wireless ("CAP") a producer of Spatium™ broadband amplifiers, which resulted in the recognition of net tangible assets of $16, and several intangible assets including developed technology of $5,000, customer relationships of $1,500, tradenames of $600, net deferred tax liabilities of $1,394 and goodwill of $9,128. Total consideration of $14,850 was paid primarily with a combination of cash and Company stock. The developed technology, customer relationship and tradename assets are amortized over a period of 3 to 14 years. The Company has estimated the fair value of the identifiable intangible assets, which are subject to amortization, using a cash flow based approach discounted with a market discount rate. The estimated fair value of these assets is classified as a Level 3 measurement within the fair-value hierarchy. The goodwill is not deductible for tax purposes. The goodwill is calculated as the purchase price in excess of the fair value of assets and liabilities acquired, and represents the Company’s ability to expand its product line into solid state amplifiers, a high margin high growth market currently underserved by the Company.
During 2012, certain product lines that were included in non-amortizing IPR&D reached technological feasibility. As a result, the Company transferred $929, to developed technology and began amortizing the amounts over a period of three years.
During the third quarter of 2012, the Company acquired developed technology for $4,850 that is being amortized over a period of eleven years. The Company estimated the fair value of this asset using the relief from royalty valuation methodology discounted at a market discount rate.
During the fourth quarter of 2012, the Company completed acquisitions that resulted in the recognition of several intangible assets including developed technology for $570, IPR&D for $850, customer relationships for $670 and goodwill for $1,015. The developed technology and the customer relationships assets is being amortized over a period of five years. The Company estimated the fair value of the developed technology and IPR&D assets using a relief from royalty valuation methodology discounted at a market discount rate. The fair value of the customer relationships asset was estimated using a cash flow based approach discounted at a market discount rate.
Amortization expense related to intangible assets at December 31, 2013 in each of the next five fiscal years and beyond is expected to be as follows:
Note 8. Bank Line
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). 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 the 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 is in compliance with these covenants as of December 31, 2013.
At December 31, 2013 and 2012, there were no amounts outstanding under the Agreement. During the year ended December 31, 2013 the average outstanding balance under the Agreement was $5,178, and interest cost of $208 was incurred on borrowings. Since there were no borrowings under the Agreement during the year ended December 31, 2012, no interest cost was incurred on borrowings during 2012.
Note 9. Income Taxes
Domestic and foreign pre-tax (loss) income for 2013, 2012 and 2011 were as follows:
Income tax (benefit) expense for 2013, 2012 and 2011 consisted of the following:
The actual income tax (benefit) expense is different from that which would have been computed by applying the statutory federal income tax rate to (loss) income before income tax. A reconciliation of income tax (benefit) expense as computed at the U.S. federal statutory income tax rate to the provision for income tax (benefit) expense for 2013, 2012 and 2011 is as follows:
Deferred income tax assets and liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. These temporary differences as of December 31, 2013 and 2012 were as follows:
The Company recorded an income tax benefit of $7,058 and $5,705 for 2013 and 2012, respectively, and income tax expense of $10,822 for 2011. The 2013 tax benefit differs from the statutory rate primarily due to losses generated in foreign jurisdictions with low tax rates offset by the generation of additional federal income tax credits. The 2012 tax benefit differs from the statutory rate primarily due to an increase in the valuation allowance placed upon certain state attributes and the impact of book to tax differences related to stock based compensation expense. The 2011 tax expense differs from the statutory rate primarily due to the benefit of federal and state credits and the expiration of the statute of limitations on an uncertain tax position. The increase to the valuation allowance during 2013 is primarily the result of the Company's increased foreign net operating loss carryforwards. The increase in the valuation allowance for the net deferred tax assets for 2013, 2012 and 2011 was $2,121, $2,996 and $131, respectively.
At December 31, 2013, the Company had approximately $111,615 of U.S. net operating loss carryforwards available to offset future U.S. taxable income, expiring from 2024 through 2032 if unused; and $134,778 of net operating loss carryforwards for state tax purposes, expiring from 2014 through 2032 if unused. Included in these amounts are NOLs from acquisitions which are subject to Internal Revenue Code section 382 annual utilization limitations following an ownership change. Of the total U.S. and state NOLs, $67,969 and $8,488, respectively, were generated from stock option deductions and are not reflected in the Company's deferred tax assets. When utilized, the benefit will be credited to additional paid-in capital in the Company's consolidated balance sheets. The Company had U.S. federal and state income tax credits of $34,565 and $15,983, respectively. These federal and state tax credits expire at various dates between 2014 and 2032. Of the total U.S. and state credits, $3,666 and $568, respectively, were generated from stock option deductions and are not reflected in the Company's deferred tax assets. No remaining federal capital loss carryforwards exist. The Company continues to maintain a valuation allowance against the tax effect of certain NOL and credit carryforwards, since management does not believe it is more likely than not that these benefits will be realized in future periods. Specifically, the carryforward period may expire before certain state NOL and credit carryforwards are utilized.
In January, 2013, the American Taxpayer Relief Act of 2012 was signed into law, retroactively reinstating the R&E credit for 2012 and through 2013. As a result, the expected credits for 2012 and 2013 of approximately $4,835 and $5,505, respectively, was recorded in the current year.
The major jurisdictions in which the Company files are the U.S., Singapore and Costa Rica. Tax years beginning in 2007 are subject to examination by taxing authorities, although NOL and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. 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 increase (decrease) in income tax expense for 2013, 2012 and 2011 as a result of the tax holidays was approximately $12,840, $765, and $(1,309), respectively.
No provision has been made for the U.S., state or additional foreign income taxes related to approximately $70,500 of undistributed earnings of foreign subsidiaries which have been permanently reinvested outside the U.S. except for existing earnings that have been previously taxed. In the event the foreign subsidiaries repatriate these earnings, the earnings may be subject to an estimated $25,000 of U.S. federal and state income taxes and foreign withholding taxes.
The Company's current cash, cash equivalent and short-term investment balances, (consisting of $37,354 in domestic balances and $41,672 in foreign balances) together with cash anticipated to be generated from operations and the balance available on its $200,000 syndicated credit facility, constitute the Company's principal sources of liquidity. The Company believes these sources of liquidity will satisfy its projected working capital, capital expenditure and possible investment needs domestically. The Company intends to permanently reinvest all foreign earnings except existing earnings that have been previously taxed. The Company is not presently aware of any restrictions on the repatriation of these funds. If these funds were needed to fund the Company's operations in the U.S., they could be repatriated. Repatriation of the Company's 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.
The Company's net unrecognized tax benefits recorded in income taxes payable totaled $2,062 and $2,809 as of December 31, 2013 and December 31, 2012, respectively. Net unrecognized tax benefits included accumulated interest and penalties of $767 and $590 as of December 31, 2013 and December 31, 2012, respectively. Within the next 12 months, the Company believes it is reasonably possible that $1,400 of net unrecognized tax benefits may be reduced as a result of the expiration of a statute of limitations.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2013 and 2012, which includes amounts recorded in income taxes payable as well as amounts offsetting the Company's deferred tax assets, is as follows:
Note 10. Commitments and Contingencies
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 does not believe the ultimate resolution of any such pending proceedings will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Lease Commitments
The Company leases certain equipment, office and manufacturing space under operating leases. Lease terms range from approximately one to ten years, expiring at various dates through 2020 with options to renew at varying terms. Commitments for minimum lease payments under non-cancelable leases as of December 31, 2013 were as follows:
Rent expense under cancelable and non-cancelable operating leases for 2013, 2012 and 2011 was as follows:
Note 11. Concentration of Risk
Suppliers
The Company currently obtains some components, equipment and services for their products from limited or single sources. The Company purchases these components, equipment and services on a purchase order basis, does not carry significant inventories of components and does not have any long-term supply contracts with these vendors. Access to sufficient capacity from these vendors in periods of high demand may be limited, as the Company often does not account for a significant part of the vendor’s business. If the Company were to change any of its sole or limited source vendors, it would be required to requalify each new vendor. Requalification could prevent or delay product shipments that could negatively affect its results of operations. In addition, reliance on these vendors may negatively affect the Company’s production if the components, equipment or services vary in reliability or quality. If the Company is unable to obtain timely deliveries of sufficient quantities of acceptable quality or if the prices increase, results of operations could be harmed.
Customers
The Company grants trade credit to its customers, who are primarily foreign manufacturers of wireless communication devices, cable and broadcast television receivers and fiber optic communication devices. The Company performs periodic credit evaluations of its customers and generally does not require collateral; however, in certain circumstances, the Company may require letters of credit or prepayment from its customers. Sales and accounts receivable from customers are denominated in U.S. dollars. The Company has not experienced significant losses related to receivables from these individual customers. The Company purchases credit insurance for the majority of its foreign sales.
Note 12. Stock, Stock Options and Rights
Preferred Stock
The Company has authorized capital of 5,000 shares of $0.001 par value preferred stock. Holders of the preferred stock are entitled to one thousand votes for each share of preferred stock on all matters submitted to a vote of the Company’s stockholders. At December 31, 2013, the Company had no shares of preferred stock issued or outstanding.
Common Stock
The Company has authorized capital of 600,000 shares of $0.001 par value common stock. Holders of the common stock are entitled to one vote for each share of common stock on all matters submitted to a vote of the Company’s stockholders.
Stock Options
1996 Stock Incentive Program
The 1996 Stock Incentive Program provides for the grant of incentive and non-qualified stock options to officers, outside directors and other employees of the Company or any parent or subsidiary. The plan was amended in 2002 to provide that options granted thereunder must have an exercise price per share no less than 100% of the fair market value of the share price on the grant date. Further, with respect to any participant who owns a quantity of stock representing more than 10% of the voting rights of the Company’s outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date. In 2005, the 1996 plan was further amended to extend the term of the plan to 2015 and permit the award of restricted stock, restricted stock units, stock appreciation rights, performance shares and performance units in addition to the grant of stock options. In addition, the amendment provided specific performance criteria that the plan administrator may use to establish performance objectives, a formula mechanism that provides for automatic grants to the non-employee chairman of the Board and prohibited (i) repricing any outstanding stock option or stock appreciation right after it has been granted (other than pro rata adjustments to reflect stock dividends and other corporate events) and (ii) canceling any outstanding stock option or stock appreciation right and replacing it with a new stock option or stock appreciation right with a lower exercise price, unless approved by the Company’s stockholders. The terms of each grant under the plan may not exceed ten years.
2008 Inducement Award Plan
The 2008 Inducement Award Plan provides for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights and other stock or cash awards to employees, officers and directors employed by the company or any parent or subsidiary. The options granted thereunder must have an exercise price per share no less than 100% of the fair market value per share on the date of grant. The terms of each grant under the plan may not exceed ten years.
2009 Incentive Plan
In May 2009, the 2009 Incentive Plan was approved by the Company’s stockholders. The plan replaced the 1996 Stock Incentive Program and provides for the grant of stock options, restricted stock units, stock appreciation rights and other stock or cash awards to employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its subsidiaries and affiliates. The options granted thereunder must have an exercise price per share no less than 100% of the fair market value per share on the date of grant. The terms of each grant under the 2009 Incentive Plan may not exceed ten years.
2012 Incentive Plan
In May 2012, the 2012 Incentive Plan was approved by the Company’s stockholders. The plan replaces the 2009 Incentive Plan and provides for the grant of stock options, restricted stock units, stock appreciation rights and other stock or cash awards to employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its subsidiaries and affiliates. The options granted thereunder must have an exercise price per share no less than 100% of the fair market value per share on the date of grant. The terms of each grant under the 2012 Incentive Plan may not exceed ten years.
2013 Incentive Plan
In May 2013, the 2013 Incentive Plan was approved by the Company’s stockholders. The plan replaces the 2012 Incentive Plan and provides for the grant of stock options, restricted stock units, stock appreciation rights and other stock or cash awards to employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its subsidiaries and affiliates. The options granted thereunder must have an exercise price per share no less than 100% of the fair market value per share on the date of grant. The terms of each grant under the 2013 Incentive Plan may not exceed ten years.
The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans at December 31, 2013:
______________
(1)
Shares are only available for issuance under the 2013 Incentive Plan after reregistration.
Subject to the discretion of the Board of Directors and beginning in 2006, outstanding awards granted to new employees under the Plans generally vest and become exercisable at the rate of 25% at the end of the first year, and thereafter at a rate of 6.25% per quarter until fully vested after a total of four years. Options and RSUs granted to current employees generally become exercisable at the rate of 25% per quarter during either the third or fourth year following the grant, quarterly over four years, or as approved by the Compensation Committee. All options granted to employees generally expire ten years after the grant date. Annual option grants to sitting board members generally expire five years after the grant date. Option grants to newly elected board members generally expire ten years after the grant date.
Stock Options
The following summarizes the Company’s stock option transactions for 2013, 2012 and 2011:
The aggregate intrinsic value of options exercised during 2013, 2012 and 2011 was $11,341, $2,758 and $18,263, respectively. Fully vested outstanding options at December 31, 2013 had an aggregate intrinsic value of $49,441, based upon the Company’s closing stock price on that date of $8.34 per share. Fully vested outstanding options at December 31, 2012 had an aggregate intrinsic value of $10,766, based upon the Company’s closing stock price on that date of $4.83 per share. The aggregate intrinsic value of all outstanding options at December 31, 2013, 2012 and 2011 was $80,174, $11,176 and $13,519, respectively. The Company issues new shares of common stock upon exercise of stock options.
The following table summarizes information concerning stock options outstanding and exercisable at December 31, 2013:
The following table summarizes the average estimates the Company used in the Black-Scholes option-pricing model during 2013, 2012 and 2011, to determine the fair value of employee stock options and employee ESPP rights granted during each period:
The Company determines its risk-free rate assumption based upon the U.S. Treasury yield for obligations with contractual lives similar to the expected lives of the Company’s option grants and ESPP subscription periods. The expected life represents the weighted average period the options are expected to remain outstanding, based upon historical experience. The dividend yield assumption is based on the Company’s historical and anticipated dividend distributions. The expected volatility is based upon a blend of the Company’s historical volatility of its exchange traded options and the stock price for the expected life of the award. Forfeitures are estimated based upon historical and anticipated future experience for the expected life of the award. Based upon these assumptions, the Company has estimated the per share weighted-average grant fair value of its options granted during 2013, 2012, and 2011 as follows:
Restricted Stock Units and Market Based Restricted Stock Units
Restricted stock units are converted into shares of Company common stock upon vesting on a one-for-one basis. The awards typically vest over four years and vesting is subject to the grantee’s continued service with the Company. The compensation expense related to the service-based RSU awards is determined using the fair market value of Company common stock on the date of the grant, and the compensation expense, reduced by estimated forfeitures, is recognized over the vesting period.
During 2013, the Company granted market based restricted stock units to certain members of executive management. The number of shares that are ultimately awarded is contingent upon the achievement of pre-determined market and service conditions. Market conditions must be met for shares to be awarded, even if the service conditions are met. Fair value of the
awards is determined at the grant date based on the target number of awards ultimately expected to be awarded. Compensation expense associated with the awards is calculated based on the target number of shares ultimately expected to be awarded and is recognized on a straight line basis over the requisite service period and will not be reversed even if the market conditions are not met. The number of shares of common stock to be awarded will range from zero to 150 percent of the target number of stock units based on the Company's total stockholder return (“TSR”) relative to the performance of companies in the SPDR S&P Semiconductor Index ("SPDR") for the applicable measurement period. TSR is calculated based on market performance between the beginning and end of the award period, generally over three years. Based on the number of awards outstanding as of December 31, 2013, the maximum number of shares of common stock that could be awarded is 299 shares.
The fair value of the MSUs was determined using a Monte Carlo simulation model. The Monte Carlo simulation model is affected by assumptions regarding subjective and complex variables. Generally, the Company's assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. Key assumptions for the Monte Carlo simulation model were as follows:
The following table summarizes RSU and MSU activity for 2013:
The aggregate intrinsic value of all outstanding RSUs and MSUs at December 31, 2013 was $3,243. The weighted average contractual term of outstanding RSUs is MSUs as of December 31, 2013 was 2.35 years. There was no RSU or MSU activity prior to 2013.
Employee Stock Purchase Plan ("ESPP")
Pursuant to the ESPP, participating employees authorize the Company to withhold compensation and to use the withheld amounts to purchase shares of the Company’s common stock at a discount. Offerings under the plan allow shares to be purchased at 85% of the lower of the fair market value on the first or last day of the six month offering period. The offering period dates are the first business days of May and November of each year.
The Company issues new shares of common stock for purchases through the ESPP. Approximately 2,000 shares were initially reserved for issuance under the ESPP, subject to annual increases at the lesser of (i) 3,000 shares, (ii) 1.5% of the number of shares outstanding on the last day of the immediately preceding fiscal year or (iii) an amount determined by the board of directors. As of December 31, 2013, 3,216 shares were reserved for issuance under the ESPP. The ESPP will expire in February 2017.
During 2013, 2012 and 2011, the approximate number of shares of the Company’s common stock that was purchased under the ESPP was as follows:
Stock-based compensation expense
Stock-based compensation expense recognized in 2013, 2012 and 2011 consisted of stock-based compensation expense related to unvested grants of employee stock options, RSUs, MSUs and the Company’s ESPP. The table below summarizes the stock-based compensation expense for 2013, 2012 and 2011:
As of December 31, 2013, the total future compensation expense related to the current unvested stock options, RSUs, MSUs and the ESPP, net of estimated forfeitures, is expected to be approximately $36,475. This expense is expected to be recognized over a weighted average period of approximately 27 months.
Stock Repurchase Program
On May 14, 2013, the Company's Board of Directors approved a stock repurchase program authorizing the purchase, at the discretion of management, of up to $75,000 of the Company's outstanding common stock. Common stock repurchases were made in the open market at prevailing market prices. The timing of the purchases was based upon market conditions and other corporate considerations, including price, corporate and regulatory requirements and alternative investment opportunities. During 2013, the Company repurchased 7,670 shares for $51,125. Shares of common stock repurchased by the Company through the repurchase program were retired and had no impact on total shares authorized.
Note 13. Employee Benefit Plans
The Company has a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code ("401(k) Plan") covering substantially all employees in the U.S. Participants in this plan may defer up to the maximum annual amount allowable under IRS regulations. Company contributions to the 401(k) Plan were as follows:
The Company offers a non-qualified deferred compensation plan (the “Compensation Plan”) to certain employees and members of the Board of Directors. Participants in the Compensation Plan are provided with the opportunity to defer a specified percentage of their cash compensation which the Company will be obligated to deliver on a future date. At the time of deferral, the Company allocates the deferred monies to a trust account that is invested at the participants’ election. The amount of compensation to be deferred by each participating employee or board member will be based on elections by each participant and adjusted for any positive or negative investment results from investment alternatives selected by the participant under the Compensation Plan. The liability for the deferred compensation and the value of the funds allocated to the trust by the Company are included in the Company's consolidated balance sheets as follows:
The Company also has a pension obligation related to its German subsidiary that becomes payable when the covered employees reach the age of 60 or 65. The Company has elected to secure the liability through a self-paid reinsurance program. The pension plan obligation and the reinsurance program funds are included in the Company's consolidated balance sheets as follows:
Additional disclosures have not been included due to the insignificance of the pension plan.
Note 14. Investments in Other Companies
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 2012, the carrying amount of the CyOptics investment was fully impaired and written down to $0. During 2012, the amount due on the promissory note was settled in full and the preferred stock was sold in exchange for an initial liquidation payment of $6,957 and an escrow holdback contingent upon certain conditions. The initial liquidation payment was received in cash in March, 2012. The final liquidation payment of $421 from the escrow holdback account was received in cash in May, 2013. Both of the liquidation transactions were 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 cash proceeds from both of the payments were included in the investing activities section of the statement of cash flows.
Note 15. Segment Information
The Company follows standards established by the FASB for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance.
As of December 31, 2013, the Company has concluded that it operates and internally manages itself as a single operating segment. In reaching this conclusion, management considered the definition of the chief operating decision maker ("CODM"), how the business is defined by the CODM, the nature of the information provided to the CODM, and how that information is used in relation to managing the business, evaluating performance and allocating resources. The Company’s chief operating decision makers are considered to be the senior management team consisting of the President and Chief Executive Officer (the “CEO”), the Chief Financial Officer (the “CFO”), and the Vice President of Worldwide Operations. Results of operations are provided and analyzed at a consolidated level. Key resources, decisions, assessment and management of performance is done at a consolidated level
Revenue from the sales of products into the Company's primary end markets was as follows:
Revenue is reported in the geographic area where the sale originates. The Company’s Costa Rica facility provides manufacturing services to its U.S. operations and does not generate revenue from external parties. The functional currency for the Costa Rican operations is the U.S. dollar as most material and equipment costs are denominated in the U.S. dollar. The impact of fluctuations of the local Costa Rican currency is not considered significant and the foreign exchange rate is not hedged. Selected financial information by geographical area is summarized below:
The Company’s products are sold to customers in various countries and shipped to factories around the world. International customer revenue representing approximately 10% or more of the Company’s total revenue for each period is as follows:
There were no other countries from which revenue represented 10% or more of total revenue for the periods presented.
Revenue from customers representing approximately 10% or more of total revenue for each period is as follows (as a percentage of total revenue):
Some of the Company's mobile devices end customers use multiple subcontractors for product assembly and test and some of those subcontractors have multiple customers. Therefore, revenues from the Company's customers may not necessarily equal the business of a single mobile devices end customer.
Related receivables from customers representing approximately 10% or more of total revenue for each period are as follows (as a percentage of total trade receivables):
Note 16. Restructuring, Impairment and Other Charges
Reduction of GaAs capacity
During the fourth quarter of 2013, management approved plans to dispose of assets relating to a reduction of gallium arsenide ("GaAs") capacity. In connection with this effort, the Company incurred impairment charges of $22,450 and other charges of $760 associated with management's plans to dispose of assets located at its Oregon and Texas facilities, of which, $449 was payable at December 31, 2013. These charges were reflected in cost of goods sold in the Company's statement of operations.
Restructuring charges
During the fourth quarter of 2013, management approved a voluntary severance plan ("VSP"), other targeted reductions in force, and the closure of its engineering and test facility in Santa Rosa, CA. Expenses incurred as a result of these activities primarily consisted of severance and lease abandonment costs related to the closure of the Santa Rosa facility.
Information with respect to restructuring charges as of December 31, 2013 is as follows (in thousands):
Restructuring charges were reflected in the Company's statement of operations during the fourth quarter of 2013 as follows (in thousands):
Note 17. Summarized Quarterly Data (Unaudited)
______________
(1)
Earnings per share is computed individually for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not necessarily equal the total for the year.
(2)
During the fourth quarter of 2013, the Company incurred restructuring, impairment and other charges related to the disposal of assets, totaling $27,120, in relation to actions taken to reduce GaAs capacity and associated costs.