In recent months shareholders of TriQuint Semiconductor (TQNT) have been fussing over sales to the company's largest customer, China's Foxconn, which ends up putting TriQuint's radio frequency devices into Apple's (NASDAQ:AAPL) iPhones and iPads. Apparently, Apple is letting iPhone 4S inventories sell out before releasing iPhone 5. This portends a bit of an interruption in the flow of orders from TriQuint. That is big since Apple products account for 40% of total sales for TriQuint. Couple the Apple situation with dim news for the Texas Instrument (NYSE:TI) platform used by Nokia (NYSE:NOK) and even darker prospects for Research in Motion (RIMM), and it appears TriQuint has won a Triple Crown of customer woes.
TQNT shares trade off 50% from the stock's 52-week high to a level that is 17.0 times analysts' earnings estimates for 2012. Is the sell-off justified or a buying-opportunity?
To answer that question let's set all that top-line angst aside and focus on TriQuint's cash flow and balances as reported in filings with the SEC. There is much to be understood about value by scrutinizing the pennies going in and going out of a company.
Cash Machine, Baby!
TriQuint is nothing if not an efficient cash machine. The company converted 14.1% of sales to operating cash flow in the last twelve months, a rate favorably comparable to an average of 12.7% in the most recent three years. Even after sales peaked in the second quarter 2011 and profit margins began eroding, TriQuint has managed to pull higher levels of cash out of operations.
We can understand how TriQuint's management team has been so successful in wringing cash out of the business by looking at the company's "financing interval." Financial accountants use this measure to figure out how long a company's working capital is tied up in inventory and accounts receivable before sales are recorded and then collected. Credit from suppliers through accounts payable eases the burden. The measure tells the number of "days" the company must use working capital, principally cash, to tide itself over until inventory is turned to sales and then sales to cash in the bank.
A year-ago in the first quarter 2011 as sales when were still climbing each quarter, TriQuint's financing interval was 83 days. Then as sales growth stalled, the financing interval began to climb, reaching 108 days by the end of the third quarter 2011. However, even as sales continued to decline management appeared to get a grip on things, bringing the number of days in the financing interval back down to 100 days by the end of March 2012.
How is TriQuint management doing it? Days in accounts payable have declined, so it was not through more credit with suppliers. Inventory days are only modestly lower, so it was not by thinning out product on hand. That leaves collections on accounts receivable, which have been remarkable. Management had winnowed down accounts receivable so that at the end of March 2012 there were only 43 days worth of sales not yet collected, the lowest level in over a year.
This is an impressive trick, but on that cannot be repeated for long. It is not likely that management can continue padding cash flows from operations by manipulating working capital accounts. This means that in a quarter or two or three, not only may TriQuint report weak sales and profit margins, it will also report slowing cash from operations and possibly a lower cash balance.
Free Cash Flow ... Not!
Cash resources are critical for TriQuint, which as a semiconductor company needs to make significant investments in production equipment and capacity. Capital expenditures totaled $356.8 million in the last three years. However, cash flow from operations totaled only $310.8 million. Capital expenditures actually exceeded cash flow from operations by $46.0 million in that three-year period. That means free cash flow was ... well ... negative and not free at all. TriQuint had to either dip into cash resources or find some other means to finance capital investments.
So let's look at TriQuint's cash balances. Remember that financing interval of 100 days. In dollar terms it is valued at $192.4 million. This is covered by working capital or the excess of current assets over current liabilities. Working capital was valued at $410.6 million at the end of March 2012. Cash and marketable securities of $194.9 million account for almost half of working capital.
Some investors might think TriQuint has too much cash, i.e. excess cash is sitting on the balance sheet. One rule of thumb is any cash balance over the amount equal to 20% of total sales is considered unnecessary to support operations and therefore "excess" cash. Another guideline measures cash as a percentage of total working capital. Cash balances over 50% of working capital are called excess cash. Alas, both measures suggest TriQuint probably needs every penny of is cash to support operations.
The unavoidable conclusion after the foregoing exercise: no bull trade here. On the surface, TriQuint's balance sheet looks strong with no debt and a big cash balance. However, there is little in cash flow or balances to give TriQuint any benefit of doubt. We already figured out that TriQuint's ability to wring cash out of the balance sheet is running out of steam. That means investors need to be concerned that dwindling profits will not support both operations and capital investments. The stock sell-off appears to have been triggered by perceived weakness in demand, but cash flows and balances are no reason to buy back in.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.