UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22511
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RF MICRO DEVICES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-1733461
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7628 THORNDIKE ROAD
GREENSBORO, NORTH CAROLINA 27409-9421
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(336) 664-1233
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(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
----- -----
As of August 6, 2003, there were 184,316,865 shares of the registrant's common
stock outstanding. Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
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RF MICRO DEVICES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE
30, 2003 AND MARCH 31, 2003...........................
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002.....
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002.....
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS............................................
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
PART I - FINANCIAL INFORMATION
ITEM 1.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, MARCH 31,
2003 2003
----------- ----------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 167,956 $ 164,422
Short-term investments 97,019 92,187
Accounts receivable, net of allowances of $1,266 at June 30,
2003 and $1,078 at March 31, 2003 64,056 66,849
Inventories (NOTE 3) 60,262 57,781
Recoverable income tax -- 6,330
Other current assets 5,625 5,052
--------- ---------
Total current assets 394,918 392,621
Property and equipment, net of accumulated depreciation of $142,546 at
June 30, 2003 and $128,968 at March 31, 2003 307,548 312,013
Goodwill 110,006 110,006
Long-term investments 63,461 59,440
Intangible assets, net of amortization of $7,934 at
June 30, 2003 and $6,073 at March 31, 2003 55,448 56,486
Other non-current assets 2,027 2,259
--------- ---------
Total assets $ 933,408 $ 932,825
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,372 $ 26,694
Accrued liabilities 24,432 20,185
Other current liabilities, net 30,000 30,661
--------- ---------
Total current liabilities 79,804 77,540
Long-term debt, net 296,281 295,865
Other long-term liability 5,158 2,020
--------- ---------
Total liabilities 381,243 375,425
Shareholders' equity:
Preferred stock, no par value; 5,000 shares authorized; no shares
issued and outstanding -- --
Common stock, no par value; 500,000 shares authorized; 184,277 and
183,958 shares issued and outstanding at June 30, 2003 and March
31, 2003, respectively 442,152 441,077
Additional paid-in capital 73,415 73,454
Deferred compensation (16,909) (18,700)
Accumulated other comprehensive income, net of tax (NOTE 4) 117 95
Retained earnings 53,390 61,474
--------- ---------
Total shareholders' equity 552,165 557,400
--------- ---------
Total liabilities and shareholders' equity $ 933,408 $ 932,825
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002
--------- ---------
Total revenue $ 131,521 $ 103,942
Operating costs and expenses:
Cost of goods sold 90,283 62,504
Research and development 31,335 23,051
Marketing and selling 10,297 8,414
General and administrative 4,552 4,200
Other operating expenses 527 742
--------- ---------
Total operating costs and expenses 136,994 98,911
--------- ---------
(Loss) income from operations (5,473) 5,031
Other (expense) income:
Interest income 877 1,868
Interest expense (3,478) (4,496)
Other income (expense), net 139 (17)
--------- ---------
(Loss) income before income taxes (7,935) 2,386
Income tax expense (NOTE 5) 149 37
--------- ---------
Net (loss) income ($ 8,084) $ 2,349
========= =========
Net (loss) income per share (NOTE 2):
Basic ($ 0.04) $ 0.01
Diluted ($ 0.04) $ 0.01
Weighted average shares outstanding used in per share calculation:
Basic 184,032 167,938
Diluted 184,032 174,529
See accompanying Notes to Condensed Consolidated Financial Statements.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002
---------- ----------
Cash flows from operating activities:
Net (loss) income ($ 8,084) $ 2,349
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation 13,943 9,606
Amortization 4,671 2,546
(Gain) loss on disposal of equipment (123) 924
Other 178 --
Changes in operating assets and liabilities:
Accounts receivable, net 2,793 3,342
Inventories (2,676) (9,385)
Recoverable income taxes 6,329 4,457
Other assets (373) (153)
Accounts payable and accrued liabilities 2,886 7,709
Other liabilities 3,538 7
--------- ---------
Net cash provided by operating activities 23,082 21,402
Cash flows from investing activities:
Purchase of capital equipment/leasehold improvements (10,154) (15,056)
Proceeds from maturities of securities available for sale 48,800 84,878
Purchase of securities available for sale (58,068) (75,817)
--------- ---------
Net cash used in investing activities (19,422) (5,995)
Cash flows from financing activities:
Proceeds from exercise of options 194 914
Repayment of capital lease obligations (365) (1,130)
--------- ---------
Net cash used in financing activities (171) (216)
--------- ---------
Net increase in cash and cash equivalents 3,489 15,191
Effect of exchange rate changes on cash 45 --
Cash and cash equivalents at the beginning of the period 164,422 157,648
--------- ---------
Cash and cash equivalents at the end of the period $ 167,956 $ 172,839
========= =========
Non-cash investing and financing activities:
Non-cash stock purchase for assets $ 842 $ --
Currency translation change, net of tax 60 --
Available-for-sale investment equity change, net of tax (38) 70
Change in fair value of cash flow hedge, net of tax -- (1,106)
See accompanying Notes to Condensed Consolidated Financial Statements.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements of RF Micro
Devices, Inc. and Subsidiaries (the Company) have been prepared in conformity
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and assumptions, which could differ materially from actual results. In addition,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the financial statements include all adjustments (which are of a
normal and recurring nature) necessary for the fair presentation of the results
of the interim periods presented. For comparative purposes, certain fiscal 2003
amounts have been reclassified to conform to fiscal 2004 presentation. These
reclassifications had no effect on net (loss) income or shareholders' equity as
previously stated. The results of operations for interim periods are not
necessarily indicative of the results that may be expected for a full year.
These condensed consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended March
31, 2003.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company uses a 52- or 53-week fiscal year ending on the Saturday closest to
March 31 of each year. The first fiscal quarter of each year ends on the
Saturday closest to June 30, the second fiscal quarter of each year ends on the
Saturday closest to September 30 and the third fiscal quarter of each year ends
on the Saturday closest to December 31; however, in this report the Company's
fiscal year is described as ending on March 31 and the first, second, and third
quarters of each fiscal year are described as ending June 30, September 30 and
December 31, respectively.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options and employee restricted stock in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). Under APB 25, no compensation expense is
recognized for stock options or restricted stock issued to employees with
exercise prices or share prices at or above quoted market value. For stock
options or restricted shares granted at exercise prices below quoted market
value, the Company records deferred compensation expense for the difference
between the price of the shares and the market value. Deferred compensation
expense is amortized ratably over the vesting period of the related options or
shares of restricted stock.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) provides an alternative to APB 25 in accounting for
stock-based compensation issued to employees. SFAS 123 provides for a fair value
based method of accounting for employee stock options and similar equity
instruments. Companies that continue to account for stock-based compensation
arrangements under APB 25 are required by SFAS 123 to disclose the pro forma
effect on net (loss) income and net (loss) income per share as if the fair value
based method prescribed by SFAS 123 had been applied. The Company has continued
to account for stock-based compensation using the provisions of APB 25 and
presents the information required by SFAS 123 as amended by Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" (SFAS 148).
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA DISCLOSURES
Pro forma information regarding net (loss) income and net (loss) income
per share is required by SFAS 123 as amended by SFAS 148, and has been
determined as if the Company accounted for its employee stock options
using the fair value method of SFAS 123 as amended by SFAS 148.
The Company's pro forma information follows (in thousands, except per
share data):
THREE MONTHS ENDED
JUNE 30,
------------------------
2003 2002
------------------------
Net (loss) income, as reported $ (8,084) $ 2,349
Non-cash stock-based compensation included in net
(loss) income 1,751 1,018
Pro forma stock-based compensation cost (17,007) (23,011)
------------------------
Pro forma net (loss) $(23,340) $(19,644)
========================
Basic net (loss) income per share, as reported $ (0.04) $ 0.01
========================
Diluted net (loss) income per share, as reported $ (0.04) $ 0.01
========================
Pro forma basic net (loss) per share $ (0.13) $ (0.12)
========================
Pro forma diluted net (loss) per share $ (0.13) $ (0.12)
========================
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. NET (LOSS) INCOME PER SHARE
The following table sets forth a reconciliation of the numerators and
denominators in the computation of basic and diluted net (loss) income per share
(in thousands, except per share data):
THREE MONTHS ENDED
JUNE 30,
2003 2002
----------- ---------
Numerator for basic and diluted net
(loss) income per share:
Net (loss) income ($ 8,084) $ 2,349
=========== ========
Denominator for basic net (loss) income
per share - weighted average shares 184,032 167,938
Effect of dilutive securities:
Stock options and warrants -- 6,591
----------- --------
Denominator for diluted net (loss) income
per share - adjusted weighted average
shares and assumed conversions 184,032 174,529
=========== ========
Basic net (loss) income per share ($ 0.04) $ 0.01
=========== ========
Diluted net (loss) income per share ($ 0.04) $ 0.01
=========== ========
In the computation of diluted net loss per share for the three months ended June
30, 2003 all outstanding stock options and warrants were excluded because the
effect of their inclusion would have been anti-dilutive. In the computation of
diluted net income per share for the three months ended June 30, 2002
outstanding stock options to purchase approximately 8.9 million shares were
excluded because the exercise price of the options was greater than the average
market price of the underlying common stock during the quarter and the effect of
their inclusion would have been anti-dilutive. The computation of diluted net
(loss) income per share for three months ended June 30, 2003 and 2002 similarly
did not assume the conversion of the Company's 3.75% convertible subordinated
notes due 2005 because the inclusion would have been anti-dilutive. The notes
are convertible at a price of $45.09 per share, and the closing price of the
Company's common stock on the date it committed to sell the notes was $35.50.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. INVENTORIES
Inventories are stated at the lower of cost or market determined using the
average cost method. The components of inventories are as follows (in
thousands):
JUNE 30, MARCH 31,
2003 2003
---------- ---------
Raw materials $ 14,191 $ 15,942
Work in process 27,262 30,174
Finished goods 37,957 29,672
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79,410 75,788
Inventory reserve (19,148) (18,007)
-------- --------
Total inventories $ 60,262 $ 57,781
======== ========
4. OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income for the Company consists of
accumulated unrealized (losses) and gains on marketable securities, foreign
currency translation adjustments and the change in fair value of a cash flow
hedge related to the Company's synthetic lease. This amount is included as a
separate component of shareholders' equity. The components of comprehensive
(loss) income, net of tax, are as follows for the periods presented (in
thousands):
THREE MONTHS ENDED
JUNE 30,
----------------------------
2003 2002
--------- -----------
Net (loss) income $(8,084) $ 2,349
Comprehensive (loss) income:
Change in fair value of cash flow hedge -- (1,106)
Unrealized (loss) gain on marketable securities (38) 70
Foreign currency 60 (2)
--------- ---------
Comprehensive (loss) income $(8,062) $ 1,311
========= =========
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. INCOME TAXES
Income tax expense for the first quarter of fiscal 2004 was $0.15 million
representing foreign income taxes on international operations. The effective
combined domestic income tax rate was 0% for the first quarter of fiscal 2004
and 0% for the first quarter of fiscal 2003. The Company's overall tax rate for
the first quarter of fiscal 2004 and 2003 differed from the statutory rate due
to adjustments to the valuation allowance primarily related to the
non-recognition of the US tax benefits on the domestic net operating losses and
tax credits, rate differences on foreign transactions, and other differences
between book and tax treatment of certain expenditures.
At June 30, 2003, the Company had outstanding net operating loss carryforwards
(NOLs) for federal domestic tax purposes of approximately $85.8 million, which
will expire in years 2022 -2025, if unused, and state losses of approximately
$102.8 million, which will expire in years 2009-2025, if unused. Included in the
amounts above are certain NOLs and other tax attribute assets acquired in
conjunction with the close of the Company's acquisition of Resonext
Communications, Inc. in December 2002. The utilization of acquired assets may be
subject to certain annual limitations as required under Internal Revenue Code
Section 382. In accordance with the Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," a valuation allowance of $28.6 million
related to domestic operating losses has been established because it is more
likely than not that some portion of the deferred tax assets will not be
realized. The Company considered this review, along with the timing of the
reversal of the Company's temporary differences and the expiration dates of the
NOLs, in reaching the decision.
6. COMMITMENTS
JAZZ SEMICONDUCTOR STRATEGIC RELATIONSHIP
The Company entered into a strategic relationship with Jazz Semiconductor, Inc.
(Jazz). Under the arrangement, the Company obtained a committed, lower cost
source of supply for wafers fabricated utilizing Jazz's silicon manufacturing
processes. In addition, the Company will collaborate with Jazz on joint process
development and the optimization of these processes for fabrication of
next-generation silicon radio frequency integrated circuits (RFICs). As part of
its strategic relationship with Jazz, the Company agreed to invest approximately
$60.0 million in Jazz, $30.0 million of which was invested in October 2002 and
$30.0 million of which is payable in the third quarter of fiscal 2004. The $30.0
million payable is recorded in other current liabilities net of the effective
discount rate of one year LIBOR plus 1.0%.
STRATEGIC ALLIANCE WITH AGERE
The Company entered into a strategic alliance with Agere Systems Inc. (Agere) in
May 2001, pursuant to which the Company agreed to invest approximately $58.0
million over two years to upgrade manufacturing clean room space and purchase
semiconductor manufacturing equipment to be deployed within Agere's Orlando,
Florida manufacturing facility, of which $16.4 million had been invested as of
June 30, 2003. On January 23, 2002, Agere announced that it was seeking a buyer
for its Orlando wafer fabrication operation. The Company currently does not
intend to make any additional investments in equipment under this arrangement.
The Company recently reopened discussions with Agere in order to resolve all
remaining issues between the parties under the alliance documents, including the
refund to the Company of amounts previously invested by it under its agreements
with Agere. These discussions are at an early stage, and the Company currently
cannot predict the outcome or financial or other effects of these discussions.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities."
FIN 46 requires an investor with a majority of the variable interests (primary
beneficiary) in a variable interest entity (VIE) to consolidate the entity and
also requires majority and significant variable interest investors to provide
certain disclosures. A VIE is an entity in which the voting equity investors do
not have a controlling interest, or the equity investment at risk is
insufficient to finance the entity's activities without receiving additional
subordinated financial support from other parties. For arrangements entered into
with VIEs created prior to January 31, 2003, the provisions of FIN 46 are
required to be adopted at the beginning of the first interim or annual period
beginning after June 15, 2003. The provisions of FIN 46 were effective
immediately for all arrangements entered into with new VIEs created after
January 31, 2003.
For the promotion of strategic business objectives, the Company invests in and
enters into arrangements with entities which may be VIEs. The Company is
currently performing a review of its investments in both non-marketable and
marketable securities as well as other arrangements to determine whether the
Company is the primary beneficiary of any of the related entities. To date, the
review has not identified any entity that would require consolidation. The
Company expects to complete the review in the second quarter of fiscal 2004.
Provided that the Company is not the primary beneficiary, the maximum exposure
to losses related to any entity that may be determined to be a VIE is limited to
the carrying amount of the investment in the entity.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" (SFAS 149). SFAS 149 amends Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative and Hedging Activities" (SFAS
133), to provide more consistent reporting of contracts as either freestanding
derivative instruments subject to SFAS 133 in their entirety, or as hybrid
instruments with debt host contracts and embedded derivative features. SFAS 149
is effective for contracts entered into or modified after June 30, 2003, and
hedging relationships designated after June 30, 2003. The Company adopted SFAS
149 for contracts entered into or modified after June 30, 2003. Adoption of SFAS
149 did not have a significant impact on the Company's consolidated financial
position, results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for
classifying and measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity. SFAS 150 is effective immediately to instruments entered into or
modified after May 31, 2003 and for all other instruments that exist as of the
beginning of the first interim financial reporting period beginning after June
15, 2003. The Company adopted SFAS 150 during the first quarter of fiscal 2004.
Adoption of SFAS 150 did not have a significant impact on the Company's
consolidated financial position, results of operations or cash flows.
8. SUBSEQUENT EVENTS
In July 2003, the Company completed the private placement of $230.0 million
aggregate principal amount of 1.50% convertible subordinated notes due 2010. The
notes are convertible into a total of approximately 30.1 million shares of the
Company's common stock at an approximate conversion price of $7.63 per share.
The trading value of the Company's stock on the commitment date, June 25, 2003,
was $5.78 per share. The net proceeds of the offering were approximately $224.7
million after payment of the underwriting discount and expenses of the offering
totaling $5.3 million, which are being amortized as interest expense over the
term of the notes based on the effective interest method. As of August 4, 2003,
the Company used a portion of the proceeds to repurchase $189.0 million of the
$300.0 million aggregate principal amount of its 3.75% convertible subordinated
notes due 2005. The Company will incur a non-cash charge of $2.4 million related
to the repurchase for unaccreted discounts and unamortized issuance costs in the
second quarter of fiscal 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that
relate to our plans, objectives, estimates and goals. Words such as "expect,"
"anticipate," "intend," "plan," "believe," and "estimate," and variations of
such words and similar expressions, identify such forward-looking statements.
Our business is subject to numerous risks and uncertainties, including the
following:
o Variability in operating results;
o The rate of growth and development of wireless markets;
o The risks associated with the operation of our molecular beam epitaxy
facility, the operation of our test and tape and reel facilities, both
foreign and domestic, and the operation of our wafer fabrication
facilities;
o Our ability to manage rapid growth and to attract and retain skilled
personnel;
o Variability in production yields, raw material costs and availability;
o Dependence on a limited number of customers;
o Dependence on our gallium arsenide (GaAs) heterojunction bipolar
transistor (HBT) products;
o Our ability to reduce costs and improve margins by converting our
second four-inch GaAs HBT wafer fabrication facility into a six-inch
facility, improving yields, implementing innovative technologies and
increasing capacity utilization;
o Dependence on third parties;
o Our ability to bring new products to market in response to market
shifts and use technological innovation to lead the industry in
time-to-market for our products;
o Currency fluctuations, tariffs, trade barriers, taxes and export
license requirements associated with our foreign operations; and
o Our ability to integrate acquired companies, including the risk that
we may not realize expected synergies from our business combinations.
These and other risks and uncertainties, which are described in more detail in
our most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission, could cause the actual results and developments to be
materially different from those expressed or implied by any of these
forward-looking statements.
RESULTS OF OPERATIONS
The following table sets forth our unaudited condensed consolidated statement of
operations data expressed as a percentage of total revenue for the periods
indicated:
THREE MONTHS ENDED
JUNE 30,
------------------------
2003 2002
--------- ---------
Revenue 100.0% 100.0%
Operating costs and expenses:
Cost of goods sold 68.7 60.1
Research and development 23.8 22.2
Marketing and selling 7.8 8.1
General and administrative 3.5 4.1
Other operating expenses 0.4 0.7
--------- ---------
Total operating costs and expenses 104.2 95.2
--------- ---------
(Loss) income from operations (4.2) 4.8
Other (expense) income:
Interest income 0.7 1.8
Interest expense (2.6) (4.4)
Other, net 0.1 --
--------- ---------
(Loss) income before income taxes (6.0) 2.2
Income tax expense 0.1 --
--------- ---------
Net (loss) income (6.1)% 2.2%
--------- ---------
REVENUE
Revenue for the first quarter of fiscal 2004 increased 26.5% to $131.5 million,
compared to $103.9 million for the same quarter in fiscal 2003. The increase
year over year was due primarily to strong growth in power amplifier sales in
response to demand from handset manufacturers. Revenues increased year over year
despite continued pressure on average selling prices for modules and microwave
monolithic integrated circuits (MMICs).
International shipments were $109.2 million and accounted for 83.1% of revenue
in the first quarter of fiscal 2004, compared to $74.9 million, or 72.0% of
revenue, in the first quarter of fiscal 2003. The international sales increase
was primarily attributable to sales to customers located in Asia which totaled
$68.8 million, or 52.3% of revenue, for the first quarter of fiscal 2004,
compared to $45.7 million, or 43.9% of revenue, for the first quarter of fiscal
2003.
GROSS PROFIT
Gross profit for the three months ended June 30, 2003 decreased to $41.2
million, or 31.4% of revenue, compared to $41.4 million, or 39.9% of revenue, in
the first quarter of the prior year. Fiscal 2004 gross profit percentages were
impacted by the shift in product mix to modules, which have a lower overall
average gross profit, than MMICs. Module sales for the three months ended June
30, 2003 represented 74% of our revenue compared to 48% for the three months
ended June 30, 2002. The continued shift in our product mix to modules is being
partially offset by the cost reduction efforts described below. Sequentially,
gross profit for the three months ended June 30, 2003 increased to $41.2
million, or 31.4% of revenue, compared to $40.8 million, or 29.5% of revenue, in
the fourth quarter of fiscal 2003.
We have historically experienced significant fluctuations in gross profit
margins and, consequently, our operating results, and we expect such
fluctuations to continue. We expect continued declines in average selling prices
and the shift in product mix for both devices and air standards to pressure
gross profit margin. However, we have multiple cost reduction efforts underway
intended to improve our gross profit margin, including conversion of our second
four-inch GaAs HBT wafer fabrication facility into a six-inch facility,
utilizing our strategic relationship with Jazz Semiconductor (Jazz) to obtain a
committed, lower-cost source of supply for silicon wafers, achieving higher
levels of product integration, successfully implementing test yield and assembly
improvement plans, lowering assembly and other supply chain costs, and
increasing our capacity utilization.
RESEARCH AND DEVELOPMENT
Research and development expenses in the first quarter of fiscal 2004 were $31.3
million, or 23.8% of revenue, compared to $23.1 million, or 22.2% of revenue,
for the three months ended June 30, 2002. The increase year over year was
primarily attributable to increased headcount and related personnel expenses
including salaries, benefits, and equipment. During the end of the third quarter
of fiscal 2003, we merged with Resonext Communications, Inc., which contributed
to the increased headcount, related personnel expenses and additional
amortization expense from the acquired intangible assets. Spending on
development wafers, mask sets and prototyping also increased as a result of
continued module development and associated work on cost reductions and yield
improvement techniques. We plan to continue to make investments in research and
development and expect that such expenses will continue to increase in absolute
dollars in future periods.
MARKETING AND SELLING
Marketing and selling expenses for the first quarter of fiscal 2004 were $10.3
million, compared to $8.4 million for the first quarter of fiscal 2003. The
absolute dollar increase year over year in fiscal 2004 compared to fiscal 2003
was primarily attributable to increased headcount and related personnel expenses
including salaries, benefits, and equipment. The Resonext merger contributed to
the increased headcount, related personnel expenses and additional amortization
expense from the acquired intangible assets. Marketing and selling expenses as a
percentage of revenue were 7.8% and 8.1% for the three months ended June 30,
2003 and 2002, respectively. The decrease as a percentage of revenues year over
year in fiscal 2004 compared to fiscal 2003 is attributable to shifts in revenue
from third party commission-based accounts to in-house accounts. We plan to
continue to make investments in marketing and selling and expect that such
expenses will continue to increase in absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended June 30, 2003 were
$4.6 million, or 3.5% of revenue, compared to $4.2 million, or 4.1% of revenue,
for the quarter ended June 30, 2002. The year over year increase in absolute
dollars was primarily due to bank charges for letters of credit expenses related
to our expanded business in Asian markets, directors' compensation expenses
related to the appointment of two new board members, and increased legal and
audit fees related to our compliance with the Sarbanes-Oxley Act of 2002. We
expect that general and administrative expenses will continue to increase in
absolute dollars in future periods.
OTHER OPERATING EXPENSE
Other operating expense for the first quarter of fiscal 2004 was $0.5 million,
compared to $0.7 million in the prior year. Other operating expense in the first
quarter of fiscal 2004 was comprised of depreciation expense for assets held and
used related to the Agere facility, and in the corresponding quarter of fiscal
2003 was comprised of start-up costs associated with our test and tape and reel
facility in Beijing, China. The operating costs of the Beijing facility
transitioned to cost of goods sold during the second quarter of fiscal 2003 once
the facility was qualified for production and economic value was obtained.
The Resonext-related acquired in-process research and development was charged to
expense in accordance with SFAS 141 in fiscal 2003. SFAS 141 specifies that the
portion of the purchase price assigned to acquired intangible assets to be used
in a particular research and development project that have no alternative future
use shall be charged to expense at the merger date. The in-process research and
development projects were related to first- and second-generation products for
802.11a/b/g applications. The first-generation product is a two-chip combination
of a transceiver and baseband/media access controller (MAC) chip that support
the 802.11 a/b/g protocols, and the fair value of the in-process research and
development associated with this project was estimated to be $6.2 million. The
second-generation product is a two-chip combination of a transceiver with a
baseband/MAC chip that supports the 802.11 a/b/g protocols and allows for
variable frequencies, and the fair value of the in-process research and
development associated with this project was estimated to be $4.3 million. The
fair value of the acquired in-process research and development was estimated
base on an analysis of the expected costs to develop the purchased in-process
research and development into a commercially viable product, and cash flows
resulting from the sale of the products developed as the result of the
in-process research and development. The projected net cash flows obtained
through this analysis were discounted using a present value factor of 19%. As of
June 30, 2003, the estimated cost to complete the projects is approximately
$20.0 to $25.0 million with an estimated completion date in the first quarter of
fiscal 2005. Due to the unanticipated technical complexities, the completion
date was extended and the original cost estimates were increased.
INTEREST INCOME
For the quarter ended June 30, 2003, interest income was $0.9 million, compared
to $1.9 million for the same quarter for the prior year. Interest income
decreased due to lower prevailing interest rates driven by the Federal Reserve
cuts to the federal funds rate and lower cash and investment balances.
INTEREST EXPENSE
Interest expense was $3.5 million for the three months ended June 30, 2003,
compared to $4.5 million for the first quarter of the prior year. The year over
year decrease in fiscal 2004 resulted from the retirement of an interest rate
swap arrangement in fiscal 2003.
INCOME TAX
Income tax expense for the first quarter of fiscal 2004 was $0.15 million
representing foreign income taxes on international operations. The effective
combined domestic income tax rate was 0% for the first quarter of fiscal 2004
and 0% for the first quarter of fiscal 2003. Our overall tax rate for the first
quarter of fiscal 2004 and 2003 differed from the statutory rate due to
adjustments to the valuation allowance primarily related to the non-recognition
of the US tax benefits on the domestic net operating losses and tax credits,
rate differences on foreign transactions, and other differences between book and
tax treatment of certain expenditures.
At June 30, 2003, we had outstanding net operating loss carryforwards (NOLs) for
federal domestic tax purposes of approximately $85.8 million, which will expire
in years 2022 -2025, if unused, and state losses of approximately $102.8
million, which will expire in years 2009-2025, if unused. Included in the
amounts above are certain NOL and other tax attribute assets acquired in
conjunction with the close of our acquisition of Resonext Communications, Inc.
The utilization of acquired assets may be subject to certain annual limitations
as required under Internal Revenue Code Section 382. In accordance with the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," a valuation allowance of $28.6 million related to domestic operating
losses has been established because it is more likely than not that some portion
of the deferred tax assets will not be realized. We considered this review, the
timing of the reversal of our temporary differences and the expiration dates of
the NOLs in reaching our conclusion.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through sales of equity and debt
securities, bank borrowings, capital equipment leases and cash from operations.
Through public and Rule 144A securities offerings, we have raised approximately
$687.0 million, net of offering expenses. As of June 30, 2003, our working
capital was $315.1 million, including $168.0 million in cash and cash
equivalents, compared to working capital at March 31, 2003 of $315.1 million.
Operating activities for the first three months of fiscal 2004 generated $23.1
million in cash, compared to $21.4 million in the first three months of fiscal
2003. This year over year increase was primarily attributable to changes in
inventory as cash used decreased $6.7 million. The year over year increase in
cash provided by changes in inventories was partially offset by a decrease in
net income of $10.4 million. Adjustments to reconcile net income (loss) for
non-cash operating items increased cash provided from operating activities by
$5.6 million year over year due primarily to increased depreciation and
amortization expense in fiscal 2004.
Net cash used in investing activities for the three months ended June 30, 2003
was $19.4 million, compared to $6.0 million in the prior year. The year over
year increase in cash used was primarily attributable to lower proceeds from
maturities of securities available-for-sale of $48.8 million compared to $85.0
million in fiscal 2003.
Net cash used by financing activities for the three months ended June 30, 2003
was $0.02 million, compared to cash used of $0.02 million for the three months
ended June 30, 2002.
COMMITMENTS
STRATEGIC RELATIONSHIP WITH JAZZ SEMICONDUCTOR. We entered into a strategic
relationship with Jazz Semiconductor (Jazz) in October 2002, pursuant to which
we agreed to invest approximately $60.0 million in Jazz. We transferred $30.0
million in cash to Jazz in the third quarter of fiscal 2003 and expect to pay
the remaining $30.0 million in the third quarter of fiscal 2004. We currently
have sufficient liquidity to pay the remaining $30.0 million.
STRATEGIC ALLIANCE WITH AGERE SYSTEMS, INC. We entered into a strategic alliance
with Agere Systems Inc. (Agere) in May 2001, pursuant to which we agreed to
invest approximately $58.0 million over two years to upgrade manufacturing clean
room space and purchase semiconductor manufacturing equipment to be deployed
within Agere's Orlando, Florida manufacturing facility, of which $16.4 million
had been invested as of June 30, 2003. This alliance was designed to provide us
a guaranteed source of supply and favorable pricing of silicon wafers. On
January 23, 2002, Agere announced that it was seeking a buyer for its Orlando
wafer fabrication operation. We currently do not intend to make any additional
investments in equipment under this arrangement. We recently reopened
discussions with Agere in order to resolve all remaining issues between the
parties under the alliance documents, including the refund to us of amounts
previously invested by it under its agreements with Agere. These discussions are
at an early stage, and we currently cannot predict the outcome or financial or
other effects of these discussions.
CONVERTIBLE DEBT In July 2003, we completed the private placement of $230.0
million aggregate principal amount of 1.50% convertible subordinated notes due
2010. The notes are convertible into a total of approximately 30.1 million
shares of our common stock at an approximate conversion price of $7.63 per
share. The trading value of our stock on the commitment date, June 25, 2003, was
$5.78 per share. The net proceeds of the offering were approximately $224.7
million. Of that amount, we used $189.0 million to repurchase a portion of our
3.75% convertible subordinated notes due 2005, and we intend to use the
remainder for general corporate purposes, including capital expenditures and
working capital. In fiscal 2004, we expect to pay interest of $1.7 million on
these notes.
During fiscal 2001, we completed the private placement of $300.0 million
aggregate principal amount of 3.75% convertible subordinated notes due 2005. The
net proceeds from this offering were $291.3 million. As of August 4, 2003, we
repurchased $189.0 million of the $300.0 million aggregate principal amount of
3.75% convertible subordinated notes due 2005 with proceeds from the offering of
our 1.50% convertible subordinated notes due 2010. In fiscal 2004, we expect to
pay interest of $7.0 million on these notes, of which we have already paid $2.8
million.
CAPITAL COMMITMENTS At June 30, 2003, we had long-term capital commitments of
approximately $10.1 million, consisting of approximately $7.8 million for
equipment related to the six-inch wafer conversion project, approximately $0.6
million for equipment related to our second fabrication facility, approximately
$0.2 million for equipment related to our molecular beam epitaxy facility,
approximately $0.2 million for equipment in our test and tape and reel
facilities in Greensboro, North Carolina and Beijing, China, and the remainder
for general corporate requirements.
FUTURE SOURCES OF FUNDING We expect to fund our commitments through a
combination of cash on hand, capital leases and other forms of financing. Our
future capital requirements may differ materially from those currently
anticipated and will depend on many factors, including, but not limited to,
market acceptance of and demand for our products, volume pricing concessions,
capital improvements to new and existing facilities, technological advances and
our relationships with suppliers and customers. We believe our cash requirements
will be adequately met from our most recent convertible note offering and cash
from operations during fiscal 2004. However, if existing resources and cash from
operations are not sufficient to meet our future requirements, or if we perceive
favorable opportunities, we may seek additional debt or equity financing or
additional credit facilities. We filed a $500.0 million shelf registration
statement providing for the offering from time to time of debt securities,
common stock, preferred stock, depositary shares, warrants and subscription
rights. We do not have any current plans to issue any securities under this
registration statement. We cannot be sure that any additional financing will not
be dilutive to holders of our common stock. Further, we cannot be sure that
additional equity or debt financing, if required, will be available on favorable
terms.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not changed significantly for the risks disclosed
in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2003.
ITEM 4. CONTROL AND PROCEDURES
As of the end of the period covered by this report, the Company's Chief
Executive Officer and the Chief Financial Officer evaluated the effectiveness of
the Company's disclosure controls and procedures in accordance with Rule 13a-15
under the Exchange Act. Based on their evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure controls
and procedures enable the Company to record, process, summarize and report in a
timely manner the information that the Company is required to disclose in its
Exchange Act reports.
There were no changes in the Company's internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
On April 9, 2003, we issued an aggregate of 158,704 shares of common stock to 10
persons in connection with our acquisition of certain assets of Channel
Technology, Inc., a Delaware corporation. All of the common stock issued in this
transaction was issued in a non-public offering pursuant to an exemption from
the Securities Act of 1933, as amended (the "Securities Act"), under Section
4(2) of the Securities Act. This offering was made without general solicitation
or advertising to a limited number of purchasers who each made appropriate
representations to the Company to ensure compliance with Section 4(2). We have
filed a registration statement on Form S-3 covering the resale of such
securities. All net proceeds from the resale of such securities will go to the
selling shareholders who offer and sell their shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Periodic Report by Robert A. Bruggeworth, as
Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a)
of the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Periodic Report by William A. Priddy, Jr., as
Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a)
of the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Periodic Report by Robert A. Bruggeworth, as
Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Periodic Report by William A. Priddy, Jr., as
Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
During the quarter ended June 30, 2003, the Company furnished or filed the
following reports on Form 8-K:
On June 26, 2003, we filed a Form 8-K to disclose pursuant to Item 5 the pricing
of our offering of $230 million principal amount of 1.50% convertible
subordinated notes due 2010 to qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933, as amended.
On June 25, 2003, we filed a Form 8-K to disclose pursuant to Item 5 that we
intended to offer, subject to market and other conditions, $200 million
aggregate principal amount of convertible subordinated notes due 2010 (plus an
additional principal amount of up to $30 million at the option of the initial
purchasers) in a private placement.
On April 22, 2003, we furnished a Form 8-K under Item 9 to disclose, pursuant to
Item 12, a press release announcing our results for the fiscal fourth quarter
and year-ended March 31, 2003.
On April 7, 2003, we furnished a Form 8-K under Item 9 to disclose, pursuant to
Item 12, a press release providing updated guidance for our fiscal 2003 fourth
quarter, ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RF Micro Devices, Inc.
Dated: August 12, 2003
/S/ WILLIAM A. PRIDDY, JR.
---------------------------
WILLIAM A. PRIDDY, JR.
Chief Financial Officer and
Corporate Vice President of Administration
Dated: August 12, 2003
/S/ BARRY D. CHURCH
---------------------------
BARRY D. CHURCH
Vice President and Corporate Controller
(Principal Accounting Officer)