Technology, Media & Telecom: Semiconductors

Transcription

1 Technology, Media & Telecom: Semiconductors Important disclosures can be found on pages 8-11 of this report. August 21, 2014 Christopher Rolland Joseph Gallo Company Update Infineon Acquires IRF; Could Be the Harbinger for More PM Deals to Come Summary and Recommendation On Wednesday, August 20, Infineon Technologies AG (IFX.DE Not Rated) agreed to acquire International Rectifier Corporation (IRF Market Perform) for $3.0 billion in cash, or $40 per share, a 51% premium to IRF s prior closing stock price. The deal is subject to approval by IRF s shareholders and regulatory approval, and is anticipated to close in late 2014 or early The deal will be funded through a mixture of cash and debt, and Infineon expects it to be accretive to non-gaap EPS and margins in the first fiscal year. Overall for the analog/power management space, we have long believed the industry was ripe for structural consolidation, particularly given low-hanging synergies achieved by integration and scale. We see four main reasons for consolidation in the space: (1) the benefits from consolidating outdated manufacturing operations into a more modern cost-effective platform; (2) elimination of a redundant direct sales force as well as upper level management; (3) the potential to roll up in niche market segments to allow for more stable pricing and margins; and (4) the potential to reduce U.S. taxes, among the highest corporate tax rates globally, which are structured under a "worldwide" tax system. In our coverage universe, we believe Atmel Corporation (ATML Market Perform) and Fairchild Semiconductor(FCS Market Perform) are two potential takeover candidates, as both are subscale and could provide numerous synergies related to the four points outlined above. Given Infineon s intended purchase price, we are raising our price target on IRF shares from $28 to $40 per share and maintain our Market Perform rating. Key Points On the surface the deal is expensive, but with synergies it appears very reasonable. When removing the ~$7 of cash from IRF s balance sheet, we estimate that the remaining company was purchased at a P/E multiple of ~16x P/E our CY15E EPS. However, given Infineon's expectations for synergies, we think the implied P/E would be more in line with IRF's peers. We note that low-margin commodity businesses, such as IRF, FCS, and ON Semiconductor (ONNN Outperform), have a tremendous amount of operating leverage; thus, small reductions in manufacturing and operating expenses can have a profound affect on EPS. Business models fit well. Infineon stated that the primary reason for the acquisition was the complementary nature of the two businesses, allowing it to enter the low-power/lowvoltage PM market (IFX's current expertise lies within high-power/high-voltage modules). The acquisition also gives IFX access to Gallium Nitride, an emerging business at IRF that we think could have eventually challenged IFX s super junction high-voltage business. Overall, management believes the deal will likely allow IFX to increase its current ~12% share in the power management market. FCS could be top takeover candidate. We note that Fairchild's and International Rectifier's daily stock price movements tend to be highly correlated (as high as 0.76). While FCS has lacked some of IRF s product-specific drivers (e.g., Grantley), the company plays in most of the same end markets (excluding white box appliances, auto, and general discretes). That said, FCS does not have Gallium Nitride and has much more idle capacity than IRF. Therefore, if an acquirer is in need of additional capacity, we think FCS could possibly provide an excellent acquisition target (the company s Korea fab is only half full). ATML is potentially another top takeover candidate. In our view, Atmel has an excellent MCU product portfolio. Additionally, the company has increasingly moved to a fab-lite model, while its Colorado fab runs extremely full and only has a three-year remaining shelf life. Furthermore, lead times have expanded dramatically in 2014 (exhibit below). For companies with a world class sales team and extra manufacturing capacity (Texas Instruments [TXN Market Perform] comes to mind), we think Atmel would make sense as a possible acquisition candidate FBR CAPITAL MARKETS & CO.

2 Additional Points SemiVision s Lead Times, ASPs, and Inventory Values for ATML 18.0 weeks 16.0 weeks Avg Lead Times (Weeks) Gross Margins 47.0% 46.0% $1.60 $1.40 Total Inventory Value ASPs (weighted) weeks 12.0 weeks 10.0 weeks 8.0 weeks 6.0 weeks 4.0 weeks 45.0% 44.0% 43.0% 42.0% 41.0% 40.0% $1.20 $1.00 $0.80 $0.60 $0.40 $ weeks Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul % $0.00 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 - Source: FBR Research ON Semiconductor deserves honorable mention in the acquisition pageant. Before the IRF acquisition, we think most investors believed no companies were interested in buying lowmargin semiconductor businesses. However, ON s fabs are now almost full as we believe they are seeking additional capacity (excluding Fujitsu JV). While not as likely as FCS or ATML, we believe ON could provide an inexpensive acquisition target for those with unused capacity. IRF s Calendar 2Q14 revenues and EPS best the Street. After the market close on Wednesday, August, 20, IRF reported calendar 2Q14 (F4Q14) results. Revenues of $298 million for the quarter (+11% quarter over quarter, +8% year over year) were ahead of the Street and FBR estimates of ~$290 million. Enterprise power was up +14% quarter over quarter, we believe driven by early Grantley server builds ahead of our expectations and Street expectations of +12% quarter over quarter. Power management devices was up +14% quarter over quarter, better than the Street s estimate of up +10% quarter over quarter, while energy-saving products was up +9% quarter over quarter, well above FBR s estimate and the Street s +6% quarter over quarter, likely driven by shipments into white box appliances and new product ramps for micromodules. High reliability (HiRel) was up +10% quarter over quarter, compared with our prior forecast of up +4% quarter over quarter (this business can be lumpy). Automotive, the only sector that disappointed, was up +3% quarter over quarter, below our +6% forecasts. Gross margins of 35.7% ( 60 bps quarter over quarter, +550 bps year over year) were roughly 70 bps worse than the Street (a negative, in our view). However, the company reduced inventories by $13 million in the quarter, likely pressuring this line item. Operating expenses were $82 million, +$4 million quarter over quarter, as R&D expenses stayed relatively unchanged. Overall, the company's pro forma EPS of $0.30 were better than the Street s $0.28, owing to better revenues offset partially by weaker-than-expected margins. IRF June 2014 Quarter Results vs. FBR Estimates and Prior vs. New Forward FBR Estimates Jun 14 FBR Jun 14 Reported Sept 14 Old Sept 14 New c'2014 Old c'2014 New c'2015 Old c'2015 New Revenues (Millions $) ,146 1,166 1,266 1,293 QoQ% / YoY% 7.6% 10.5% 0.1% -0.5% 10.1% 12.0% 10.5% 10.9% Gross Margins 36.4% 35.7% 37.5% 36.6% 37.1% 36.4% 38.5% 37.5% Operating Exps ($m) Op. Margins 9.2% 8.2% 10.6% 9.2% 9.8% 8.8% 13.8% 12.3% GAAP EPS $0.24 $0.18 $0.29 $0.30 $1.13 $1.09 $1.82 $1.85 Pro Forma EPS $0.27 $0.30 $0.33 $0.34 $1.25 $1.30 $1.97 $1.99 Source: Company reports and FBR Research Page 2

3 Key IRF Valuation Metrics Price target valuation methodology. We rate IRF Market Perform with a $40 price target, based on a calendar year 2015 P/E multiple of 16x, including stock compensation expense and exclude net cash and interest income. We view this multiple as fair given management s recent execution track record, IRF s financial leverage, and management s restructuring and cost-reduction actions. Forward price to earnings. IRF is trading at a P/E multiple of 25x (2015E), including stock compensation expense and exclude net cash and interest income. Historically, IRF has traded in a range of 10x 25x earnings, with a median historical multiple of 18x. Enterprise value to sales valuation. IRF is trading at an EV/sales multiple of 1.8x (2015E). Historically, IRF has traded within a range of 0.3x 5x sales, with a median multiple of 2.0x. Enterprise value to EBITDA. IRF s current EV/EBITDA multiple is 12.2x (2014). Historically, IRF has traded in a range of 7x 25x trailing EBITDA, with a median multiple of 9.5x. Valuation Summary for FBR's Semiconductor Devices Coverage Universe 20-Aug-14 Ticker Rating Price Target to Target Cap ($m) ARM HOLDINGS ARMH OP $47.12 $59 25% 22, ATMEL CORP ATML MP $8.68 $9.25 7% 3, BROADCOM CORP BRCM OP $38.91 $45 16% 24, FAIRCHILD SEMICONDUCTOR FCS MP $16.74 $17 2% 2, INTERNATIONAL RECTIFIER CORP IRF MP $39.10 $40 2% 2, INTEL CORP INTC OP $34.50 $35 1% 176, MARVELL TECHNOLOGY GROUP MRVL MP $13.54 $17 26% 7, NVIDIA CORP NVDA MP $19.25 $20 4% 10, NXP SEMICONDUCTORS NV NXPI OP $64.20 $76 18% 16, ON SEMICONDUCTOR CORP ONNN OP $9.20 $12 30% 4, QUALCOMM INC QCOM OP $76.44 $81 6% 131, TEXAS INSTRUMENTS INC TXN MP $47.88 $49 2% 52, XILINX INC XLNX OP $42.62 $62 45% 12, Median (ex-armh) $26.88 $28 6% 8, Average (ex-armh) $28.15 $32 14% 31, All P/E multiples include stock compensation expense and back out net cash and related interest income (or the opposite for debt) Note: % Return to Target is potential. Source: FactSet and FBR Research Semiconductor Industry Risks Price Return Market Current Target Current Target Current Target Current Target Current Target Current Target Risks to this sector include: (1) demand or macroeconomic risks that could weaken end-user consumption of chips; (2) cyclical risks, such as excess inventory or capacity; (3) chip price declines; (4) risks of excess competition driving pricing and margin weakness; and (5) technology design or implementation risks. Company Specific Risks - International Rectifier Corporation IRF) Semiconductor cycle risk. Like all chip firms, International Rectifier faces the risk of a general industry downturn that could materially weaken end-market demand over several quarters. Such a downturn would likely lead to price declines, margin compression, and an inventory build. As a maker of analog products, International Rectifier is exposed to macroeconomic-driven end markets such as industrial, thereby making cyclical capital spending an additional issue. Factory utilization risk. Because International Rectifier operates its own manufacturing facilities, the company has substantial fixed costs and, therefore, faces underutilization risks. If demand drops or product mix shifts between non-fungible manufacturing assets, International Rectifier's product margins and profitability may be adversely affected. Pricing risk. Given the historical precedent of same-part price declines in the analog chip market, steep ASP erosion would negatively affect International Rectifier's financial performance EV/S ALTERA CORPORATION ALTR OP $34.65 $47 36% 11, ADVANCED MICRO DEVICES AMD MP $4.28 $4.50 5% 3, APPLIED MICRO AMCC MP $8.33 $10 20% NM NM NM NM NM NM EV/S 2015 EV/S 2015 EV/S 2014 P/E 2014 P/E 2015 P/E 2015 P/E 2014 EV/ EBITDA 2014 EV/ EBITDA 2015 EV/ EBITDA 2015 EV/ EBITDA Page 3

4 Stiff competition. The analog and discrete chip markets are fiercely competitive, and International Rectifier competes against much larger companies such as Analog Devices, Linear Technology, and Maxim in this space. As such, International Rectifier faces the risk of loss of future design wins with its proprietary products, where gross margins are highest. In the low-end commodity space, International Rectifier faces the risk of top-line revenue loss from emerging competitors from Taiwan and China, whose chips have lower cost. Customer design-win risks. Given its exposure to large OEM customers in the PC and other markets, a significant portion of International Rectifier's revenue depends on the company's ability to win future designs in a market where product refresh cycles are quite rapid. If the company fails to win new designs, its revenue and profitability could be materially affected. Company Profile Headquartered in El Segundo, California, International Rectifier Corporation designs, manufactures, and markets power management products. The company's products are used broadly across end markets and applications such as computers, communications networking, consumer electronics, energy-efficient appliances, lighting, satellites, launch vehicles, aircraft, and automotive. The company is considered a leading supplier of power MOSFETs. International Rectifier reports revenue across three product segments: computing and communications (51% of sales), energy-saving products (30%), and aerospace and defense (15%); it also receives a fair amount of royalty revenue related to its large intellectual property portfolio (4%). The company owns and operates wafer fabrication and/or assembly facilities in California, Massachusetts, Mexico, the United Kingdom, Italy, India, and China. Major competitors in its power management IC business include Intersil, Linear Technology, Maxim Integrated Products, Semtech, and Texas Instruments. Major competitors in the power components business include Fairchild Semiconductor, Infineon Technologies, Mitsubishi, ON Semiconductor, Philips, Renesas, STMicroelectronics, Toshiba, and Vishay. International Rectifier was formed in 1947 and has approximately 4,500 employees worldwide. Page 4

5 International Rectifier Co. FY2014 FY2015E Income Analysis ($ millions) Q1 Q2 Q3 Q4 Q1E Q2E Q3E Q4E FY'11 FY'12 FY'13 Sep-13 Dec-13 Mar-14 Jun-14 FY'14 Sep-14 Dec-14 Mar-15 Jun-15 FY'15 TOTAL REVENUE 1, , , ,239.0 Depreciation Variable Cost of Sales TOTAL COS GROSS PROFIT R & D Marketing, G & A OPERATING EXPENSES OPERATING INCOME (49.9) Other Exp & (Income) Int. Exp & (Income) (10.1) (0.3) 0.1 (0.0) (0.0) 0.0 (0.0) (0.0) (0.0) (0.0) (0.0) PRETAX INCOME (51.3) Provision for Taxes (0.076) GAAP NET INCOME (55.1) (88.8) PRO FORMA NET INCOME (6.9) (65.2) GAAP EPS $2.34 ($0.80) ($1.28) $0.26 $0.18 $0.81 $0.30 $0.35 $0.38 $0.48 $1.51 Pro Forma EPS $1.98 ($0.11) ($0.94) $0.27 $0.30 $0.97 $0.34 $0.39 $0.41 $0.52 $1.65 Shares O/S Basic Diluted (mil) Shares O/S Fully Diluted (mil) MARGIN ANALYSIS Depreciation 6.6% 8.1% 9.2% 8.2% 8.0% 8.1% 7.3% 7.9% 7.4% 7.2% 7.0% 6.7% 7.0% Gross Margin % 39.5% 32.9% 26.5% 35.5% 36.5% 36.3% 35.7% 36.0% 36.6% 37.1% 36.7% 37.3% 36.9% Incremental Gross Margin % 61.3% 95.6% 115.9% % % 108.2% 29.9% 107.7% % 59.0% 24.9% 51.5% 44.5% R&D 10% 13% 13% 12% 12% 12% 11% 12% 11% 11% 10% 10% 10% Marketing, G & A 16% 19% 19% 16% 17% 17% 16% 16% 16% 16% 16% 15% 16% Operating Margin % 12.9% 1.0% -5.1% 7.3% 7.8% 7.5% 8.2% 7.7% 9.2% 10.3% 10.7% 12.5% 10.7% Incremental Operating Margin 45% 114% 80% -229% 593% 140% 15% 104% -191% 61% 22% 52% 36% Pretax Margin % 14% 1% -5% 7% 7% 7% 8% 7% 9% 10% 11% 12% 11% Tax Rate 8.7% 190.6% -27.1% 36.1% -8.3% -2.3% 31.0% 14.8% 9.1% 8.2% 8.3% 7.0% 8.0% Net Income Margin 12% -1% -7% 6% 5% 7% 7% 6% 8% 9% 10% 12% 10% Page 5

6 International Rectifier Co. Q4 Q4 Q4 Q1 Q2 Q3 Q4 Q1E Q2E Q3E Q4E Balance Sheet ($millions) Jun-11 Jun-12 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 ASSETS: Cash, Equiv & ST Inv Accounts Receivable Inventories Other Current Assets Current Assets ,030 1,056 1,086 1,121 1, PP&E, Net Goodwill and Intangibles Investments Other Assets TOTAL ASSETS 1,671 1,532 1,453 1,497 1,526 1,546 1,566 1,580 1,600 1,624 1, LIABILITIES & EQUITY: Accrued Salaries Notes Payable Accts Payable Bank Loans Accrued Liabilities and Other Current Liabilities Long Term Debt Other Liabilities Deferred Inc. Tax Long Term Liabilities Total Liabilities SHAREHOLDERS' EQUITY 1,358 1,276 1,211 1,253 1,291 1,316 1,328 1,342 1,360 1,381 1, TOTAL LIAB. & EQUITY 1,671 1,532 1,453 1,497 1,526 1,546 1,566 1,580 1,600 1,624 1,651 ============================= =============== ======== ======= ======= ======= ======== ===================== ======== Page 6

7 International Rectifier Co. Q1 Q2 Q3 Q4 Q1E Q2E Q3E Q4E Statement of Cash Flow ($M) FY'11 FY'12 FY'13 Sep-13 Dec-13 Mar-14 Jun-14 FY'14 Sep-14 Dec-14 Mar-15 Jun-15 FY'15 Cash flows operating activities: Net income (55.1) (88.8) Depreciation & Amort Amortz. Of Goodwill & Intangibles 3.3 (9.1) (4.5) Other operating cash flows (6.6) (9.6) Changes in working capital: (55.0) (127.0) 94.7 (21.9) (20.2) (8.6) 3.9 (15.1) (4.3) (24.1) Net Cash from Operating Activities (21.2) Cash flows investing activities: Capital Expenditures (146.3) (128.1) (72.6) (11.9) (10.7) (13.2) (8.3) (44.1) (11.0) (11.0) (11.0) (11.0) (44.0) Acquisitions, net of cash acquired Net change in available-for-sale investm Other investing cash flows Net Cash from Investing Activities (74.6) (48.6) (4.7) (10.8) (5.7) (8.2) (7.3) (32.0) (11.0) (11.0) (11.0) (11.0) (44.0) Cash flowsfinancing activities: Increase (decrease) in debt (4.5) (4.5) Proceeds from sales stock Other financing activities (0.4) 8.9 (7.1) 1.7 (6.8) (3.2) Repurchase of common stock (32.6) (41.7) (10.7) (10.0) 0.0 (2.6) (10.0) (22.6) (10.0) (10.0) (10.0) (10.0) (40.0) Payment of dividends Net Cash from Financing Activities (18.6) (26.8) (0.9) (16.8) (7.9) (10.0) (10.0) (10.0) (10.0) (40.0) Exchange rate impact 1.9 (4.2) (1.5) Net increase (decrease) in cash (100.8) Free Cash Flow 77 (149) Free Cash Flow per share $ 1.09 $ (2.15) $ 1.79 $ 0.18 $ 0.31 $ 0.53 $ 0.85 $ 1.97 $ 0.37 $ 0.59 $ 0.36 $ 0.60 $ 1.92 Page 7

8 Important Information FBR is the global brand for FBR & Co. and its subsidiaries. This report has been prepared by FBR Capital Markets & Co. (FBRC), a subsidiary of FBR & Co. FBRC is a broker-dealer registered with the SEC and member of FINRA, the NASDAQ Stock Market and the Securities Investor Protection Corporation (SIPC). The address for FBRC is 1001 Nineteenth Street North Suite 1100, Arlington, VA All references to FBR Capital Markets & Co. (FBRC) mean FBR & Co. and its subsidiaries including FBRC. Company-Specific Disclosures FBR acts as a market maker or liquidity provider for the company's securities: International Rectifier Corporation, Altera Corporation, Applied Micro Circuits Corporation, Advanced Micro Devices, ARM Holdings plc, Atmel Corporation, Broadcom Corporation, Fairchild Semiconductor International, Intel Corporation, Marvell Technology Group Ltd., NVIDIA Corporation, ON Semiconductor Corporation and Xilinx, Inc. For up-to-date company disclosures including price charts, please click on the following link or paste URL in a web browser: General Disclosures Information about the Research Analyst Responsible for this report: The primary analyst(s) covering the issuer(s), Christopher Rolland, certifies (certify) that the views expressed herein accurately reflect the analyst's personal views as to the subject securities and issuers and further certifies that no part of such analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in the report. The analyst(s) responsible for this research report has received and is eligible to receive compensation, including bonus compensation, based on FBR s overall operating revenues, including revenues generated by its investment banking activities. Information about FBR's Conflicts Management Policy: Our Research conflicts management policy is available at: Information about investment banking: In the normal course of its business, FBR seeks to perform investment banking and other services for various companies and to receive compensation in connection with such services. As such, investors should assume that FBR intends to seek investment banking or other business relationships with the companies. Information about our recommendations, holdings and investment decisions: The information and rating included in this report represent the long-term view as described more fully below. The analyst may have different views regarding short-term trading strategies with respect to the stocks covered by the rating, options on such stocks, and/or other securities or financial instruments issued by the company. Our brokers and analysts may make recommendations to their clients, and our affiliates may make investment decisions that are contrary to the recommendations contained in this research report. Such recommendations or investment decisions are based on the particular investment strategies, risk tolerances, and other investment factors of that particular client or affiliate. From time to time, FBR, its affiliated entities, and their respective directors, officers, employees, or members of their immediate families may have a long or short position in the securities or other financial instruments mentioned in this report. We provide to certain customers on request specialized research products or services that focus on covered stocks from a particular perspective. These products or services include, but are not limited to, compilations, reviews, and analysis that may use different research methodologies or focus on the prospects for individual stocks as compared to other covered stocks or over differing time horizons or under assumed market events or conditions. Readers should be aware that we may issue investment research on the subject companies from a technical perspective and/or include in this report discussions about options on stocks covered in this report and/or other securities or financial instruments issued by the company. These analyses are different from fundamental analysis, and the conclusions reached may differ. Technical research and the discussions concerning options and other securities and financial instruments issued by the company do not represent a rating or coverage of any discussed issuer(s). The disclosures concerning distribution of ratings and price charts refer to fundamental research and Page 8

9 do not include reference to technical recommendations or discussions concerning options and other securities and financial instruments issued by the company. Important Information Concerning Options Transactions: This discussion is directed to experienced professional investors with a high degree of sophistication and risk tolerance. Options transactions are not suitable for all investors. This brief statement does not address all of the risks or other significant aspects of entering into any particular transaction. Tax implications are an important consideration for options transactions. Prior to undertaking any trade you should discuss with your preferred tax, ERISA, legal, accounting, regulatory, or other advisor how such particular trade may affect you. Opinion with respect to options is distinct from fundamental research analysis. Opinion is current as of the time of publication, and there should be no expectation that it will be updated, supplemented, or reviewed as information changes. We make no commitment to continue to follow any ideas or information contained in this section. Analysis does not consider the cost of commissions. Research personnel may consult Options Sales and Trading personnel when preparing commentary concerning options. Supporting documentation is available upon request. Please ensure that you have read and understood the current options risk disclosure document before entering into any options transactions. The options risk disclosure document can be accessed at the following Web address: optionsclearing.com/about/publications/character-risks.jsp. If this link is inaccessible, please contact your representative. Risks Some options strategies may be complex, high risk, and speculative. There are potentially unlimited combinations of hedged and unhedged options strategies that expose investors to varying degrees of risk. Generally, buyers establishing long options positions risk the loss of the entire premium paid for the position, while sellers establishing short options positions have unlimited risk of loss. There are a number of commonly recognized options strategies, that expose investors to varying degrees of risk, some of which are summarized below: Buying Calls or Puts--Investors may lose the entire premium paid. Selling Covered Calls--Selling calls on long stock position. Risk is that the stock will be called away at strike, limiting investor profit to strike plus premium received. Selling Uncovered Calls--Unlimited risk that investors may experience losses much greater than premium received. Selling Uncovered Puts--Significant risk that investors will experience losses much greater than premium income received. Buying Vertical Spreads (Calls--long call and short call with higher strike; Puts--long put and short put with lower strike) Same expiration month for both options. Investors may lose the entire premium paid. Buying Calendar Spreads (different expiration months with short expiration earlier than long). Investors may lose the entire premium paid. Selling Call or Put Vertical Spreads (Calls--short call and long call with higher strike; Puts--short put and long put with a lower strike, same expiration month for both options.) Investors risk the loss of the difference between the strike prices, reduced by the premium received. Buying Straddle--Buying a put and a call with the same underlying strike and expiration. Investors risk loss of the entire premium paid. Selling Straddle--Sale of call and put with the same underlying strike and expiration.) Unlimited risk that investors will experience losses much greater than the premium income received. Buying Strangle--Long call and long put, both out of the money, with the same expiration and underlying security. Investors may lose the entire premium paid. Selling Strangle--Short call and put, both out of the money, with the same expiration and underlying security. Unlimited risk of loss in excess premium collected. Important Information about Convertible & Other Fixed-Income Securities and Financial Instruments: This discussion is directed to experienced professional investors with a high degree of sophistication and risk tolerance. Opinion with respect to convertible, other fixed-income securities and other financial instruments is distinct from fundamental research analysis. Opinion is current as of the time of publication, and there should be no expectation that it will be updated, supplemented, or reviewed as information changes. We make no commitment to continue to follow any ideas or information contained in this section. Page 9

10 Research analysts may consult Credit Sales and Trading personnel when preparing commentary on convertible and fixedincome securities and other financial instruments. FBR may be a market maker in the company s convertible or fixed-income securities. FBR Capital Markets LT, Inc. may be a market maker in financial instruments that are not securities. Securities and financial instruments discussed may be unrated or rated below investment grade, may be considered speculative, and should only be considered by accounts qualified to invest in such securities. Securities and financial instruments discussed may not be registered or exempt from registration in all jurisdictions. Nonregistered securities discussed may be subject to a variety of unique risk considerations, including those related to liquidity, price volatility, and lack of widely distributed information. Rule 144A securities are sold only to persons who are Qualified Institutional Buyers within the meaning of Rule 144A, under the Securities Act of 1933, as amended. Information about our rating system: FBR instituted the following three-tiered rating system on October 11, 2002, for securities it covers: Outperform (OP) FBR expects that the subject company will outperform its peers over the next 12 months. We recommend that investors buy the securities at the current valuation. Market Perform (MP) FBR expects that the subject company s stock price will be in a trading range neither outperforming nor underperforming its peers over the next 12 months. Underperform (UP) FBR expects that the subject company will underperform its peers over the next 12 months. We recommend that investors reduce their positions until the valuation or fundamentals become more compelling. A description of the five-tiered rating system used prior to October 11, 2002, can be found at disclosurespre10702.aspx. Rating. FBR Research Distribution 1 FBR Banking Services in the past 12 months 1 BUY [Outperform] 50.10% 12.85% HOLD [Market Perform] 47.28% 4.26% SELL [Underperform] 2.62% 0.00% (1) As of midnight on the business day immediately prior to the date of this publication. General Information about FBR Research: Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable but is not guaranteed as to accuracy and does not purport to be complete. Opinion is as of the date of the report unless labeled otherwise and is subject to change without notice. Updates may be provided based on developments and events and as otherwise appropriate. Updates may be restricted based on regulatory requirements or other considerations. Consequently, there should be no assumption that updates will be made. FBR and its affiliates disclaim any warranty of any kind, whether express or implied, as to any matter whatsoever relating to this research report and any analysis, discussion or trade ideas contained herein. This research report is provided on an "as is" basis for use at your own risk, and neither FBR nor its affiliates are liable for any damages or injury resulting from use of this information. This report should not be construed as advice designed to meet the particular investment needs of any investor or as an offer or solicitation to buy or sell the securities or financial instruments mentioned herein, and any opinions expressed herein are subject to change. Some or all of the securities and financial instruments discussed in this report may be speculative, high risk, and unsuitable or inappropriate for many investors. Neither FBR nor any of its affiliates make any representation as to the suitability or appropriateness of these securities or financial instruments for individual investors. Investors must make their own determination, either alone or in consultation with their own advisors, as to the suitability or appropriateness of such investments based upon factors including their investment objectives, financial position, liquidity needs, tax status, and level of risk tolerance. These securities and financial instruments may be sold to or purchased from customers or others by FBR acting as principal or agent. Securities and financial instruments issued by foreign companies and/or issued overseas may involve certain risks, including differences in accounting, reporting, and registration, as well as foreign currency, economic, and political risks. Page 10

11 This report and the securities and financial instruments discussed herein may not be eligible for distribution or sale in all jurisdictions and/or to all types of investors. This report is provided for information purposes only and does not represent an offer or solicitation in any jurisdiction where such offer would be prohibited. Commentary regarding the future direction of financial markets is illustrative and is not intended to predict actual results, which may differ substantially from the opinions expressed herein. If any hyperlink is inaccessible, call and ask for Editorial. FBR utilizes a tiered approach to service its clients. The services provided by FBR s research analysts to clients vary, based upon a variety of factors including, but not limited to, client preferences and the extent of a client s total relationship with the Firm. FBR does not provide any of the Firm s clients with access to unpublished research opinion. FBR provides clients across all tiers equal access to research reports. Important information for French addresses and potential investors: Addresses and potential investors based in France expressly acknowledge that they have not been subject to any kind of solicitation by FBR Capital Markets & Co, as defined under Article L and seq. of the French Monetary and Financial code. The above analyses have not been prepared in the context of a public offering of financial instruments in France within the meaning of Article L and seq. of the French Monetary and Financial code and shall not be deemed to be drawn up for the purpose of providing investment services as defined under Article L and seq. of the French Monetary and Financial code. In this respect, the above analyses shall not be qualified as a personalized investment advice related to financial instruments under French law and shall therefore not be deemed to be qualified as investment advice provided by FBR Capital Markets & Co. Addresses and potential investors based in France may initiate the first contact with FBR Capital Markets & Co in order to get additional information on financial analyses and services provided by the latter. By doing so, addresses and potential investors based in France expressly acknowledge that the banking and financial solicitation regime as defined under Article L and seq. of the French Monetary and Financial code shall not be applicable. Information for Clients of FBRC: This publication has been approved by FBR Capital Markets & Co. (FBRC), which accepts responsibility for its contents and its distribution to our clients. Any FBRC client who receives this research and wishes to effect a transaction in the securities or financial instruments discussed should contact and place orders with an FBRC Sales representative or a representative of FBR Capital Markets LT, Inc. for financial instruments that are not securities. Copyright 2014 FBR Capital Markets & Co. Page 11