TriQuint Semiconductor (TQNT)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

For the Transition Period from          to         

Commission File Number 0-22660

TRIQUINT SEMICONDUCTOR, INC.

(Exact name of registrant as specified in its charter)

 

2300 N.E. Brookwood Parkway,
Hillsboro, Oregon 97124

(Address of principal executive offices) (Zip code)

(503) 615- 9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes x   No o

As of July 29, 2005, there were 139,917,948 shares of the Registrant’s Common Stock outstanding.

TRIQUINT SEMICONDUCTOR, INC.

INDEX

 

PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements

TRIQUINT SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2005			2004			2005			2004
Revenues		$	67,927		$	84,628		$	134,892		$	164,362
Cost of goods sold		47,086			55,560			95,669			107,099
Gross profit		20,841			29,068			39,223			57,263
Operating expenses:
Research, development and engineering		12,069			11,741			24,392			24,358
Selling, general and administrative		13,839			12,124			27,248			23,659
Reduction in workforce		362			133			362			428
Impairment of assets		—			389			31			389
Gain on disposal of equipment		(16		)	(85		)	(222		)	(85		)
Acquisition related charges		413			—			827			—
Total operating expenses		26,667			24,302			52,638			48,749
Income (loss) from operations		(5,826		)	4,766			(13,415		)	8,514
Other income (expense):
Interest income		2,649			1,694			5,098			3,316
Interest expense		(2,470		)	(2,712		)	(4,965		)	(5,730		)
Foreign currency gain (loss)		(69		)	(231		)	3			(309		)
Impairment charge—investments in other companies		(100		)	—			(100		)	—
Gain on retirement of debt		114			539			114			539
Other, net		2			(3		)	42			132
Total other income (expenses), net		126			(713		)	192			(2,052		)
Income (loss) from continuing operations, before income tax		(5,700		)	4,053			(13,223		)	6,462
Income tax expense (benefit)		(4,175		)	83			(4,083		)	(153		)
Income (loss) from continuing operations		(1,525		)	3,970			(9,140		)	6,615
Discontinued operations:
Income (loss) from discontinued operations		1,188			(3,645		)	1,090			(6,277		)
Gain on disposal		11,034			—			11,034			—
Income tax expense		4,488			38			4,520			49
Income (loss) from discontinued operations		7,734			(3,683		)	7,604			(6,326		)
Net income (loss)		$	6,209		$	287		$	(1,536	)	$	289
Basic per share net income (loss):
Income (loss) from continuing operations		$	(0.01	)	$	0.03		$	(0.06	)	$	0.05
Income (loss) from discontinued operations		0.05			(0.03		)	0.05			(0.05		)
		$	0.04		$	0.00		$	(0.01	)	$	0.00
Diluted per share net income (loss):
Income (loss) from continuing operations		$	(0.01	)	$	0.03		$	(0.06	)	$	0.05
Income (loss) from discontinued operations		0.05			(0.03		)	0.05			(0.05		)
		$	0.04		$	0.00		$	(0.01	)	$	0.00
Common equivalent shares:
Basic		139,194			136,592			138,989			136,176
Diluted		139,194			140,666			138,989			141,573

 

The accompanying notes are an integral part of these financial statements.

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TRIQUINT SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)

		June 30,			December 31,
		2005			2004
ASSETS
Current assets:
Cash and cash equivalents		$	81,845			$	89,719
Investments in marketable securities		143,932				108,778
Accounts receivable, net		38,148				35,654
Inventories, net		42,751				49,619
Prepaid expenses		3,122				2,653
Other current assets		8,884				7,692
Assets held for sale		8,377				33,890
Total current assets		327,059				328,005
Long-term investments in marketable securities		175,387				189,555
Property, plant and equipment, net		190,493				199,518
Other noncurrent assets, net		15,822				5,322
Total assets		$	708,761			$	722,400
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	39,460			$	34,075
Deferred tax liability		7,727				7,607
Capital leases, current portion		138				275
Liabilities held for sale		343				15,057
Total current liabilities		47,668				57,014
Long-term liabilities:
Convertible subordinated notes		218,755				223,755
Other long-term liabilities		728				244
Total liabilities		267,151				281,013
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $.001 par value, 600,000,000 shares authorized, 139,856,584 shares and 138,773,680 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively		140				139
Additional paid-in capital		475,767				472,675
Accumulated other comprehensive loss		(3,041		)		(1,707		)
Accumulated deficit		(31,256		)		(29,720		)
Total stockholders’ equity		441,610				441,387
Total liabilities and stockholders’ equity		$	708,761			$	722,400

 

The accompanying notes are an integral part of these financial statements.

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TRIQUINT SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Six Months Ended June 30,
		2005			2004
Cash flows from operating activities:
Income (loss) from continuing operations		$	(9,140	)	$	6,615
Adjustments to reconcile income (loss) to net cash provided by operating activities:
Depreciation and amortization		18,797			19,152
Tax expense allocation to discontinued operations		(4,488		)	—
Impairment of long-lived assets		31			389
Gain on retirement of debt		(114		)	(539		)
Impairment charge—investments in other companies		100			—
Loss (gain) on disposal of assets		(222		)	279
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable, net		(1,912		)	(6,424		)
Inventories, net		6,868			977
Other assets		(2,531		)	276
Accounts payable and accrued expenses		2,855			(490		)
Net cash provided by operating activities		10,244			20,235
Cash flows from investing activities:
Purchase of available-for-sale investments		(245,635		)	(348,580		)
Maturity/sale of available-for-sale investments		223,874			307,941
Proceeds from sale of discontinued operations		13,500			—
Business acquisition, net of cash acquired		(2,716		)	—
Proceeds from sale of fixed assets		953			67
Capital expenditures		(6,610		)	(13,250		)
Net cash used in investing activities		(16,634		)	(53,822		)
Cash flows from financing activities:
Principal payments under capital lease obligations		(137		)	—
Repurchase of convertible subordinated notes		(4,844		)	(43,875		)
Issuance of common stock, net		3,093			7,495
Net cash used in financing activities		(1,888		)	(36,380		)
Net decrease in cash and cash equivalents from continuing operations		(8,278		)	(69,967		)
Cash provided by (used in) discontinued operations		404			(8,866		)
Net decrease in cash and cash equivalents		(7,874		)	(78,833		)
Cash and cash equivalents at beginning of period		89,719			126,491
Cash and cash equivalents at end of period		$	81,845		$	47,658
Supplemental disclosures:
Cash paid for interest		$	4,519		$	5,750
Cash paid for income taxes		$	364		$	258
Preferred stock received in sale of discontinued operations		$	4,500		$	—
Note receivable from sale of discontinued operations		$	3,341		$	—

 

The accompanying notes are an integral part of these financial statements.

3

TRIQUINT SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

1.   Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”). However, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In addition, the preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. For TriQuint Semiconductor, Inc. (the “Company”), the accounting estimates requiring management’s most difficult and subjective judgments include revenue recognition, the valuation of inventory, the assessment of recoverability of long-lived assets, the valuation of investments in privately held companies, the recognition and measurement of income tax assets and liabilities, the accounting for stock-based compensation and the establishment of reserves for potential warranty costs. In the opinion of management, the condensed consolidated financial statements include all adjustments consisting of normal, recurring adjustments necessary for the fair presentation of the results of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company for the fiscal year ended December 31, 2004, as included in the Company’s 2004 Annual Report on Form 10-K as filed with the SEC on March 15, 2005.

On April 29, 2005, the Company completed its sale of its optoelectronics operations in Pennsylvania and its optoelectronics subsidiary in Mexico and on July 13, 2005, completed the sale of the land and building and related facilities occupied by the Company’s former optoelectronics operations in Breinigsville, Pennsylvania (see Note 3). In accordance with GAAP, the balance sheet at December 31, 2004 has been adjusted to reflect the assets and liabilities of the operations in Pennsylvania and Mexico optoelectronics operations as held for sale. At June 30, 2005, various equipment and the land and building which the Company sold on July 13, 2005 remained classified as held for sale. Additionally, the statements of operations and cash flows have been adjusted to reflect the results of these optoelectronics operations as discontinued operations for the periods presented.

The Company’s fiscal quarters end on the Saturday nearest the end of the calendar quarter, which was July 2, 2005. For convenience, the Company has indicated that its second quarter ended on June 30. The Company’s fiscal year ends on December 31.

Reclassifications

Where necessary, prior period amounts have been reclassified to conform to the current period presentation. Reclassifications made to the 2004 financial statements include adjustments to reclassify auction rate preferred securities from cash and cash equivalents to short-term investments. As a result, purchases and sales of available-for-sale securities included in the Company’s statement of cash flow for the six months ended June 30, 2004 were increased $114,073 and $166,275, respectively, to account for the reclassification of the auction rate preferred securities. These reclassifications had no effect on net income or loss or stockholders’ equity as previously reported.

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Stock-Based Compensation

The Company accounts for compensation cost related to employee stock options and other forms of employee stock-based compensation plans, other than the Company’s employee stock option plan (“ESOP”), in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company also applies Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair value based method defined in SFAS No. 123 had been applied. Beginning in the first quarter of 2006, the Company will be required to account for stock-based compensation under SFAS No. 123(R), Share-Based Payment, which will require the Company to recognize the cost of the options on its financial statements. See “Recent Accounting Pronouncements” below for further discussion.

The Company continues to apply the provisions of APB No. 25 in accounting for its equity compensation plans. As the fair value was equal to the grant price on the date of grant, no compensation cost has been recognized for its stock-based compensation awards in the financial statements. Had the Company determined compensation cost based on the fair value at the date of grant for its stock-based compensation awards under SFAS No. 123, the Company’s net income (loss) would have been adjusted to the pro forma amounts indicated in the following table:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2005			2004			2005			2004
Net income (loss) as reported		$	6,209		$	287		$	(1,536	)	$	289
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax		(3,190		)	(9,362		)	(7,120		)	(20,033		)
Pro forma net income (loss)		$	3,019		$	(9,075	)	$	(8,656	)	$	(19,744	)
Earnings per share:
Basic and Diluted—as reported		$	0.04		$	0.00		$	(0.01	)	$	0.00
Basic and Diluted—pro forma		$	0.02		$	(0.07	)	$	(0.06	)	$	(0.14	)

 

2.   Business Combinations

On January 2, 2005, the Company completed the acquisition of TFR Technologies, Inc. (“TFR”), a manufacturer and developer of thin film resonator filters for communication applications using bulk acoustic wave (“BAW”) or film bulk acoustic resonator (“FBAR”) technology. The Company believes that BAW technology is critical to developing higher frequency filters for next generation wireless communication products and is a natural complement to the Company’s SAW filters. The Company paid $2,920 in cash on the closing date and will pay an additional $2,263 in cash within one year after the closing date. The Company is also obligated to pay royalties on revenues it recognizes from TFR technology based products over the four year period subsequent to the closing date, up to a maximum of $3,000. Additionally, the Company expects to incur employee retention charges of up to $1,738, which will be expensed over a period of up to 18 months after the closing date. During the three and six months ended June 30, 2005, the Company incurred $413 and $827, respectively, of these charges. The results of operations for the TFR business are included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2005.

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The Company accounted for the TFR acquisition as a purchase in accordance with SFAS No. 141, Business Combinations. Details of the purchase price are as follows:

Cash paid at closing		$	2,920
Cash due within one year(1)		2,263
Acquisition costs(2)		166
Total		$	5,349

⁽¹⁾                 The Company may also be required to pay up to an additional $3,000 for royalties, which the Company will recognize as additional goodwill. The amount is based upon future revenues the Company recognizes from TFR technology based products over the four year period after the closing date.

⁽²⁾                 During the first and second quarters of 2005, the Company incurred $162 and $4, respectively, of costs associated with the acquisition. The Company expects to incur up to an additional $1,738 of charges related to employee retention. The Company will expense these charges throughout a period of up to 18 months after the closing date. During the three and six months ended June 30, 2005, the Company incurred $413 and $827, respectively, of such charges.

The purchase price was allocated to TFR’s assets and liabilities based upon fair values as follows:

Cash		$	370
Accounts receivables and other assets		695
Property, plant and equipment		716
Intangible assets (Note 7)		936
Goodwill (Note 7)		2,846
Payables and other liabilities		(214		)
Total		$	5,349

 

Pro forma results of operations have not been presented for this acquisition because its effect was not material to the Company on either an individual or aggregate basis.

3.   Discontinued Operations

During the first quarter of 2005, the Company concluded that its optoelectronics operations were not going to meet the revenue projections it made when the Company initially acquired the operations from Agere Systems, Inc. in January 2003. Further, significant reductions in average selling prices combined with reduced valuation for new technologies with improved performance resulted in continued losses from these operations for the Company. As a result, the Company decided to dispose of these operations and on April 14, 2005, entered into an agreement to sell its optoelectronics operations in Breinigsville, Pennsylvania and its optoelectronics subsidiary in Matamoros, Mexico to CyOptics, Inc. (“CyOptics”). With the sale, the Company believes it will benefit from focusing its attention on its wireless handset, base station, defense and wireless broadband access markets and build upon its portfolio of semiconductor and filter products. The transaction allows the Company to exit its optoelectronics operation that manufactures indium phosphide (“InP”) optical components. The sale, completed on April 29, 2005, was an asset sale including the products, manufacturing equipment, inventory, the Mexican entity, related intellectual property rights and other assets that constitute the operations that manufacture InP optical chips and components for the optical networking market. CyOptics paid the Company the following consideration: $13,500 cash at closing, $4,500 of CyOptics’ preferred stock (representing approximately 10% of the voting shares of CyOptics)and a promissory note in the amount of $3,341, net of a $2,292 discount to record the

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note at a current market rate (see Note 16 for further discussion). CyOptics also assumed certain liabilities associated with the optoelectronics operations.

Separately, on March 7, 2005, TriQuint Optoelectronics, a wholly-owned subsidiary of the Company, entered into a purchase and sale agreement (the “Agreement”) to sell the land and building and related facilities occupied by TriQuint’s optoelectronics operations in Breinigsville, Pennsylvania (the “Facility Sale”). On July 13, 2005, the Company completed the sale to Hamilton TEK Partners, LP (“Hamilton”) for $9,300, less commissions, fees, and other costs to sell the facility. Pursuant to the Agreement, the Company assigned to Hamilton its lease to CyOptics for approximately 90,000 square feet of the 849,000 square foot facility. The lease was executed on April 29, 2005 and was for a period of two years, with an option to renew. In association with the Facility Sale, the Company has provided Hamilton with a guarantee on CyOptics’ obligation under the original lease term. The financial impact of the Facility Sale, including the lease guarantee, will be reported in the third quarter of 2005. At June 30, 2005 and December 31, 2004, the facility was recorded on the Company’s consolidated balance sheets in the amount of $8,000 in the “Assets held for sale” line item. See Note 19 for further discussion.

The Company’s condensed consolidated financial statements have been reclassified for all periods presented to reflect the Breinigsville, Pennsylvania and Matamoros, Mexico optoelectronics operations as discontinued operations. The Company first reflected these operations as discontinued operations in the first quarter of 2005 when the Company decided to discontinue the operations. In accordance with GAAP, the revenues, costs and expenses directly associated with the optoelectronics business have been reclassified as discontinued operations on the condensed consolidated statements of operations for all periods presented. Corporate expenses such as general corporate overhead and interest have not been allocated to discontinued operations. Additionally, assets and liabilities of the Breinigsville, Pennsylvania and Matamoros, Mexico operations have been reclassified as held for sale on the Company’s condensed consolidated balance sheets for all periods presented, and the Company’s condensed consolidated statements of cash flows have been reclassified to reflect the operations in Breinigsville, Pennsylvania and Matamoros, Mexico as discontinued operations for all periods presented.

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Operating results of the discontinued optoelectronic operations are as follows:

		Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
Revenues		$	2,579		$	8,020		$	10,000		$	18,189
Cost of goods sold		2,488			7,050			8,295			15,934
Gross profit		91			970			1,705			2,255
Research, development and engineering		433			3,599			1,952			7,057
Selling, general and administrative		680			1,676			1,955			3,673
Reduction in force		—			(147		)(2)	495		(1)	(761		)(2)
Impairment of long-lived assets		5			—			5			—
Gain on disposal of equipment		(2,213		)	(524		)	(3,769		)	(1,432		)
Total operating expenses		(1,095		)	4,604			638			8,537
Income (loss) from operations		1,186			(3,634		)	1,067			(6,282		)
Foreign currency gain (loss)		9			(7		)	14			32
Other		(7		)	(4		)	9			(27		)
Other income (expense), net		2			(11		)	23			5
Income (loss) from discontinued operations before income tax expense		1,188			(3,645		)	1,090			(6,277		)
Gain on disposal(3)		11,034			—			11,034			—
Income tax expense		4,488			38			4,520			49
Net income (loss) from discontinued operations		$	7,734		$	(3,683	)	$	7,604		$	(6,326	)

⁽¹⁾                 In the fourth quarter of 2004, the Company repositioned its optoelectronics product strategy. As part of this restructuring the Company terminated approximately 110 employees in Pennsylvania and approximately 90 employees in Mexico. At the time of the restructuring, the Company’s optoelectronics operations incurred severance and related payroll costs of $2,337, of which $1,485 remained at December 31, 2004. During the first quarter of 2005, the Company’s optoelectronics operations incurred an additional $495 of charges related to the repositioning. These charges resulted from post-termination costs associated with transitioning employees who completed their services to the business in the first quarter of 2005. As of June 30, 2005, a liability of $124 remained in connection with the repositioning and was included in “Liabilities held for sale” on the Company’s condensed consolidated balance sheet. The severance charges are included in the discontinued operations portion of the Company’s condensed consolidated statements of operations. There was no severance charges relating to this restructuring during the three months ended June 30, 2005.

⁽²⁾                 As part of the Agere purchase in the first quarter of 2003, the Company recorded an accrued severance liability of $1,800, of which $838 remained as of December 31, 2003. This amount was reduced by $614 during the first quarter of 2004 and $147 in the second quarter of 2004 to reflect a reduction in the number of employees originally expected to be impacted from the acquisition due to normal attrition of the workforce, which reduced the estimated involuntary workforce reductions. The reduction is included in the discontinued operations portion of the Company’s condensed consolidated statements of operations. No liability remained for the severance costs at December 31, 2004.

⁽³⁾                 The gain on disposal for the three and six months ended June 30, 2005 represents the net gain recorded in the second quarter of 2005 on the disposal of the Company’s optoelectronics operations in Breinigsville, Pennsylvania and its optoelectronics subsidiary in Matamoros, Mexico to CyOptics, Inc.

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The carrying value of the assets and liabilities held for sale of the discontinued optoelectronic operations included in the consolidated balance sheets are as follows:

		June 30,					December 31,
		2005					2004
Assets held for sale:
Cash			$	—				$	285
Accounts receivable, net			—					4,477
Inventories, net			—					10,127
Other long-term assets(1)			8,238					16,130
Prepaid expenses			96					637
Other assets			43					710
Assets held for sale			$	8,377				$	32,366	(2)
Liabilities held for sale:
Accounts payable and accrued expenses			$	—				$	14,685
Other liabilities			343					372
Liabilities held for sale			$	343				$	15,057

⁽¹⁾                 Prior to the sale of the Company’s optoelectronics operations in Breinigsville, Pennsylvania and Matamoros, Mexico, the Company had identified certain long-term assets as held for sale. These assets included the Pennsylvania facility ($8,000), a variety of equipment used for optoelectronics fabrication and assembly operations at the Pennsylvania and Mexico facilities, and intangible assets related to the optoelectronics business. During the three and six months ended June 30, 2005, the Company sold $559 and $730, respectively, of the assets it had classified as held for sale as of December 31, 2004 and disposed of $90 and $234 of the assets during the three and six month periods. Additionally, during the three and six months ended June 30, 2005, the Company transferred $33 and $266 of the assets classified as held for sale to the Company’s Oregon, Texas and Florida operations and reclassified these assets as held and used at their fair value. The Company disposed of $6,737 of long-lived assets as a result of the sale of the operations to CyOptics in the second quarter of 2005. The Company also classified $75 of assets as held for sale during the six months ended June 30, 2005.

⁽²⁾                 At December 31, 2004, the Company also classified certain assets from its continuing operations as held for sale. See Note 8 for further discussion.

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4.   Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS No. 123(R), Share-Based Payment, which replaces SFAS No. 123, supersedes APB No. 25, and amends SFAS No. 95, Statement of Cash Flow. Currently, the Company uses the Black-Scholes model for option expense calculation and presents pro forma disclosure of the statements of operations effect in financial statement footnotes only under APB No. 25. However, under SFAS No. 123(R), pro forma disclosure of the statements of operations effects of share-based payments will no longer be an alternative and all share-based payments to employees, including grants of employee stock options, will be recognized in the financial statements based on their fair values. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. SFAS 123(R) is effective for public companies with annual periods that begin after June 15, 2005. In anticipation of the effective date, the Company accelerated the vesting of options, excluding option grants to the Company’s board members and chief executive officer, with an option price equal or greater to $9.00 per share in the fourth quarter of 2004. The acceleration was done as part of a comprehensive review of the Company’s entire benefits program and the decision to accelerate some of the Company’s options was made after review of the Company’s current stock price, the competitive standpoint for the Company from the options, the benefit of the options to the employees and the potential effects of SFAS No. 123(R). The closing price of the Company’s stock, as reported on the Nasdaq National Market, on the date of the option acceleration was $4.00 per share. The Company expects the adoption of SFAS 123(R) will have a material impact on its results of operations however the Company has not yet determined the method of adoption, the effect of adopting SFAS 123(R), or whether adoption in the first quarter of 2006 will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

In March 2005, the Securities and Exchange Commission released Staff Accounting Bulletin (“SAB”) No. 107, to provide guidance on SFAS No. 123(R). SAB No. 107 provides the staff’s view regarding the valuation of share-based payment arrangements for public companies. In particular, this SAB provides guidance related to share-based payment transactions with non-employees, the transition from non public to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first time adoption of SFAS No. 123(R), the modification of employee share options prior to the adoption of SFAS No. 123(R) and disclosure in Management’s Discussion and Analysis subsequent to adoption of SFAS No. 123(R). SAB No. 107 is effective March 29, 2005. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which amends APB Opinion No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The statement is to be applied prospectively for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not anticipate that the adoption of SFAS No. 153 will have a significant impact on the Company’s overall results of operations or financial position.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs—an amendment of ARB No. 43, in an effort to converge U.S. accounting standards for inventories with International Accounting Standards. FAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to

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the costs of conversion be based on the normal capacity of the production facilities. FAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company’s current accounting policy complies with the requirements of the new standard.

In November 2004, the FASB ratified a consensus reached by the Emerging Issues Task Force (“EITF”) with respect to EITF Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations. A number of issues have arisen in practice in applying the criteria in paragraph 42, and the following broad categories of issues related to the application of both criteria in that paragraph have been identified: (a) whether the intent of the paragraph is that all operations and cash flows of the disposal component be eliminated from the ongoing operations of the entity or whether some minor level of operations or cash flow may remain; (b) if some insignificant level of operations or cash flows of the disposal component can continue without precluding discontinued operations reporting, the level at which “significance” should be measured; and (c) in applying the paragraph, the factors to consider in determining whether the selling entity has retained “significant continuing involvement” in the disposed component. As of June 30, 2005, the Company identified the optoelectronics operations as a discontinued operation pursuant to EITF No. 03-13 and has presented the consolidated financial statements accordingly.

5.   Net Income (Loss) Per Share

Net income (loss) per share is presented as basic and diluted net income (loss) per share. Basic net income (loss) per share is net income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding. Diluted net income (loss) per share is similar to basic except that the denominator includes potential common shares that, had they been issued, would have had a dilutive effect. For the three months ended June 30, 2005, the Company reported a net loss from continuing operations and net income from discontinued operations, resulting in net income for the period. As a result of the net loss from continuing operations in the second quarter, there is no dilutive effect on the reported net income for the three months ended June 30, 2005.

The following is a reconciliation of the basic and diluted shares:

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2005		2004		2005		2004
Shares for basic net income (loss) per share:
Weighted-average shares outstanding—Basic		139,194		136,592		138,989		136,176
Dilutive securities		—		4,074		—		5,397
Weighted-average shares outstanding—Dilutive		139,194		140,666		138,989		141,573

 

For the three and six months ended June 30, 2005, options and other exercisable convertible securities totaling 22,856 and 22,706 shares, respectively, were excluded from the calculation as their effect would have been antidilutive. For the three and six months ended June 30, 2004, options and other exercisable convertible securities totaling 16,886 and 15,000 shares, respectively, were excluded from the calculation as their effect would have been antidilutive.

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6.   Inventories

Inventories, stated at the lower of cost or market, consisted of the following:

		June 30,			December 31,
		2005			2004
Inventories, net:
Raw materials		$	14,629			$	19,617
Work-in-process		16,544				14,656
Finished goods		11,578				15,346
		$	42,751			$	49,619

 

7.   Goodwill and Other Acquisition-Related Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company is required to perform impairment analysis on its goodwill at least annually, or when events and circumstances warrant. The Company intends to perform this test in the fourth quarter of each year, unless indicators warrant testing at an earlier date. During the six months ended June 30, 2005 and 2004, there were no impairments or impairment indicators present and no loss was recorded. Goodwill and other acquisition-related intangible assets are included in “Other non-current assets, net” on the Company’s condensed consolidated balance sheet.

Information regarding the Company’s other acquisition-related intangible assets is as follows:

		Useful		June 30, 2005													December 31, 2004
		Life					Accumulated					Net Book								Accumulated					Net Book
		(Years)		Gross			Amortization					Value					Gross			Amortization					Value
Non-Amortizing:
Goodwill				$	3,296			$	—				$	3,296			$	450			$	—				$	450
Amortizing:
Patents, trademarks and other		<1 - 10		8,352				6,672					1,680				7,416				5,605					1,811
Total intangible assets				$	11,648			$	6,672				$	4,976			$	7,866			$	5,605				$	2,261

 

During the first quarter of 2005, the Company recorded $2,842 of goodwill and $936 of amortizing intangible assets associated with the Company’s acquisition of TFR Technologies, Inc. and in the second quarter made certain purchase price accounting adjustments increasing goodwill $4 (see Note 2). The fair value of the intangible assets acquired as part of the acquisition were determined by management, which considered a number of factors including an evaluation by an independent appraiser, and given useful lives that range from less than one year to ten years. The goodwill was recorded as the excess of the total consideration paid for TFR, less the net assets identified. Evaluation of this amount will be reviewed on a yearly basis, or as circumstances warrant, in accordance with SFAS No. 142. Amortization expense of amortizing intangible assets was $490 and $1,067, respectively, for the three and six months ended June 30, 2005. During the three and six months ended June 30, 2004, amortization expense of amortizing intangible assets was $458 and $917, respectively.

8.   Assets and Liabilities Held for Sale

As of June 30, 2005, the Company had $8,377 of assets held for sale as compared to $33,890 as of December 31, 2004. The balances as of June 30, 2005 and December 31, 2004 were as follows:

·       Due to the April 2005 sale of the Company’s optoelectronics operations in Breinigsville, Pennsylvania and Matamoros, Mexico, the Company has included the assets of these operations as held for sale on the Company’s condensed consolidated balance sheets for all periods presented

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accordance with GAAP. As of June 30, 2005 and December 31, 2004 these assets accounted for $8,377 and $32,366, respectively, of the consolidated balance sheets (see Note 3).

·       As of December 31, 2004, the Company held $850 of assets obtained from the liquidation of an investment the Company had in a privately held company. During the first quarter of 2005, the Company sold $725 of the assets and disposed of $33 of the assets, resulting in a net gain of $5. The Company also reclassified $62 of the assets during the period as held and used at their fair value in accordance with GAAP. During the second quarter of 2005, the Company disposed of the remaining $31 of assets. As of June 30, 2005, none of the assets had a book value.

·       As of December 31, 2004, the Company held $674 of equipment located at the Company’s Texas facility. During the first quarter of 2005, the Company transferred these assets back into production at their fair value in accordance with GAAP. As a result of the transaction, the Company recorded an impairment charge of $31 during the six months ended June 30, 2005. As of June 30, 2005, none of these assets remained classified as held for sale.

As of June 30, 2005 and December 31, 2004, the Company had $343 and $15,057, respectively, of liabilities held for sale. These liabilities are the liabilities recorded by the Company’s former optoelectronics operations in Breinigsville, Pennsylvania and Matamoros, Mexico. In accordance with GAAP, these liabilities are classified as held for sale on the Company’s condensed consolidated balance sheets for all periods presented due to the sale of these operations in the second quarter of 2005 (see Note 3).

9.   Product Warranty

The Company estimates the potential liability for costs to repair or replace products under warranties and technical support costs when the related product revenue is recognized. The liability for product warranties is calculated based on a combination of factors including historical product return experience, known product warranty issues with specific customers, and judgment of expected levels of returns based on economic and other factors. An accrual for expected warranty costs results in a charge to the financial results in the period recorded. This liability can be difficult to estimate and, if the Company experiences warranty claims in excess of projections, the Company may need to record additional accruals, which would adversely affect the financial results. The liability for product warranties for operations is included in “Accounts payable and accrued expenses” on the Company’s condensed consolidated balance sheets.

The following table provides a reconciliation of the activity related to the Company’s reserve for warranty expense for operations:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2005			2004			2005			2004
Beginning balance		$	964		$	734		$	806		$	1,636
Accruals		175			486			556			630
Deductions		(317		)	(231		)	(540		)	(1,277		)
Ending balance		$	822		$	989		$	822		$	989

 

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10.   Property, Plant and Equipment

Property, plant and equipment for operations consisted of the following:

		June 30,			December 31,
		2005			2004
Land		$	19,691			$	19,691
Buildings		92,153				92,113
Leasehold improvements		1,324				1,299
Machinery and equipment		239,861				238,073
Furniture and fixtures		4,928				4,903
Computer equipment and software		20,664				21,042
Assets in process		7,356				3,961
		385,977				381,082
Accumulated depreciation		(195,484		)		(181,564		)
		$	190,493			$	199,518

 

For the three and six months ended June 30, 2005, the Company incurred depreciation expense of $8,071 and $17,220, respectively. For the three and six months ended June 30, 2004, the Company incurred depreciation expense of $8,818 and $17,645, respectively.

11.   Comprehensive Income (Loss)

The components of other comprehensive income (loss) were as follows:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2005			2004			2005			2004
Net income (loss)		$	6,209		$	287		$	(1,536	)	$	289
Other comprehensive income:
Net unrealized gain (loss) on cash flow hedges		(323		)	(10		)	(561		)	20
Net unrealized gain (loss) on available for sale investments		796			(2,138		)	(773		)	(1,994		)
Comprehensive income (loss)		$	6,682		$	(1,861	)	$	(2,870	)	$	(1,685	)

 

12.   Foreign Currency Exchange

The Company’s functional currency for all operations worldwide is the U.S. dollar. For foreign operations with the U.S. dollar as the functional currency, monetary assets and liabilities are remeasured at the period-end exchange rates. Certain non-monetary assets and liabilities are remeasured using historical rates. Statements of operations are remeasured at the prior month’s balance sheet rate. To manage its exposure to foreign currency exchange rate fluctuations, the Company enters into derivative financial instruments, including hedges. The ineffective portion of the gain or loss for derivative instruments that are designated and qualify as cash flow hedges is immediately reported as a component of other income (expense), net. The effective portion of the gain or loss on the derivative instrument is initially recorded in accumulated other comprehensive income (“OCI”) as a separate component of stockholders’ equity and subsequently reclassified into earnings in the period during which the hedged transaction is recognized into earnings. During the three months ended June 30, 2005, the Company reported foreign currency losses from remeasurement and hedging activity of $69, compared to foreign currency gains from remeasurement and hedging activity of $3 during the six months ended June 30, 2005. During the three and six months ended June 30, 2004, the Company reported foreign currency losses from remeasurement and hedging activity of $231 and $309, respectively.

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As of June 30, 2005 and 2004, the Company had forward currency contracts outstanding of $3,797 and $35,037, respectively. The contracts designated as cash flow hedges at June 30, 2005 and 2004 were approximately $3,797 and $2,876, respectively. The contracts designated as balance sheet hedges at June 30, 2004 were approximately $32,161. The Company had no balance sheet hedges as of June 30, 2005.

13.   Reduction in Force

During the three and six months ended June 30, 2005, the Company recorded a charge to earnings of $362 for severance related costs associated with a reduction in force of approximately 130 employees at the Company’s Florida and Costa Rica operations. This reduction in force was made due to declining quarterly revenue from these operations and the Company’s ongoing effort to align costs and capacity with its levels of production and revenue. As of June 30, 2005, a liability of $115 remained for the unpaid portion of these severance costs and was included in “Accounts payable and accrued expenses” on the Company’s condensed consolidated balance sheets.

During the three and six months ended June 30, 2004, the Company accrued and recorded as a charge to earnings severance costs of $133 and $428, respectively, associated with a reduction in force of approximately 30 employees assigned to its Texas operations. The charge was a result of the Company’s ongoing efforts to align costs and capacity with its levels of production and revenue. As of June 30, 2004, a liability of $107 remained for the unpaid portion of these severance costs. No liability remained at December 31, 2004.

The following table details the severance activity for periods presented:

		Three Months Ended							Six Months Ended
		June 30,							June 30,
		2005			2004			2005				2004
Beginning severance liability		$	—		$	184		$		—		$	—
Severance charges incurred		362			133			362				428
Severance disbursements		(247		)	(210		)	(247			)	(321			)
Ending severance liability		$	115		$	107		$		115		$	107

 

14.   Commitments and Contingencies

Legal Matters

In February 2003, several nearly identical putative civil class action lawsuits were filed in the United States District Court for the Middle District of Florida against Sawtek, Inc., the Company’s wholly owned subsidiary since July 2001. The lawsuits also named as defendants current and former officers of Sawtek and the Company. The cases were consolidated into one action, and an amended complaint was filed in this action on July 21, 2003. The amended class action complaint is purportedly filed on behalf of purchasers of Sawtek’s stock between January 2000 and May 24, 2001, and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act, as well as Securities and Exchange Commission Rule 10b-5, by making false and misleading statements and/or omissions to inflate Sawtek’s stock price and conceal the downward trend in revenues disclosed in Sawtek’s May 23, 2001 press release. The complaint does not specify the amount of monetary damages sought. Sawtek and the individual defendants filed their motion to dismiss on September 3, 2003, and briefing on the motion was completed on November 19, 2003. The court heard oral argument on November 21, 2003, and issued an order partially denying the motion to dismiss on December 19, 2003. Specifically, the court found that the complaint was not barred by the statute of limitations, but reserved ruling on the other aspects of the motion to dismiss. Because the statute of limitations issue is a novel question of law, the court stayed the proceedings in this case to allow the defendants to file an interlocutory appeal to the Eleventh Circuit Court of Appeals. The defendants duly filed for interlocutory appeal on January 22, 2004. Because the

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Court of Appeals has been considering the identical issue in another matter, the appeal process has been stayed, pending the Court of Appeals’ decision in the other matter.

On June 1, 2005, the Eleventh Circuit issued a memorandum decision in the unrelated case that raised the similar statute of limitations issue. The Court of Appeals held that factual issues were raised, which precluded resolution of the statute of limitations issues at this time. The Court of Appeals remanded that case to the lower court for the purpose of making factual findings. The Sawtek appeal process with respect to the statute of limitations remains stayed pending remand of this unrelated case.

On June 3, 2005, the defendants requested the United States District Court to lift its stay of the proceedings in the Sawtek case, and to proceed to rule on the remaining issues raised in the motion to dismiss the complaint. The District Court has allowed the parties to file supplemental briefing on or before August 19, 2005, and scheduled a hearing for August 25, 2005 to hear re-argument on the balance of the motion to dismiss the complaint. The Company continues its vigorous defense against the claims asserted against Sawtek, and denies the allegations contained in the complaint.

On March 16, 2005, Preferred Real Estate Investments, Inc. (“PREI”) filed a complaint against the Company’s subsidiary, TriQuint Optoelectronics, Inc., in the Court of Common Pleas of Lehigh County, Pennsylvania (the “court”) alleging specific performance and general damages relating to negotiations for the sale of the Company’s facility in Breinigsville, Pennsylvania (the “facility”). On June 30, 2005 the Company settled the dispute with PREI and received a notice from the court of praecipe to settle, discontinue and end the claim against the Company’s subsidiary. As part of the settlement, the Company paid PREI $250 for damages of which Hamilton TEK Partners, LP (“Hamilton”), the purchaser of the facility, agreed to compensate the Company for $125. In the third quarter of 2005, the Company completed the sale of the facility to Hamilton and received the $125 compensation. See Note 19 for further discussion of the facility sale.

Optoelectronics Warranty Liability

As part of the April 29, 2005 sale of the Company’s optoelectronics operations in Breinigsville, Pennsylvania and optoelectronics subsidiary in Matamoros, Mexico to CyOptics, the Company transferred its warranty liability to the new buyer. At the time of the sale, the Company had an accrued warranty liability of $3,496. Conditions of the sale to CyOptics held that CyOptics would be liable for warranty claims on products sold prior to the April 29^th sale, up to the accrued liability at the time of the sale. If CyOptics receives claims in excess of this amount for products sold prior to the sale, the Company is responsible for such claims. The Company believes the $3,496 liability recorded at April 29, 2005 reasonably represented the estimated future warranty liability for products sold and does not anticipate additional claims.

Lease Guarantee

Subsequent to the end of the second quarter of 2005, the Company completed the sale of the land, building and related facilities previously occupied by its optoelectronic operations in Breinigsville, Pennsylvania to Hamilton TEK Partners, L.P. (“Hamilton”) (the “Facility Sale”). At the time of the Facility Sale, the Company had an operating lease with CyOptics for approximately 90,000 square feet of the 849,000 square foot facility. In association with the Facility Sale, the Company assigned the lease to Hamilton as the new landlord and guaranteed the base rent due from CyOptics to Hamilton under the initial two year lease term. In the third quarter of 2005, the Company intends to evaluate the guarantee and determine whether a reserve is necessary. See Note 19 for further discussion.

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15.   Convertible Subordinated Notes

During the three and six months ended June 30, 2005, the Company repurchased $5,000 of the Company’s 4% convertible subordinated notes at a cost of $4,844. This repurchase resulted in a gain on retirement of long-term debt of $114, net of the write-down of associated capitalized bond issuance costs of $42. During the three and six months ended June 30, 2004, the Company repurchased $45,000 of the outstanding notes at a cost of $43,875, resulting in a gain on retirement of long-term debt of $539, net of a write-down of associated bond issuance costs of $586. At June 30, 2005, the Company had $218,755 of convertible subordinated notes outstanding and net capitalized issuance costs of $1,675 as compared to $223,755 of convertible subordinated notes outstanding and $2,228 of net capitalized issuance costs at December 31, 2004. During the three and six months ended June 30, 2005, the Company amortized $254 and $510, respectively, of the capitalized issuance costs. During the three and six months ended June 30, 2004, the Company amortized $260 and $590, respectively, of the capitalized issuance costs.

16.   CyOptics Subordinated Promissory Note and Preferred Stock

On April 29, 2005, the Company completed the sale of its optoelectronic operations in Breinigsville, Pennsylvania and its optoelectonics subsidiary in Matamoros, Mexico to CyOptics, Inc. (“CyOptics”). The terms of the sale included $4,500 of preferred stock representing approximately 10% of the voting shares of CyOptics and a subordinated unsecured promissory note for $5,633 that was discounted $2,292 to reflect the current market rate for similar debt of comparable companies (see Note 3). The promissory note is an interest-bearing note at the rate of the lesser of (i) 8.5% and (ii) 3.0% plus the one-year LIBOR as determined on the date of the note and redetermined on each subsequent April 1 thereafter. At the time of the transaction, the Company reviewed current market rates for similar debt, CyOptics’ financial condition and obtained an independent valuation analysis on the debt. As a result, the Company determined the market rate for similar debt was approximately 20% and thus recorded a discount on the original value of the note to record it at a current market rate. The initial payment of the note is due April 1, 2007 and the Company believes there is risk with the receivable and thus will evaluate CyOptics’ financial condition on a regular basis. As such, in accordance with SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, the Company has placed the loan on nonaccrual status. The Company intends to use the cost-recovery method at time of collection until the amount and timing of collections are reasonably estimable and collections are probable. As of June 30, 2005 the balance of the note receivable from CyOptics was $3,341 and included in “Other noncurrent assets, net” on the Company’s condensed consolidated balance sheets.

The $4,500 of preferred stock obtained in the transaction represents approximately 10% of the capital stock of CyOptics on a fully diluted basis and will be held at cost. The stock is non-redeemable Series F preferred stock and ranks prior and in preference to other series of preferred stock. The value of the preferred stock was determined based upon the price paid by unrelated parties for the same Series F preferred stock on the same date as the closing of the sale of the optoelectronics operations. The Company believes there is risk associated with the equity value and thus will evaluate CyOptics’ financial condition on a regular basis. As of June 30, 2005, the Company has recorded the value of the equity in CyOptics as $4,500 and included the balance in “Other noncurrent assets, net” on the Company’s condensed consolidated balance sheet.

17.   Income Taxes

During the three and six months ended June 30, 2005, the Company recorded net income tax benefits from continuing operations of $4,175 and $4,083, respectively. These benefits were partially offset by the $4,488 of tax expense recorded from discontinued operations in the second quarter of 2005 and tax expense of the Company’s foreign operations in Costa Rica, Mexico, Sweden and Japan. The $4,175 tax benefit from continuing operations is a result of the reduction in the prior year valuation allowance caused

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by income generated from discontinued operations. During the three months ended June 30, 2004, the Company recorded a net income tax expense of $83 primarily due to tax expense of foreign operations. During the six months ended June 30, 2004, the Company recorded a net tax benefit of $153 primarily due to the result of recording a receivable of $300 for a refund due with respect to an amount paid in a prior year, offset by tax accruals associated with foreign operations.

The current deferred tax liability includes the TFR acquisition, offset by the valuation allowance. The Company’s deferred tax liability recorded on its condensed consolidated balance sheets relates primarily to management’s estimate of the income tax expense in the jurisdictions in which the Company has operations. The Company currently receives tax benefits due to a partial tax holiday associated with its Costa Rican operation. For the three and six months ended June 30, 2005, this benefit was approximately $1,043 and $1,362, respectively. For the three and six months ended June 30, 2004, this benefit was approximately $1,070 and $1,624, respectively. The tax holiday expires in 2007.

18.   Segment Information

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes standards for 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. The Company has aggregated its businesses into a single reportable segment as allowed under SFAS No. 131 because the segments have similar long-term economic characteristics. In addition, the segments are similar in regards to (a) nature of products and production processes, (b) type of customers and (c) method used to distribute products. Accordingly, the Company describes its reportable segment as high-performance components and modules for communications applications. All of the Company’s revenues result from sales in its product lines.

The Company’s sales outside of the United States for the three and six months ended June 30, 2005 were approximately 61% and 59%, respectively, of total revenues. Sales outside of the United States for the three and six months ended June 30, 2004 were approximately 54% and 53%, respectively, of total revenues.

19.  Subsequent Events

On July 13, 2005, TriQuint Optoelectronics, a wholly-owned subsidiary of the Company, completed the sale of the land, building and related facilities previously occupied by its optoelectronic operations in Breinigsville, Pennsylvania to Hamilton TEK Partners, L.P. (“Hamilton”) (the “Facility Sale”). In association with the prior sale of the Company’s optoelectronics operations, the Company had executed a lease agreement with respect to approximately 90,000 square feet of the 849,000 square foot facility to CyOptics as tenant with terms acceptable to Hamilton. In association with the Facility Sale, the Company assigned the lease to Hamilton as the new landlord at the time of the closing of the Facility Sale and guaranteed the base rent due from CyOptics to Hamilton under the initial two year lease term. The facility was sold for $9,300 in cash, less commissions, fees, and other costs related to the Facility Sale. The financial impact of the Facility Sale will be reported in the third quarter of 2005. See Note 3 for further discussion.

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