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 July 3, 2004
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
- ------------------------------------------ -----------------
(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) (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
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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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As of July 30, 2004, there were 186,623,901 shares of the registrant's
common stock outstanding.
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, 2004
and March 31, 2004............................................3-4
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2004 and 2003.......................5
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 2004 and 2003.....................6-7
Notes to Condensed Consolidated Financial Statements............8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................16
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..............................22
-2-
PART I - FINANCIAL INFORMATION
ITEM 1.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, March 31,
2004 2004
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 191,537 $ 220,915
Short-term investments 142,121 106,930
Accounts receivable, net of allowances of
$1,592 at June 30, 2004 and $1,547 at
March 31, 2004 81,735 86,287
Inventories 68,162 58,552
Prepaid expenses 3,904 3,854
Other current assets 6,598 6,244
---------- ----------
Total current assets 494,057 482,782
Property and equipment, net of accumulated
depreciation of $190,426 at June 30, 2004
and $179,492 at March 31, 2004 280,334 280,356
Goodwill 114,806 110,006
Long-term investments 59,609 59,739
Intangible assets, net of amortization of
$14,570 at June 30, 2004 and $12,952
At March 31, 2004 51,929 50,165
Investment in equity method investee -- 3,169
Other non-current assets 1,897 1,799
---------- ----------
Total assets $1,002,632 $ 988,016
========== ==========
Liabilities and
shareholders' equity
Current liabilities:
Accounts payable $ 41,977 $ 33,465
Accrued liabilities 22,663 22,206
Current obligations under capital leases 192 213
---------- ----------
Total current liabilities 64,832 55,884
Long-term debt, net of unamortized discount
of $5,057 at June 30, 2004 and $5,374 at
March 31, 2004 324,943 324,626
Obligations under capital leases,
less current portion 31 60
Other long-term liabilities 4,403 4,308
---------- ----------
Total liabilities 394,209 384,878
-3-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
June 30, March 31,
2004 2004
------------- -------------
(Unaudited)
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; 186,507 and 186,257 shares
issued and outstanding as of June 30, 2004
and March 31, 2004, respectively 449,666 448,942
Additional paid-in capital 76,957 76,957
Deferred compensation (12,578) (14,442)
Accumulated other comprehensive
income, net of tax 183 499
Retained earnings 94,195 91,182
---------- ----------
Total shareholders' equity 608,423 603,138
---------- ----------
Total liabilities and
shareholders' equity $1,002,632 $ 988,016
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
-4-
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,
2004 2003
----------- -----------
Revenue $ 165,774 $ 131,521
Operating costs and expenses:
Cost of goods sold 100,887 90,283
Research and development 35,346 31,335
Marketing and selling 11,132 10,297
General and administrative 5,836 4,552
Other operating expenses 6,603 527
---------- ----------
Total operating costs and expenses 159,804 136,994
Income (loss) from operations 5,970 (5,473)
Interest expense (2,148) (3,478)
Interest income 1,053 877
Loss in equity method investee (1,761) (138)
Other (expense) income, net (96) 139
---------- ----------
Income (loss) before income taxes 3,018 (8,073)
Income tax expense (5) (149)
---------- ----------
Net income (loss) $ 3,013 $ (8,222)
========== ==========
Net income (loss) per share:
Basic $ 0.02 $ (0.04)
Diluted $ 0.02 $ (0.04)
Shares used in per share calculation:
Basic 186,397 184,032
Diluted 191,166 184,032
See accompanying Notes to Condensed Consolidated Financial Statements.
-5-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
------------------------------
JUNE 30, JUNE 30,
2004 2003
------------------------------
Cash flows from operating activities:
Net income (loss) $ 3,013 $ (8,222)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 14,071 13,943
Amortization 2,577 2,920
Acquired in-process research and
development cost 6,201 --
Loss (gain) on disposal of assets 569 (123)
Loss from equity method investee 1,761 138
Amortization of deferred compensation 1,864 1,751
Other 12 178
Changes in operating assets and liabilities:
Accounts receivable 4,659 2,793
Inventories (9,373) (2,676)
Prepaid expense and other current and
non-current assets 300 (373)
Accounts payable and accrued liabilities 3,973 2,886
Recoverable income tax -- 6,329
Other liabilities (225) 3,538
--------- ---------
Net cash provided by operating activities 29,402 23,082
Investing activities:
Purchase of property and equipment (13,243) (10,154)
Purchase of securities available-for-sale (69,386) (58,068)
Proceeds from maturities of securities available-
For-sale 33,325 48,800
Purchase of business, net of cash received (10,133) --
--------- ---------
Net cash used in investing activities (59,437) (19,422)
Financing activities:
Proceeds from exercise of stock options,
warrants and employee stock purchases 724 194
Repayment of capital lease obligations (59) (365)
--------- ---------
Net cash provided by (used in) financing
activities 665 (171)
-6-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
(Unaudited)
THREE MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
2004 2003
------------------------------
Net (decrease) increase in cash and cash
equivalents (29,370) 3,489
Effect of exchange rate changes on cash (8) 45
Cash and cash equivalents at beginning of year 220,915 164,422
--------- ---------
Cash and cash equivalents at end of year $ 191,537 $ 167,956
========= =========
Non-cash investing and financing activities:
Non-cash stock purchase for assets $ -- $ 842
Currency translation change, net of tax 11 60
Available-for-sale investment equity change,
net of tax (327) (38)
See accompanying Notes to Condensed Consolidated Financial Statements.
-7-
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 2004 amounts have been reclassified to conform to fiscal
2005 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, 2004.
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 reports information as one operating segment
in accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131).
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 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 following information
-8-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
required by SFAS 123 as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure" (SFAS 148).
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
JUNE 30,
--------------------------
2004 2003
--------------------------
Net income (loss), as reported $ 3,013 $ (8,222)
Non-cash stock-based compensation included in
net income (loss) 1,864 1,751
Pro forma stock-based compensation cost (11,922) (17,007)
--------- ---------
Pro forma net loss $ (7,045) $ (23,478)
========= =========
Basic net income (loss) per share, as reported $ 0.02 $ (0.04)
Diluted net income (loss) per share, as reported $ 0.02 $ (0.04)
Pro forma basic net loss per share $ (0.04) $ (0.13)
Pro forma diluted net loss per share $ (0.04) $ (0.13)
-9-
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
JUNE 30,
----------------------------
2004 2003
----------------------------
Numerator for basic and diluted net
income (loss) per share:
Net income (loss) $ 3,013 $ (8,222)
Denominator for basic net income (loss)
per share - weighted average shares 186,397 184,032
Effect of dilutive securities:
Stock options and warrants 4,769 --
--------- ---------
Denominator for diluted net income (loss)
per share - adjusted weighted average
shares and assumed conversions 191,166 184,032
========= =========
Basic net income (loss) per share $ 0.02 $ (0.04)
========= =========
Diluted net income (loss) per share $ 0.02 $ (0.04)
========= =========
In the computation of diluted net income per share for the three months
ended June 30, 2004, 14.0 million shares of outstanding stock options
were excluded because the effect of their inclusion would have been anti-
dilutive. In the computation of diluted net loss per share for the three
months ended June 30, 2003, all outstanding stock options were excluded
because the effect of their inclusion would have been anti-dilutive. The
computation of diluted net income (loss) per share for the three months
ended June 30, 2004 and 2003 did not assume the conversion of the
Company's 3.75% convertible subordinated notes due 2005 because the
inclusion would have been anti-dilutive. On July 27, 2004, the Company
announced that it called for redemption on August 15, 2004, the remainder
of the outstanding 3.75% notes. As an alternative to redemption, holders
may convert these notes at a price of $45.09 per share, and the closing
price of the Company's common stock on July 27, 2004 was $5.92.
Accordingly, the Company expects all of the notes to be surrendered for
redemption. In addition, the computation of diluted net income (loss)
per share for the three months ended June 30, 2004 and 2003 did not
assume the conversion of the Company's 1.50% convertible subordinated
notes due 2010 because the inclusion would have been anti-dilutive. 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.
-10-
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,
2004 2004
------------- ------------
Raw materials $ 23,078 $ 17,876
Work in process 29,304 27,729
Finished goods 36,400 32,136
--------- ---------
88,782 77,741
Inventory reserve (20,620) (19,189)
--------- ---------
Total inventories $ 68,162 $ 58,552
========= =========
4. OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) for the Company consists of
accumulated unrealized losses on marketable securities and foreign
currency translation adjustments. This amount is included as a separate
component of shareholders' equity. The components of comprehensive
income (loss), net of tax, are as follows for the periods presented (in
thousands):
THREE MONTHS ENDED
JUNE 30,
------------------------
2004 2003
------------------------
Net income (loss) $ 3,013 $ (8,222)
Comprehensive income (loss):
Unrealized loss on marketable securities (327) (38)
Foreign currency 11 60
-------- --------
Comprehensive income (loss) $ 2,697 $ (8,200)
======== ========
5. INCOME TAXES
Income tax expense for the three months ended June 30, 2004 and June 30,
2003 was $0.01 million and $0.15 million, respectively, primarily
representing foreign income taxes on international operations. The
effective combined domestic income tax rate was 0% for the three months
ended June 30, 2004 and June 30, 2003. The Company's overall tax rate
for the three months ended June 30, 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 on 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 three months ended
June 30, 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 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.
-11-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. INCOME TAXES (continued)
At June 30, 2004, the Company had outstanding net operating loss
carryforwards (NOLs) for federal domestic tax purposes of approximately
$63.6 million, which will begin to expire in 2022, if unused, and state
losses of approximately $64.0 million, which will begin to expire in
2009, 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. and the close of
the Company's acquisition of Silicon Wave. 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 $19.8 million related to domestic operating losses
and credit carryforwards 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 and credits, in reaching its decision.
6. BUSINESS ACQUISITION
On May 24, 2004, the Company completed the acquisition of Silicon Wave,
Inc. ("Silicon Wave"), a privately held San Diego-based supplier of
highly integrated Bluetooth-Registered Trademark- solutions for wireless
personal area networks. As a result of the Silicon Wave acquisition, the
Company acquired all of the assets and liabilities of Silicon Wave,
including in-process research and development, and approximately 70
former Silicon Wave employees have joined the Company. Silicon Wave's
Bluetooth product portfolio includes integrated single-chip silicon CMOS
radio processors (including the radio modem and digital baseband
functions), as well as stand-alone CMOS radio modem solutions.
The Company paid approximately $16.8 million in cash for all outstanding
shares of Silicon Wave capital stock with available cash on hand.
Immediately prior to the closing of the acquisition, the Company sold all
of the shares of Silicon Wave that the Company had purchased during
fiscal 2004 to an existing Silicon Wave investor group for $6.0 million,
the Company's original cost for these shares. As a result, the Company
paid net cash consideration of $10.8 million for all Silicon Wave shares
not previously owned by the Company. In addition to the above-mentioned
payment, the Company agreed to pay earn-out consideration to the former
Silicon Wave stockholders upon achievement of certain revenue goals for
the period from April 4, 2004 to April 1, 2006. If the Company's revenue
derived from Silicon Wave products for the period from April 4, 2004 to
April 2, 2005 exceeds $6.0 million, it will pay an aggregate cash amount
equal to one-half of the revenue derived from Silicon Wave products
during this period. If the Company's revenue derived from Silicon Wave
products for the period from April 3, 2005 to April 1, 2006 exceeds $25.0
million, it will pay an additional aggregate cash amount equal to the
revenue derived from Silicon Wave products during this period up to a
maximum of $75.0 million. The Silicon Wave acquisition was accounted for
in accordance with APB Opinion No. 18 "The Equity Method of Accounting
for Investments in Common Stock" as a step acquisition and in accordance
with the Statement of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS 141), using the purchase method of accounting.
The Company has incurred direct acquisition costs related to the Silicon
Wave business combination of $0.3 million. The direct acquisition costs
of $0.3 million were accounted for as part of the Company's purchase
price allocation. These costs consist of legal, accounting and appraisal
fees. The direct costs of the business combination will be included in
the Company's purchase price allocation in accordance with SFAS 141. The
unaudited pro forma combined balance sheets give effect to such direct
costs as if they had been incurred as of March 31, 2004.
-12-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. BUSINESS ACQUISITION (continued)
The total purchase price components are as follows (in thousands):
Cash paid at closing $ 16,810
Transaction costs 315
-------
Total purchase price $ 17,125
=======
The total purchase price of $17.1 million was preliminarily allocated to
the assets acquired and liabilities assumed based on their fair values as
determined by the Company with the assistance of a third party valuation
specialist as of May 24, 2004, as follows (in thousands):
Current assets, including cash of $1.0
million 1,884
Property, plant and equipment 1,500
Other assets 173
Identifiable intangible assets:
Core and developed technology 3,339
In-process research & development 6,201
-------
Total assets acquired $ 13,097
Current liabilities assumed $ (5,363)
Adjustment of equity method investment $ 4,591
Resulting goodwill $ 4,800
-------
Total purchase price $ 17,125
=======
Of the $9.5 million of acquired identifiable intangible assets, $3.3
million represents the value of acquired core and developed technology
and $6.2 million represents the value of in-process research and
development cost that has no alternative future use (Note 7). The core
and developed technology assets acquired are being amortized over their
estimated useful lives of two and ten years and such amortization is
included in cost of goods sold. The acquired in-process research and
development with no alternative future use was charged to "other
operating expense" at the acquisition date in accordance with SFAS 141.
The $4.8 million allocated to goodwill represents the excess of the
purchase price over the fair value of assets acquired and liabilities
assumed. In accordance with Statement of Financial Accounting Standards
No. 142,"Goodwill and Other Intangible Assets", (SFAS 142) the goodwill
is not being amortized and will be evaluated for impairment on an annual
basis. Of the total amount of goodwill, none is expected to be
deductible for federal income tax purposes.
-13-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. BUSINESS ACQUISITION (continued)
The following unaudited pro forma consolidated financial information for
the three months ended June 30, 2004 and June 30, 2003 assumes that the
Silicon Wave acquisition, which was closed by the Company on May 24,
2004, was completed at the beginning of the periods presented below (in
thousands):
Three Months Ended
---------------------------------
June 30, 2004 June 30, 2003
--------------- ---------------
Revenue $ 166,034 $ 132,790
Net loss (1,891) (12,837)
Basic and diluted net loss per common share (0.01) (0.07)
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the operating results that would
have been achieved had the acquisition actually taken place at the
beginning of the periods presented above. In addition, these results are
not intended to be a projection of future results and do not reflect any
synergies that might be achieved from the combined operations.
7. GOODWILL AND INTANGIBLE ASSETS
During the first quarter of fiscal 2005, the Company acquired $3.3
million of core and developed technology as a result of the Silicon Wave
acquisition. This acquisition also resulted in a $4.8 million excess
purchase price over the fair value of the assets acquired and liabilities
assumed, which was allocated to goodwill.
The change in the carrying amount of goodwill for the three months ended
June 30, 2004 is as follows (in thousands):
June 30, 2004
-------------
Balance as of March 31, 2004 $ 110,006
Goodwill acquired during the period 4,800
----------
Balance as of June 30, 2004 $ 114,806
==========
The components of identifiable intangible assets are as follows (in thousands):
As of As of
June 30, 2004 March 31, 2004
---------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Technology licenses $ 11,756 $ 4,161 $ 11,714 $ 3,934
Acquired product technology
and other 54,742 10,408 51,403 9,018
-------- -------- -------- --------
Total $ 66,498 $ 14,569 $ 63,117 $ 12,952
======== ======== ======== ========
-14-
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Intangible asset amortization expense was $1.6 million and $1.9 million
for the three months ended June 30, 2004 and June 30, 2003, respectively.
Amortization expense for the Company's identifiable intangible assets as
of June 30, 2004 is estimated to be $4.9 million for the remainder of
fiscal 2005, $6.5 million in fiscal 2006, $6.4 million in fiscal 2007,
$5.6 million in fiscal 2008 and $5.6 million in fiscal 2009.
-15-
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:
- The rate of growth and development of wireless markets;
- The risks associated with the operation of our molecular beam epitaxy
(MBE) facility, our wafer fabrication facilities and our other foreign
and domestic manufacturing facilities;
- Our ability to attract and retain skilled personnel and develop
leaders for key business units and functions;
- Dependence on third parties, including wafer foundries, passive
component manufacturers, assembly and packaging suppliers and test,
tape and reel suppliers;
- The risks associated with the development of our own assembly
capabilities for module production packaging in Beijing, China;
- Variability in operating results;
- Variability in production yields, raw material costs and
availability;
- Dependence on a limited number of customers;
- Dependence on our gallium arsenide (GaAs) heterojunction bipolar
transistor (HBT) products;
- Our ability to reduce costs and improve margins in response to
declining average selling prices by implementing innovative technologies;
- Our ability to increase production capacity in a timely fashion in
response to increases in demand for our products;
- Our ability to bring new products to market in response to market shifts
and to use technological innovation to shorten time-to-market for our
products;
- Currency fluctuations, tariffs, trade barriers, taxes and export license
requirements and health and security issues associated with our foreign
operations; and
- 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.
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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,
-------------------------
2004 2003
----------- ----------
Revenue 100.0% 100.0%
Operating costs and expenses:
Cost of goods sold 60.9 68.7
Research and development 21.3 23.8
Marketing and selling 6.7 7.8
General and administrative 3.5 3.5
Other operating expenses 4.0 0.4
--------- ---------
Total operating costs and expenses 96.4 104.2
Income (loss) from operations 3.6 (4.2)
Other (expense) income:
Interest expense (1.3) (2.6)
Interest income 0.6 0.7
Loss in equity method investee (1.1) (0.1)
Other, net -- 0.1
--------- ---------
Income (loss) before income taxes 1.8 (6.1)
Income tax expense (0.0) (0.1)
--------- ---------
Net income (loss) 1.8% (6.2)%
========= =========
REVENUE
Revenue for the three months ended June 30, 2004 increased 26.0% to
$165.8 million, compared to $131.5 million for the three months ended
June 30, 2003. As expected, revenue from Global System for Mobile
Communications (GSM) and Code Division Multiple Access (CDMA) products
increased through market share gains in existing products and market
acceptance of new products for next-generation air interface standards,
such as Enhanced Data rates for GSM Evolution (EDGE) and Wideband CDMA.
These increases were partially offset by expected reductions in revenue
from Time Division Multiple Access (TDMA) products due to the continued
shift from TDMA to GSM as major cellular network operators in certain
geographical areas convert their infrastructure. In addition, the
Company's growth in wireless local area network (WLAN) was hindered by
significant erosion of average selling prices for WLAN components.
Additionally, silicon fabrication supply constraints for Bluetooth
products impacted revenue growth during the quarter ended June 30, 2004.
This supply constraint has been resolved for the foreseeable future.
International shipments were $131.1 million and accounted for 79.1% of
revenue for the three months ended June 30, 2004, compared to $109.2
million, or 83.1% of revenue, for the three months ended June 30, 2003.
The increase in international sales dollars was primarily attributable to
sales to customers located in Asia, which totaled $98.6 million, or 59.5%
of revenue, for the three months ended June 30, 2004, compared to $68.8
million, or 52.3% of revenue, for the three months ended June 30, 2003.
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GROSS PROFIT
Gross profit for the three months ended June 30, 2004 increased to $64.9
million, or 39.1% of revenue, compared to $41.2 million, or 31.4% of
revenue, for the three months ended June 30, 2003 and $60.9 million, or
37.3% of revenue, for the three months ended March 31, 2004. Margins
increased primarily due to yield improvements of our power amplifier
products, ongoing cost savings initiatives and increased capacity
utilization.
We have historically experienced significant fluctuations in gross profit
margins and, consequently, our operating results, and we expect such
fluctuations to continue. Gross margins are routinely affected by
average selling prices and cost of silicon components and other raw
materials. As a result, we will continue to focus on cost reduction
efforts, including (1) strategic supply relationships, such as Jazz
Semiconductor, Inc., which provides us with a committed, lower-cost
source of supply for silicon wafers, (2) achieving higher levels of
product integration, (3) successfully implementing test yield and
assembly improvement plans, such as investing in our own assembly
capabilities in Beijing, China, to obtain a lower overall cost structure
and other supply chain savings, and (4) increasing our capacity
utilization.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended June 30,
2004 were $35.3 million, or 21.3% of revenue, compared to $31.3 million,
or 23.8% of revenue, for the three months ended June 30, 2003. The
increase year over year was primarily attributable to increased headcount
and related personnel expenses including salaries and benefits. During
the first quarter of fiscal 2005, we acquired Silicon Wave, which
contributed in part to the increased headcount and related personnel
expenses. 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 three months ended June 30, 2004
were $11.1 million, compared to $10.3 million for the three months ended
June 30, 2003. The absolute dollar increase for the three months ended
June 30, 2004 compared to the three months ended June 30, 2003 was a
result of increased commissions from increased sales volume and the
acquisition of Silicon Wave. Marketing and selling expenses decreased as
a percentage of revenue to 6.7% for the three months ended June 30, 2004
compared to 7.8% for the three months ended June 30, 2003 as these
expenses grew at a slower rate than sales. 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 three months ended June 30,
2004 were $5.8 million, or 3.5% of revenue, compared to $4.6 million, or
3.5% of revenue, for the three months ended June 30, 2003. The year over
year increase in absolute dollars was primarily due to increased
headcount as well as increased legal and accounting fees related to our
compliance efforts associated with Section 404 of 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 three months ended June 30, 2004 were
$6.6 million, compared to $0.5 million in the prior year. Other
operating expense for the three months ended June 30, 2004 were primarily
comprised of the $6.2 million charge for acquired in-process research and
development associated with the Silicon Wave acquisition, for which the
Company determined, with the assistance of an independent valuation firm,
had no alternative future use. The Silicon Wave-related acquired in-
process research and development was charged to expense in accordance
with SFAS 141 during the three months ended June 30, 2004. 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
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shall be charged to expense at the merger date. The in-process research
and development was primarily related to a single-chip integrated circuit
built on 0.13-micron CMOS technology and designed for usage with mobile
phones. As of the valuation date, the fair value of the acquired in-
process research and development was estimated to be $6.2 million, based
on a discounted cash flow model. As of June 30, 2004, the estimated cost
to complete this project is approximately $7.9 million with an estimated
completion date during the calendar year of 2006.
Also included in other operating expense was $0.4 million related to
start-up costs associated with the expansion of the Company's test, tape
and reel facility in Beijing, China to add module assembly manufacturing
functions. The start-up costs have been expensed as incurred in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." The operating costs of the module assembly manufacturing
functions at the Beijing facility will be included in cost of goods sold
once the facility begins producing economic value from the plant
expansion. We currently expect this facility to achieve production
qualification in the fourth calendar quarter of 2004.
LOSS IN EQUITY METHOD INVESTEE
Prior to the Company's acquisition of Silicon Wave, the Company invested
an aggregate of $6.0 million in Silicon Wave in two installments during
fiscal 2004 as part of a broader strategic relationship between the
companies. During the first quarter of fiscal year 2004, the Company
made a $4.0 million investment which represented less than a 20%
ownership interest, and, because the Company did not have the ability to
exercise significant influence over the management of Silicon Wave, the
investment was carried at its original cost and accounted for using the
cost method of accounting for investments in accordance with APB Opinion
No. 18 "The Equity Method of Accounting for Investments in Common Stock"
(APB 18).
During the third quarter of fiscal 2004, the Company made an additional
$2.0 million equity investment in Silicon Wave. The additional
investment increased the Company's ownership interest to greater than
20%. In accordance with APB 18, the Company re-evaluated its ownership
interest and whether it had the ability to exercise significant influence
over the operation of Silicon Wave and determined that the additional
investment triggered a change in accounting for the investment from the
cost method to the equity method, which the Company adopted in the third
quarter of fiscal 2004. As required by APB 18, the investment and
results of operations for the prior periods presented 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 Silicon Wave of $1.8 million for the period from March 31,
2004 through May 24, 2004 (the closing date of the Silicon Wave
acquisition) and $0.1 for the three months ended June 30, 2003.
INCOME TAX
Income tax expense for the three months ended June 30, 2004 and June 30,
2003 was $0.01 million and $0.15 million, respectively, primarily
representing foreign income taxes on international operations. The
effective combined domestic income tax rate was 0% for the three months
ended June 30, 2004 and 0% for the three months ended June 30, 2003. Our
overall tax rate for the first quarter of fiscal 2005 differed from the
statutory rate due to adjustments to the valuation allowance primarily
related to the partial recognition of the U.S. 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 first quarter of
fiscal 2004 differed from the statutory rate due to adjustments to the
valuation allowance primarily related to the non-recognition of the U.S.
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, 2004, we had outstanding net operating loss carryforwards
(NOLs) for federal domestic tax purposes of approximately $63.6 million,
which will begin to expire in 2022, if unused, and state losses of
approximately $64.0 million, which will begin to expire in 2009, 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. and the close of our
acquisition of
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Silicon Wave. 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 $19.8 million related to domestic operating losses and credit
carryforwards 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 and credits 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 revenue from
product sales. Through public and Rule 144A securities offerings, we
have raised approximately $687.0 million, net of offering expenses. As
of June 30, 2004, our working capital was $429.2 million, including
$191.5 million in cash and cash equivalents, compared to working capital
at March 31, 2004 of $426.9 million.
Operating activities for the three months ended June 30, 2004 generated
$29.4 million in cash, compared to $23.1 million for the three months
ended June 30, 2003. This year over year increase was primarily
attributable to improved earnings, which were partially offset by an
increase in raw materials inventory. The increase in inventory resulted
from raw materials purchased for expected growth in GaAs-related product
revenue. Also, the inventory increase reflected the continued trend
towards increased silicon content in our product mix, which is caused by
significantly longer cycle times for silicon content than our traditional
GaAs content. Adjustments to reconcile net income (loss) for non-cash
operating items increased cash provided from operating activities by $8.2
million year over year due primarily to the write-off of the in-process
research and development cost which was recorded as a result of the
Silicon Wave acquisition.
Net cash used in investing activities for the three months ended June 30,
2004 was $59.4 million, compared to $19.4 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, increased
purchases of securities available-for-sale, and the acquisition of
Silicon Wave.
Net cash provided by financing activities for the three months ended June
30, 2004 was $0.07 million, compared to cash used of $0.02 million for
the three months ended June 30, 2003.
COMMITMENTS
Convertible Debt During fiscal 2004, we completed 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 of the
$300.0 million aggregate principal amount of our 3.75% convertible
subordinated notes due 2005 (the "Notes"). On July 27, 2004, the Company
announced that it called for redemption on August 15, 2004 the remainder
of the outstanding Notes. The aggregate principal amount outstanding of
the Notes is $100.0 million. The Notes will be redeemed at a redemption
price of 100.0% of the principal amount of the Notes, plus accrued and
unpaid interest to, but excluding the redemption date. As an alternative
to redemption, prior to close of business on August 13, 2004, holders may
convert their Notes into shares of the Company's common stock at a price
of $45.09 per share, or 22.18 shares of the Company's common stock per
$1,000 principal amount of the Notes. Cash will be paid in lieu of
fractional shares. On July 27, 2004, the closing price of the Company's
common stock on the Nasdaq was $5.92 per share and accordingly, the
Company expects all of the Notes to be surrendered for redemption. We
currently expect to retire these Notes with cash flow from operations and
cash on hand. Our interest expense will decrease by $3.75 million over
the next 12 months as a result of this redemption.
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Capital Commitments At June 30, 2004, we had long-term capital
commitments of approximately $35.9 million, consisting of approximately
$11.3 million for the expansion of our wafer fabrication facilities,
approximately $9.5 million for equipment related to our molecular beam
epitaxy facility, approximately $9.0 million for our investment in
assembly capabilities as we continue to develop an internal manufacturing
process for module production packaging in Beijing, China, approximately
$1.2 million for equipment related to our U.S. and Beijing, China, test,
tape and reel facilities, and the remainder for general corporate
requirements.
Future Sources of Funding 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 our
products, volume pricing concessions, capital improvements, demand for
our products, technological advances and our relationships with suppliers
and customers. Based on current and projected levels of cash flow from
operations, coupled with our most recent note offering, we believe that
we have sufficient liquidity to meet both our short-term and long-term
cash requirements. However, if there is a decrease in demand for our
products, or in the event that growth is faster than we anticipated,
operating cash flows may be insufficient to meet our needs. If existing
resources and cash from operations are not sufficient to meet our future
requirements or if we perceive conditions to be favorable, we may seek
additional debt or equity financing, additional credit facilities or
obtain asset-based financing. We maintain 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, however, currently have any
plans to issue any securities under this registration statement. We
cannot be sure that any additional equity or debt 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, 2004.
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 Company's last fiscal quarter that
have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger among RF Micro Devices,
Inc., Deere Merger Corp. and Silicon Wave, Inc.,
dated as of April 21, 2004. The Company hereby
undertakes, pursuant to Item 601 (b)(2) of Regulation
S-K, to furnish supplementally to the SEC upon
request a copy of the Voting Agreement (EXHIBIT B)
and the Schedule of Exceptions. (1)
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.
(1) Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed June 8, 2004.
(b) Reports on Form 8-K
During the quarter ended June 30, 2004, the Company furnished or filed
the following reports on Form 8-K:
On June 8, 2004, the Company filed a Form 8-K to disclose pursuant to
Item 2, the completion of its acquisition of Silicon Wave, Inc.
On April 27, 2004, the Company furnished a Form 8-K under Item 12 to
disclose a press release announcing its results for the fiscal fourth
quarter and year-ended March 31, 2004.
On April 22, 2004, the Company filed a Form 8-K under Item 5 to disclose
that it had signed a definitive agreement to acquire Silicon Wave, Inc.
On April 9, 2004, the Company furnished a Form 8-K under Item 12 to
disclose a press release providing updated guidance for its fiscal 2004
fourth quarter, ended March 31, 2004.
-22-
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 10, 2004
/s/ William A. Priddy, Jr.
-----------------------------
WILLIAM A. PRIDDY, JR.
Chief Financial Officer,
Corporate Vice President of
Administration and Secretary
(Principal Financial Officer)
Dated: August 10, 2004
/s/ Barry D. Church
-----------------------------
Barry D. Church
Vice President and Corporate
Controller
(Principal Accounting Officer)
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