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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 JANUARY 3, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22511
-----------------
RF MICRO DEVICES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-1733461
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7628 THORNDIKE ROAD
GREENSBORO, NORTH CAROLINA 27409-9421
------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(336) 664-1233
----------------------------------------------------
(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 February 9, 2004, there were 185,808,476 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
----- -----
RF MICRO DEVICES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
2003 AND MARCH 31, 2003......................................3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE
MONTHS ENDED DECEMBER 31, 2003 AND 2002......................4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE
MONTHS ENDED DECEMBER 31, 2003 AND 2002......................5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002.................6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.........7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......21
ITEM 4. CONTROLS AND PROCEDURES.........................................21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................21
PART I - FINANCIAL INFORMATION
ITEM 1.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31, MARCH 31,
2003 2003
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 192,021 $ 164,422
Short-term investments 115,713 92,187
Accounts receivable, net of allowances of $1,641 at
December 31, 2003 and $1,078 at March 31, 2003 88,000 66,849
Inventories (NOTE 4) 57,055 57,781
Recoverable income tax -- 6,330
Other current assets 8,639 5,052
--------- ---------
Total current assets 461,428 392,621
Property and equipment, net of accumulated depreciation of $170,790 at
December 31, 2003 and $128,968 at March 31, 2003 296,503 312,013
Goodwill 110,006 110,006
Long-term investments 63,954 59,440
Intangible assets, net of amortization of $11,377 at
December 31, 2003 and $6,073 at March 31, 2003 51,740 56,486
Other non-current assets 1,960 2,259
--------- ---------
Total assets $ 985,591 $ 932,825
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,198 $ 26,694
Accrued liabilities 23,016 20,185
Other current liabilities, net 223 30,661
--------- ---------
Total current liabilities 57,437 77,540
Long-term debt, net of unamortized discount of $5,671 as of
December 31, 2003 and $4,135 as of March 31, 2003 324,329 295,865
Other long-term liabilities 4,373 2,020
--------- ---------
Total liabilities 386,139 375,425
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; 185,734 and
183,958 shares issued and outstanding at December 31, 2003 and
March 31, 2003, respectively 446,276 441,077
Additional paid-in capital 76,957 73,454
Deferred compensation (16,287) (18,700)
Accumulated other comprehensive income, net of tax (NOTE 6) 465 95
Retained earnings 92,041 61,474
--------- ---------
Total shareholders' equity 599,452 557,400
--------- ---------
Total liabilities and shareholders' equity $ 985,591 $ 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
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ----------
Total revenue $ 192,973 $ 145,813
Operating costs and expenses:
Cost of goods sold 112,555 91,387
Research and development 31,894 24,408
Marketing and selling 11,891 9,076
General and administrative 5,722 4,658
Other operating expenses 527 10,500
--------- ---------
Total operating costs and expenses 162,589 140,029
--------- ---------
Income from operations 30,384 5,784
Other (expense) income:
Interest income 990 1,167
Interest expense (2,169) (11,992)
Loss in equity method investee (NOTE 3) (781) --
Other (expense) income, net (163) (84)
--------- ---------
Income (loss) before income taxes 28,261 (5,125)
Income tax expense (NOTE 7) 61 58
--------- ---------
Net income (loss) $ 28,200 ($ 5,183)
========= =========
Net income (loss) per share (NOTE 2):
Basic $ 0.15 ($ 0.03)
Diluted $ 0.13 ($ 0.03)
Weighted average shares outstanding used in per share calculation:
Basic 185,461 170,642
Diluted 222,889 170,642
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)
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
---------- ----------
Total revenue $ 487,958 $ 369,490
Operating costs and expenses:
Cost of goods sold 302,491 227,629
Research and development 93,797 70,029
Marketing and selling 33,625 26,222
General and administrative 15,493 13,635
Other operating expenses 1,581 11,853
---------- ----------
Total operating costs and expenses 446,987 349,368
---------- ----------
Income from operations 40,971 20,122
Other (expense) income:
Interest income 2,589 4,659
Interest expense (10,784) (20,944)
Loss in equity method investee (NOTE 3) (1,737) --
Other (expense) income, net (79) (57)
---------- ----------
Income before income taxes 30,960 3,780
---------- ----------
Income tax expense (NOTE 7) 393 129
---------- ----------
Net income $ 30,567 $ 3,651
========== ==========
Net income per share (NOTE 2):
Basic $ 0.17 $ 0.02
Diluted $ 0.16 $ 0.02
Weighted average shares outstanding used in per share calculation:
Basic 184,690 169,048
Diluted 210,369 174,752
See accompanying Notes to Condensed Consolidated Financial Statements.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
----------- ------------
Cash flows from operating activities:
Net income $ 30,567 $ 3,651
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 42,533 30,673
Intangible amortization 5,304 1,358
Deferred compensation amortization 5,955 3,425
Amortization 5,840 2,900
Loss in equity method investee 1,737 --
Loss on disposal of assets, net 327 1,166
Acquired in-process research and development -- 10,500
Other 203 (81)
Changes in operating assets and liabilities:
Accounts receivable, net (21,150) (5,787)
Inventories 532 (24,047)
Recoverable income taxes 6,330 4,545
Other assets (3,296) 297
Accounts payable and accrued liabilities 10,233 16,378
Other liabilities 2,863 (2,192)
--------- ---------
Net cash provided by operating activities 87,978 42,786
Cash flows from investing activities:
Purchase of capital equipment/leasehold improvements (27,757) (121,129)
Proceeds from maturities of securities available for sale 127,159 277,059
Purchase of securities available for sale (152,512) (192,723)
Purchase of businesses, net of cash received -- 27,737
Purchase of non-public investments (36,000) (30,000)
--------- ---------
Net cash used in investing activities (89,110) (39,056)
Cash flows from financing activities:
Proceeds from exercise of options 4,319 2,938
Proceeds from 1.50% convertible subordinated notes, net 224,781 --
Repurchase of 3.75% convertible subordinated notes (200,000) --
Repayment of capital lease obligations (474) (2,971)
--------- ---------
Net cash provided by financing activities 28,626 (33)
--------- ---------
Net increase in cash and cash equivalents 27,494 3,697
Effect of exchange rate changes on cash 105 30
Cash and cash equivalents at the beginning of the period 164,422 157,648
--------- ---------
Cash and cash equivalents at the end of the period $ 192,021 $ 161,375
========= =========
Non-cash investing and financing activities:
Stock issued in connection with business combinations, net of cash received $ -- $ 133,019
Jazz investment payable -- 30,000
Other comprehensive income (loss), net of tax 370 (1,993)
Issuance of restricted stock as deferred compensation 3,542 5,604
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 income (loss) 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, for the purpose of the
Company's quarterly and annual filings, the Company describes its fiscal year as
ending on March 31 and the first, second, and third quarters as ending June 30,
September 30 and December 31, respectively. Fiscal 2004 is a 53-week fiscal year
and thus the third quarter ended December 31, 2003 includes 14 weeks compared to
13 weeks for the third quarter ended December 31, 2002.
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 income (loss) and net income (loss) 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 income (loss) and net income (loss) 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ------------------------
2003 2002 2003 2002
------------------------------------------------------------------
Net income (loss), as reported $ 28,200 ($ 5,183) $ 30,567 $ 3,651
Non-cash stock-based compensation included
in net income (loss) 2,025 1,390 5,916 3,425
Pro forma stock-based compensation cost (14,214) (19,269) (49,137) (64,424)
----------- ---------- ----------- ----------
Pro forma net income (loss) $ 16,011 $(23,062) $(12,654) $(57,348)
=========== ========== =========== ==========
Basic net income (loss) per share, as reported $ 0.15 ($ 0.03) $ 0.17 $ 0.02
=========== ========== =========== ==========
Diluted net income (loss) per share, as reported $ 0.13 ($ 0.03) $ 0.16 $ 0.02
=========== ========== =========== ==========
Pro forma basic net income (loss) per share $ 0.09 ($ 0.14) ($ 0.07) ($ 0.34)
=========== ========== =========== ==========
Pro forma diluted net income (loss) per share $ 0.08 ($ 0.14) ($ 0.07) ($ 0.34)
=========== ========== =========== ==========
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. NET INCOME (LOSS) PER SHARE
The following table sets forth a reconciliation of the numerators and
denominators in the computation of basic and diluted net income (loss) per share
(in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Numerator for basic and diluted net income (loss)
per share:
Net income (loss) available to common shareholders $ 28,200 ($ 5,183) $ 30,567 $ 3,651
Plus: Income impact of assumed conversions
for interest on 1.50% convertible notes 1,059 -- 2,049 --
--------- --------- --------- ---------
Net income (loss) plus assumed conversion of notes-
Numerator for diluted $ 29,259 ($ 5,183) $ 32,616 $ 3,651
========= ========= ========= =========
Denominator for basic net income (loss) per share -
weighted average shares 185,461 170,642 184,690 169,048
Effect of dilutive securities:
Stock options 7,284 -- 5,608 5,704
Assumed conversion of 1.50%
convertible notes 30,144 -- 20,071 --
--------- --------- --------- ---------
Denominator for diluted net income (loss) per share
- - adjusted weighted average shares and assumed
conversions 222,889 170,642 210,369 174,752
========= ========= ========= =========
Basic net income (loss) per share $ 0.15 ($ 0.03) $ 0.17 $ 0.02
========= ========= ========= =========
Diluted net income (loss) per share $ 0.13 ($ 0.03) $ 0.16 $ 0.02
========= ========= ========= =========
In the computation of diluted net income per share for the three months ended
December 31, 2003 and the nine months ended December 31, 2003 and 2002,
outstanding stock options to purchase approximately 12.0 million shares, 14.0
million shares and 12.1 million shares, respectively, were excluded because the
exercise price of the options was greater than the average market price of the
underlying common stock and the effect of their inclusion would have been
anti-dilutive. In the computation of diluted net loss per share for the three
months ended December 31, 2002, all outstanding stock options and warrants were
excluded because the effect of their inclusion would have been anti-dilutive.
The computation of diluted net income (loss) per share for three months and nine
months ended December 31, 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 computation assumed the conversion
of the Company's 1.50% convertible subordinated notes due 2010 for the three
months and nine months ended December 31, 2003. The 3.75% notes are convertible
at a price of $45.085 per share, and the closing price of the Company's common
stock on the date it committed to sell the notes was $35.50. The 1.50% notes are
convertible at a price of $7.63 per share, and the closing price of the
Company's common stock on the date it committed to sell the notes was $5.78.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. INVESTMENTS
In the first quarter of fiscal 2004, the Company made a $4.0 million equity
investment in a privately held company as a part of a strategic relationship
with this leading provider of low-power, highly integrated radio frequency
communications system components for the global BLUETOOTH(R) wireless market.
This investment represented less than a 20% ownership stake. The Company did not
have the ability to exercise significant influence over the management of the
investee company, therefore, the investment was carried at its original cost and
accounted for using the cost method of accounting for investments in accordance
with Accounting Principles Board Opinion No. 18, (APB 18) "The Equity Method of
Accounting for Investments in Common Stock."
During the third quarter of fiscal 2004, the Company made an additional $2.0
million equity investment in this privately held company. The additional
investment increased the Company's ownership stake to greater than 20%. In
accordance with APB 18 the Company re-evaluated its ownership interest and
determined that the additional investment triggered a change in accounting for
the investment from the cost method to the equity method and the Company adopted
this method in the third quarter of fiscal 2004. As required by APB 18, the
investment and results of operations for the prior periods presented by the
Company were adjusted retroactively and have been restated to reflect the
application of the equity method.
Application of the equity method resulted in an equity method loss in the
investee company of $1.7 million for the nine months ended December 31, 2003. Of
the $1.7 million loss, $0.8 million was recognized in the third quarter, $0.8
million in the second quarter and $0.1 million in the first quarter of fiscal
2004. Pursuant to APB 18, the Company consistently uses a one month lag in
reporting its proportionate share of the financial results of the investee
because the information is not timely available. The losses in the first and
second quarters of fiscal 2004 were recognized retroactively. The net (loss) per
basic and diluted share for the first quarter of fiscal 2004 would have been
$(0.04) and $(0.04), respectively, and the net income per basic and diluted
share for the second quarter of fiscal 2004 would have been $0.06 and $0.05,
respectively.
4. 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):
DECEMBER 31, MARCH 31,
2003 2003
---------- ----------
Raw materials $ 14,270 $ 15,942
Work in process 26,060 30,174
Finished goods 36,865 29,672
---------- ----------
77,195 75,788
Inventory reserve (20,140) (18,007)
---------- ----------
Total inventories $ 57,055 $ 57,781
---------- ----------
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. LONG-TERM DEBT
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. During the second
quarter, the Company used a portion of the proceeds to repurchase $200.0 million
of the $300.0 million aggregate principal amount of its 3.75% convertible
subordinated notes due 2005. In the second quarter of fiscal 2004, the Company
recorded a non-cash charge of $2.6 million related to the write-off of
unaccreted discounts and unamortized issuance costs upon early extinguishment of
these 3.75% convertible subordinated notes.
The Company's 3.75% convertible subordinated notes had a fair value of $99.5
million and the 1.50% convertible subordinated notes had a fair value of $353.1
million as of December 31, 2003, on the Private Offerings, Resale and Trading
Through Automated Linkages (PORTAL) Market.
6. OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive 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 income, net
of tax, are as follows for the periods presented (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ---------------------
2003 2002 2003 2002
-------------------- ---------------------
Net income (loss) $28,200 ($5,183) $30,567 $ 3,651
Comprehensive income, net of tax
Change in fair value of cash flow hedge -- 521 -- (1,752)
Reclassification of realized loss on
cash flow hedge -- 7,755 -- 7,755
Unrealized gain (loss) on marketable securities 110 10 186 (316)
Foreign currency translation gains 131 37 184 75
------- ------- ------- -------
Comprehensive income, net of tax $28,441 $ 3,140 $30,937 $ 9,413
======= ======= ======= =======
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. INCOME TAXES
Income tax expense for the third quarter of fiscal 2004 was $0.1 million and
$0.4 million for the nine months ended December 31, 2003, representing foreign
income taxes on international operations. The effective combined domestic income
tax rate was 0% for both the third quarter of fiscal 2004 and the third quarter
of fiscal 2003. The Company's overall tax rate for the third quarter of fiscal
2004 differed from the statutory rate due to adjustments to the valuation
allowance primarily related to the partial recognition of the U.S. tax benefits
from the domestic net operating losses, tax credits, rate differences on foreign
transactions, and other differences between book and tax treatment of certain
expenditures. The Company's overall tax rate for the third quarter of fiscal
2003 differed from the statutory rate due to adjustments to the valuation
allowance primarily related to the non-recognition of the U.S. tax benefits from
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 December 31, 2003, the Company had outstanding net operating loss
carryforwards (NOLs) for federal domestic tax purposes of approximately $43.7
million, which will expire in years 2022-2024, if unused, and state tax losses
of approximately $60.7 million, which will expire in years 2009-2024, 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 $13.2 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.
8. COMMITMENTS
JAZZ SEMICONDUCTOR STRATEGIC RELATIONSHIP
The Company entered into a strategic relationship with Jazz Semiconductor, Inc.
(Jazz) in October 2002. The Company will collaborate with Jazz on joint
semiconductor process development and the optimization of these semiconductor
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 the third quarter of fiscal 2003 and $30.0 million of which was
invested in the third quarter of fiscal 2004.
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
December 31, 2003. The equipment had a book value of $12.7 million at December
31, 2003. On January 23, 2002, Agere announced that it was seeking a buyer for
its Orlando wafer fabrication operation. As a result of this announcement and
the related uncertainty concerning the future of Agere's Orlando facility, the
parties suspended further performance under the agreements. The Company does not
intend to make any additional investments in equipment under this arrangement.
The Company recently began negotiations with representatives of Agere in order
to attempt to resolve all remaining issues between the parties under the
alliance documents. As part of this process, the Company is currently exploring,
among other things, the possibility of leasing the equipment to Agere as well as
the possibility of using Agere as either a primary or secondary source of supply
for certain silicon products. The Company currently expects that these issues
will be resolved in the fourth quarter of fiscal 2004, however, the Company
currently cannot predict the outcome of our negotiations with Agere or the
impact of such outcome on our financial statements.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
9. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the 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.
Effective December 24, 2003, the FASB issued Staff Position FIN 46R that defers
the application of this Interpretation to interests in potential VIEs, if the
VIE was created prior to February 1, 2003 and the Company has not issued
financial statements reporting interests in VIEs in accordance with FIN 46 until
the end of periods ending after March 15, 2004.
For the promotion of strategic business objectives, the Company invests in and
enters into arrangements with entities that 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 fourth quarter of fiscal 2004 as
required by FIN 46R. Provided that the Company is not determined to be 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 with respect 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.
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 improving yields,
implementing innovative technologies and increasing capacity
utilization;
o Dependence on third parties including wafer foundries, passive
component manufacturers, assembly and packaging suppliers, and test,
tape and reel suppliers;
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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
Revenue 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of goods sold 58.3 62.7 62.0 61.6
Research and development 16.5 16.8 19.2 19.0
Marketing and selling 6.2 6.2 6.9 7.1
General and administrative 3.0 3.2 3.2 3.7
Other operating expenses 0.3 7.2 0.3 3.2
------ ------ ------ ------
Total operating costs and expenses 84.3 96.1 91.6 94.6
------ ------ ------ ------
Income from operations 15.7 3.9 8.4 5.4
Other (expense) income:
Interest income 0.5 0.8 0.5 1.3
Interest expense (1.1) (8.2) (2.2) (5.7)
Loss in equity method investee (0.4) -- (0.4) --
Other, net (0.1) (0.1) -- --
------ ------ ------ ------
Income (loss) before income taxes 14.6 (3.6) 6.3 1.0
Income tax expense -- -- -- --
------ ------ ------ ------
Net income (loss) 14.6% (3.6)% 6.3% 1.0%
====== ====== ====== ======
REVENUE
Revenue for the third quarter of fiscal 2004 increased 32.3% to $193.0 million,
compared to $145.8 million for the same quarter in fiscal 2003. For the nine
months ended December 31, 2003, revenue increased 32.1% to $488.0 million,
compared to $369.5 million for the same period in fiscal 2003. The increases
year over year reflect strong growth in demand from cellular handset
manufacturers and market share gains for our power amplifier products.
Additionally, the third quarter of fiscal 2004 contained 14 weeks as compared to
13 weeks for the third quarter of fiscal 2003. Revenues increased year over year
despite continued pressure on average selling prices. Revenue growth to multiple
customers continues to diversify our customer base, as we added a third customer
representing greater than 10% of our revenues in the third quarter of fiscal
2004.
We expect revenue growth to come from all the current- and next-generation air
interface standards, such as Code Division Multiple Access (CDMA), CDMA-1X,
Wideband Code Division Multiple Access (WCDMA), Global System for Mobile
Communications (GSM), General Packet Radio Service (GPRS), and Enhanced Data
rates for GSM Evolution (EDGE). The end market for handsets based on Time
Division Multiple Access (TDMA) is decreasing as major cellular network
operators in certain geographies convert their infrastructure to GSM/GPRS/EDGE
networks.
International shipments were $158.6 million and accounted for 82.2% of revenue
in the third quarter of fiscal 2004, compared to $121.7 million, or 83.5% of
revenue, in the third quarter of fiscal 2003. For the nine months ended December
31, 2003 international shipments were $400.1 million, or 82.0% of revenue, up
from $290.6, or 78.6% of revenue for the nine months ended December 31, 2002.
The international sales increase was primarily attributable to sales to
customers located in Asia which totaled $118.0 million, or 61.1% of revenue, for
the third quarter of fiscal 2004, compared to $87.4 million, or 59.9% of
revenue, for the third quarter of fiscal 2003. Year-to-date shipments to Asia
totaled $279.1 million, or 57.2% of revenue in fiscal 2004, and $195.4 million,
or 52.9% of revenue in fiscal 2003. This increase in sales to Asia reflects a
shift in our original equipment manufactures (OEMs) customer's reliance on
internal sources for manufacturing and production of handsets to original design
manufacturing companies (ODMs) to provide value-added services such as handset
design and the subsequent manufacture of such handsets.
GROSS PROFIT
Gross profit for the three months ended December 31, 2003 increased to $80.4
million or 41.7% of revenue, compared to $54.4 million or 37.3% of revenue in
the third quarter of the prior year. For the nine months ended December 31,
2003, gross profit increased to $185.5 million or 38.0% of revenue, compared to
$141.9 million or 38.4% of revenue for the nine months ended December 31, 2002.
The gross profit percentage increase in the third quarter of fiscal 2004
compared to the same quarter in fiscal 2003 was primarily due to our cost
reduction efforts consisting of test and assembly yield improvements, material
cost reductions, reduction in the cost to assemble our products, capacity
utilization and cost savings from our conversion from a four-inch to a six-inch
gallium arsenide (GaAs) wafer fabrication facility. These positive factors more
than offset a reduction in our average gross profit percentage from a product
mix shift from higher margin MMICs to modules. The gross profit percentage
decreased for the nine months ended December 31, 2003 compared to the nine
months ended December 31, 2002 as we continued to shift our product mix from
MMICs to modules. Module sales for the nine months ended December 31, 2003
represented 76% of our revenue compared to 55% for the nine months ended
December 31, 2002. Our year to date gross profit percentage was partially offset
by cost reduction efforts, some of which are described below.
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
to pressure gross profit margin. We also expect the product mix changes from
TDMA to GSM to additionally pressure our gross margin as major cellular network
operators in certain geographies convert their infrastructure. However, we have
multiple cost reduction efforts underway intended to improve our gross profit
margin, including continued ramp in utilization of our six-inch wafer
fabrication facility, utilizing our strategic relationship with Jazz
Semiconductor 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 (R&D) expenses in the third quarter of fiscal 2004 were
$31.9 million, or 16.5% of revenue, compared to $24.4 million, or 16.8% of
revenue, in the third quarter of fiscal 2003. For the nine months ended December
31, 2003, research and development expenses were $93.8 million or 19.2% of
revenue, compared to $70.0 million, or 19.0% of revenue for the same period in
fiscal 2003. The absolute dollar 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. The year over year R&D investment
increases are also focused on product development related to our POLARIS(TM)
family of cellular transceivers, wireless local area network (WLAN) products,
next generation power amplifiers, global positioning system (GPS) and
infrastructure products. Our spending also includes research expenses for
semiconductor process technologies related to gallium arsenide (GaAs), silicon,
and gallium nitride (GaN). 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 third quarter of fiscal 2004 were $11.9
million or 6.2% of revenue, compared to $9.1 million, or 6.2% of revenue for the
third quarter of fiscal 2003. For the nine months ended December 31, 2003,
marketing and selling expenses increased to $33.6 million or 6.9% of revenue,
compared to $26.2 million, or 7.1% of revenue for the nine months ended December
31, 2002. 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. The year
over year increases were partially offset by a decrease in commission expense in
fiscal 2004 compared to fiscal 2003, which 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.
Additionally, with the rapid expansion of the handset market in Asia, we plan to
continue to expand our sales and applications support throughout this region, as
required, to service our growing customer base.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended December 31, 2003 were
$5.7 million or 3.0% of revenue, compared to $4.7 million or 3.2% of revenue for
the quarter ended December 31, 2002. For the nine months ended December 31,
2003, general and administrative expenses were $15.5 million or 3.2% of revenue,
compared to $13.6 million or 3.7% of revenue in the same period last fiscal
year. The year over year increases in absolute dollars were due to increased
headcount and related personnel expenses including salaries, and benefits, bank
charges for letters of credit expenses related to our expanded business in Asian
markets, increased directors' compensation cost and expenses related to the
appointment of two new board members, increase in premiums related to key
employee insurance and increased legal and audit fees related to our compliance
with the Sarbanes-Oxley Act of 2002 and business operations in China. 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 third quarter of fiscal 2004 was $0.5 million,
compared to $10.5 million in the prior year period. For the nine months ended
December 31, 2003, other operating expense was $1.6 million, compared to $11.9
million for the same period in fiscal 2003. Other operating expense for the
three and nine months ended December 31, 2003 was comprised of depreciation
expense for assets held and used related to the Agere facility. Other operating
expense in the third quarter of the prior year was comprised of Resonext-related
acquired in-process research and development. Other operating expense for the
nine months ended December 31, 2002 includes the Resonext-related acquired
in-process research and development and the 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 supports
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
based 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 acquired
in-process research and development. The projected net cash flows obtained
through this analysis were discounted using a present value factor of 19%.
The first and second-generation product efforts have been discontinued, and,
accordingly, no additional expenditures will occur for these projects. We
currently expect to use technology derived from these initial development
efforts in combination with our other technologies to develop products that have
higher levels of product integration and are responsive to market requirements.
INTEREST EXPENSE
Interest expense was $2.2 million for the three months ended December 31, 2003,
compared to $12.0 million for the third quarter of the prior year. Interest
expense for the nine months ended December 31, 2003 and 2002 was $10.8 million
and $20.9 million, respectively. The quarter over quarter decline in interest
expense is attributable to $7.8 million of expense in the third quarter of
fiscal 2003 related to the retirement of an interest rate swap compared to zero
impact in fiscal 2004. The quarter over quarter is also impacted positively by
approximately $1.0 million in lower interest due to the repurchase of $200.0
million of our $300.0 million 3.75% convertible subordinated notes and issuance
of $230.0 million 1.5% convertible subordinated notes in the second quarter of
fiscal 2004. The year over year decline in interest expense is additionally
attributable to $7.8 million of expense in the third quarter of fiscal 2003
related to the retirement of an interest rate swap and decreased interest
expense in the first nine months of fiscal 2004 that resulted from the
retirement of the interest rate swap. The decrease is partially offset by a
non-cash charge for unaccreted discounts and unamortized issuance cost of $2.6
million related to the early extinguishment of $200.0 million principal amount
of our 3.75% convertible subordinated notes.
LOSS IN EQUITY METHOD INVESTEE
In the first quarter of fiscal 2004, we made a $4.0 million equity investment in
a privately held company. This investment represented less than 20% ownership
stake. Because we did not have the ability to exercise significant influence
over the management of the investee company, therefore, the investment was
carried at its original cost and accounted for using the cost method of
accounting for investments in accordance with Accounting Principles Board
Opinion No. 18 (APB 18), "The Equity Method of Accounting for Investments in
Common Stock."
During the third quarter of fiscal 2004, we made an additional $2.0 million
equity investment in this private company. The additional investment increased
our ownership stake to greater than 20%. In accordance with APB 18, we
re-evaluated our ownership interest and determined that the additional
investment triggered a change in accounting for the investment from the cost
method to the equity method and we adopted this method in the third quarter of
fiscal 2004. As required by APB 18, the investment and results of operations for
the prior periods presented by us were adjusted retroactively and have been
restated to reflect the application of the equity method.
Application of the equity method resulted in an equity method loss in the
investee company of $1.7 million for the nine months ended December 31, 2003. Of
the $1.7 million loss, $0.8 million was recognized in the third quarter, $0.8
million in the second quarter and $0.1 million in the first quarter of fiscal
2004. The losses in the first and second quarters of fiscal 2004 were recognized
retroactively.
INCOME TAX
Income tax expense for the three months and nine months ending December 31, 2003
was $0.1 million and $0.4 million, respectively, representing foreign income
taxes on international operations. The effective combined domestic income tax
rate was 0.0% for the third quarter of fiscal 2004 and 0.0% for the third
quarter of fiscal 2003. Our effective tax rate was 1.3% for the nine months
ended December 31, 2003 compared to 3.4% for the same period in fiscal 2003. Our
overall tax rate for the three months and nine months ended December 31, 2003
differed from the statutory rate due to adjustments to the valuation allowance
primarily related to the partial recognition of the US tax benefits on the
domestic net operating losses, tax credits, rate differences on foreign
transactions, and other differences between book and tax treatment of certain
expenditures. Our overall tax rate for the three months and nine months ended
December 31, 2002 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 December 31, 2003, we had outstanding NOLs for federal domestic tax purposes
of approximately $43.7 million, which will expire in years 2022-2024, if unused,
and state losses of approximately $60.7 million, which will expire in years
2009-2024, if unused. Included in the amounts above are certain NOLs 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 $13.2 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 December 31, 2003, our working
capital was $404.0 million, including $192.0 million in cash and cash
equivalents, compared to working capital at March 31, 2003 of $315.1 million.
Operating activities for the first nine months of fiscal 2004 generated $88.0
million in cash, compared to $42.8 million in the first nine months of fiscal
2003. This year over year increase was primarily attributable to a year over
year increase in net income of $26.9 million and changes in inventory as cash
used decreased $24.6 million. Fiscal 2003 included planned inventory build-up
for forecasted demand and delivery schedules as well as in-transit inventory
required to stock the production line at our test, tape and reel facility in
Beijing, China. During fiscal 2004, we continued to focus on inventory
management and supply chain cycle improvements. Our inventory turns increased to
7.3 turns for the third quarter of fiscal 2004 compared to 5.8 turns for the
third quarter of fiscal 2003. Cash used in accounts receivable increased to
$21.1 million for the first nine months of fiscal 2004, compared to $5.8 million
in the first nine months of fiscal 2003 due to an increase in revenue year over
year of 32.1% while maintaining an average collection period of 44.2 days in
fiscal 2004 compared to 38.5 days in fiscal 2003, an increase of 15% year over
year, which partially offset the inventory decrease. Adjustments to reconcile
net income for non-cash operating items increased cash provided from operating
activities by $12.0 million year over year, due primarily to increased
depreciation and amortization expense in fiscal 2004.
Net cash used in investing activities for the nine months ended December 31,
2003 was $89.1 million, compared to $39.0 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 $127.2 million compared to
$277.1 million in fiscal 2003. The lower proceeds were offset by a $93.4 million
decrease in spending on capital equipment compared to fiscal 2003, which
included the buyout of the synthetic lease assets for $84.5 million.
Additionally in fiscal 2003, we entered into a strategic relationship with Jazz
that required us 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 paid the
remaining $30.0 million in the third quarter of fiscal 2004.
Net cash provided by financing activities for the nine months ended December 31,
2003 was $28.6 million, compared to cash used of $0.03 million for the nine
months ended December 31, 2002. The year over year increase in cash provided was
due to the private placement of $230.0 million aggregate principal amount of
1.50% convertible subordinated notes due 2010. 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. The net proceeds from the 1.50%
offering were offset by the repurchase of $200.0 million principal amount of our
$300.0 million 3.75% convertible subordinated notes due 2005.
COMMITMENTS
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 December 31, 2003. The equipment had a book value of
$12.7 million at December 31, 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. As a result of this announcement and the related
uncertainty concerning the future of Agere's Orlando facility, the parties
suspended further performance under the agreements. We do not intend to make any
additional investments in equipment under this arrangement. We recently began
negotiations with representatives of Agere in order to attempt to resolve all
remaining issues between the parties under the alliance documents. As part of
this process, we are currently exploring, among other things, the possibility of
leasing the equipment to Agere as well as the possibility of using Agere as
either a primary or secondary source of supply for certain silicon products. We
currently expect that these issues will be resolved in the fourth quarter of
fiscal 2004, however, we currently cannot predict the outcome of our
negotiations with Agere or the impact of such outcome on our financial
statements.
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 $200.0 million to repurchase a portion of our
3.75% convertible subordinated notes due 2005 in the second quarter of fiscal
2004, 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 1.50% convertible subordinated notes due
2010.
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. During the second quarter
of fiscal 2004, we repurchased $200.0 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. As of
December 31, 2003, we expect to pay interest of $1.9 million on the remaining
$100.0 million convertible subordinated notes, which has not been paid. During
fiscal 2004, we have already made a semi-annual interest payment of $4.9 million
on these notes, some of which was related to the repurchased notes and
semi-annual payment.
CAPITAL COMMITMENTS At December 31, 2003, we had long-term capital commitments
of approximately $12.6 million, consisting of approximately $1.4 million for
equipment related to the six-inch wafer conversion project, approximately $2.4
million for our molecular beam epitaxy facility due to volume demands,
approximately $4.6 million for equipment in our Beijing, China facility, 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 from 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. CONTROLS 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 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 December 31, 2003, the Company furnished or filed the
following reports on Form 8-K:
On October 21, 2003, we furnished a Form 8-K under Item 12 to disclose a press
release announcing our results for the fiscal 2004 second quarter ended
September 30, 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.
Date: February 17, 2004
/S/ WILLIAM A. PRIDDY, JR.
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WILLIAM A. PRIDDY, JR.
Chief Financial Officer and
Corporate Vice President of Administration
Date: February 17, 2004
/S/ BARRY D. CHURCH
--------------------------
BARRY D. CHURCH
Vice President and Corporate Controller
(Principal Accounting Officer)
EXHIBIT INDEX
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.