SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2001
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 organizatio Identification No.)
7628 THORNDIKE ROAD
GREENSBORO, NORTH CAROLINA 27409-9421
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(Address of principal executive offices, including zip code)
(336) 664-1233
----------------------------------------------------
(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 November 6, 2001, there were 166,634,408 shares of the registrant's
common stock outstanding.
EXPLANATORY NOTE
We are amending our Quarterly Report on Form 10-Q for the quarter ended
September 29, 2001 to revise Part I, Item 1, "Condensed Consolidated Financial
Statements," and Part I, Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," to include additional data
regarding inventory reserves, impairment of assets and commitments.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE
Condensed Consolidated Statements of Operations for
the three months ended September 30, 2001 and 2000.................
Condensed Consolidated Statements of Operations for
the six months ended September 30, 2001 and 2000...................
Condensed Consolidated Balance Sheets as of September 30, 2001
and March 31, 2001.................................................
Condensed Consolidated Statements of Cash Flows for
the six months ended September 30, 2001 and 2000...................
Notes to Condensed Consolidated Financial Statements...............
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.....................................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
-------------- -------------
Revenue:
Product sales $ 98,023 $ 101,912
Engineering revenue 248 308
--------- ---------
Total revenue 98,271 102,220
Operating costs and expenses:
Cost of goods sold 61,902 50,346
Research and development 16,977 14,748
Marketing and selling 6,805 7,569
General and administrative 3,483 3,346
Other operating expenses (Note 7) 6,106 --
--------- ---------
Total operating costs and expenses 95,273 76,009
--------- ---------
Income from operations 2,998 26,211
Other income (expense):
Interest income 3,514 3,527
Interest expense (4,201) (2,004)
Other, net (530) (26)
--------- ---------
Income before income taxes 1,781 27,708
--------- ---------
Income tax expense 249 9,975
--------- ---------
Net income $ 1,532 $ 17,733
========= =========
Net income per share (Note 2):
Basic $ 0.01 $ 0.11
Diluted $ 0.01 $ 0.10
Weighted average shares outstanding used in per
share calculation:
Basic 164,918 161,262
Diluted 173,829 173,661
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------ -------------
Revenue:
Product sales $ 167,550 $ 199,434
Engineering revenue 773 992
--------- ---------
Total revenue 168,323 200,426
Operating costs and expenses:
Cost of goods sold 127,803 97,988
Research and development 32,992 28,922
Marketing and selling 13,370 14,913
General and administrative 6,743 7,065
Other operating expenses (Note 7) 11,018 --
Impairment of long-lived assets (Note 6) 6,801 --
--------- ---------
Total operating costs and expenses 198,727 148,888
--------- ---------
(Loss) income from operations (30,404) 51,538
Other income (expense):
Interest income 7,456 4,652
Interest expense (8,212) (2,267)
Other, net (553) (18)
--------- ---------
(Loss) income before income taxes (31,713) 53,905
--------- ---------
Income tax (benefit) expense (Note 8) (4,859) 19,930
--------- ---------
Net (loss) income ($ 26,854) $ 33,975
========= =========
Net (loss) income per share:
Basic ($ 0.16) $ 0.21
Diluted ($ 0.16) $ 0.20
Weighted average shares outstanding used in per share calculation:
Basic 164,705 160,959
Diluted 164,705 174,054
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, MARCH 31,
2001 2001
------------ ----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 185,305 $ 266,076
Short-term investments 155,170 75,162
Accounts receivable, net 50,386 38,610
Recoverable income taxes 12,478 28,477
Inventories (Note 3) 45,849 71,015
Other current assets 8,480 12,974
--------- ---------
Total current assets 457,668 492,314
Property and equipment, net of accumulated depreciation of $66,666 at
September 30, 2001 and $49,757 at March 31, 2001 206,916 208,571
Non-current deferred tax assets 20,624 --
Related party technology licenses, net of amortization of $1,781 at
September 30, 2001 and $1,300 at March 31, 2001 11,462 11,943
Other non-current assets 15,361 8,103
--------- ---------
Total assets $ 712,031 $ 720,931
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,988 $ 14,613
Accrued liabilities 12,157 9,410
Current obligations under capital leases 4,579 4,976
--------- ---------
Total current liabilities 29,724 28,999
Long-term debt, net of financing cost 293,466 292,700
Non-current deferred tax liability 22,541 19,471
Obligations under capital leases, less current maturities 1,213 3,263
Other long-term liability (Note 5) 9,836 --
--------- ---------
Total liabilities 356,780 344,433
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; 165,189 and
163,710 shares issued and outstanding at September 30, 2001 and
March 31, 2001, respectively 252,656 246,930
Additional paid-in capital 57,045 53,196
Deferred compensation (13,723) (14,798)
Accumulated other comprehensive loss, net of tax (Note 4) (5,266) (223)
Retained earnings 64,539 91,393
--------- --------
Total shareholders' equity 355,251 376,498
--------- ---------
Total liabilities and shareholders' equity $ 712,031 $ 720,931
========= =========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
----------------------- ------------------------
Cash flows from operating activities:
Net (loss) income ($ 26,854) $ 33,975
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation 17,155 12,740
Amortization 2,728 1,384
Loss on disposal of equipment and long-term investment 641 -
Impairment of long-lived assets 6,801 -
Tax benefit from exercise of employee stock options 3,849 -
Changes in operating assets and liabilities:
Accounts receivable, net (11,776) (13,476)
Recoverable income taxes 15,999 -
Inventories 25,166 (22,743)
Non-current deferred tax assets (20,624) -
Other assets 6,188 (4,139)
Accounts payable and accrued liabilities 1,122 16,338
Other liabilities 4,043 4,520
----------------------- ------------------------
Net cash provided by operating activities 24,438 28,599
Cash flows from investing activities:
Purchase of property and equipment (22,600) (54,586)
Proceeds from maturities of held-to-maturity securities 17,950 22,905
Proceeds from maturities of available for sale securities 38,921 -
Purchase of held-to-maturity securities - (28,917)
Purchase of available for sale securities (142,629) (16,196)
Purchase of other investments - (5,000)
Purchase of technology license (130) -
----------------------- ------------------------
Net cash used in investing activities (108,488) (81,794)
Cash flows from financing activities:
Proceeds from convertible debt offering, net of
financing cost - 291,474
Proceeds from exercise of options and
employee stock purchases 5,726 4,394
Repayment of capital lease obligations (2,447) (2,213)
----------------------- ------------------------
Net cash provided by financing activities 3,279 293,655
----------------------- ------------------------
Net (decrease)/increase in cash and cash equivalents (80,771) 240,460
Cash and cash equivalents at the beginning of the period 266,076 28,956
----------------------- ------------------------
Cash and cash equivalents at the end of the period $ 185,305 $ 269,416
======================= ========================
Noncash investing and financing activities:
Available-for-sale investment equity change, net of tax $ 644 $ 2,058
Fair value of cash flow hedge, net of tax ($ 5,687)
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</FN>
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements 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 2001 amounts have been reclassified to conform to
fiscal 2002 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 Form 10-K for the year
ended March 31, 2001.
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 and the second fiscal quarter of each year ends on
the Saturday closest to September 30; however, in this report the Company's
fiscal year is described as ending on March 31 and the first and second quarters
of each fiscal year are described as ending June 30 and September 30,
respectively.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 income (loss) per share (in
thousands, except per share data):
Three Months Ended Six Months Ended
------------------------------------- -------------------------------------
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
----------------- ---------------- ----------------- ----------------
Numerator for basic and diluted
income (loss) per share:
Net income (loss) $ 1,532 $ 17,733 ($ 26,854) $ 33,975
================= ================ ================= ================
Denominator for basic income (loss)
per share - weighted average shares 164,918 161,262 164,705 160,959
Effect of dilutive securities:
Stock options and warrants 8,911 12,399 - 13,095
----------------- ---------------- ----------------- ----------------
Denominator for diluted income (loss)
per share - adjusted weighted average
shares and assumed conversions 173,829 173,661 164,705 174,054
Basic income (loss) per share $ 0.01 $ 0.11 ($ 0.16) $ 0.21
================= ================ ================= ================
Diluted income (loss) per share $ 0.01 $ 0.10 ($ 0.16) $ 0.20
================= ================ ================= ================
In the computation of diluted loss per share for the six months ended September
30, 2001, all outstanding stock options and warrants were excluded because the
effect of their inclusion would have been anti-dilutive. The computation of
diluted loss per share similarly did not assume the conversion of the Company's
3.75% convertible subordinated notes due 2005 because the inclusion would be
anti-dilutive. The notes are convertible at a price of $45.085 per share and the
closing price of the Company's stock on the date it committed to sell the notes
was $35.50.
In the computation of diluted income per share for the three months ended
September 30, 2001 and 2000 and the six months ended September 30, 2000,
outstanding stock options to purchase approximately 2.7 million shares, 1.2
million shares, and 0.8 million shares, respectively, were excluded because the
exercise price of the options was greater than the average market price of the
common stock and the effect of their inclusion would have been anti-dilutive.
The computation of diluted income per share for these periods additionally did
not assume the conversion of the Company's 3.75% convertible subordinated notes
due 2005 because the inclusion would be anti-dilutive.
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):
September 30, 2001 March 31, 2001
--------------------- -------------------
Raw materials $ 24,024 $ 25,641
Work in process 25,602 26,686
Finished goods 26,745 38,571
--------------------- -------------------
76,371 90,898
Inventory reserve (30,522) (19,883)
--------------------- -------------------
Total inventory $ 45,849 $ 71,015
===================== ===================
During the quarter ended June 30, 2001, inventory reserves increased primarily
due to recent customer demand shift from microwave monolithic integrated circuit
(MMIC) to more complex, highly integrated multi-chip module power amplifiers.
The industry volatility and lower forecasts for handset sales during the first
part of fiscal 2002 increased the Company's overall inventory risk associated
with predictability of future sales and management's reliance on sales
forecasts. An inventory reserve adjustment of $15.3 million was recorded as an
addition to cost of goods sold based on management's best estimate of inventory
risk. The net loss for the six-month period ended September 30, 2001 prior to
this change in estimate would have been $13.9 million including a tax benefit of
$2.5 million. The net loss per basic and diluted share for the second quarter of
fiscal 2002 would have been ($0.08).
The Company has utilized a leading material requirement planning system,
implemented planning strategies for each product and maintains an inventory
management team. During the first two quarters of fiscal 2002, the Company's
gross inventories have decreased $14.5 million, which management believes
demonstrates the effectiveness of the Company's focus on supply chain management
through the implementation of new planning strategies and an inventory
management team. During fiscal year 2000 and the first two quarters of fiscal
2001 gross inventories grew consistent with sales. As sales began to decline in
the last two quarters of fiscal 2001, inventory levels began to grow
disproportionately with sales. The Company's response to industry trends and
corresponding implementation of new production planning strategies did not
impact gross inventory levels until the second quarter of fiscal 2002.
In the event the Company sells inventory that had been covered by a specific
inventory reserve, the sale is recorded at the actual selling price and the
related cost of goods sold at the full inventory cost. The Company evaluates
inventory levels quarterly against sales forecasts on a part-by-part basis and
evaluates its overall inventory risk. Reserves are adjusted to reflect inventory
values in excess of forecasted sales as well as overall inventory risk assessed
by management. Inventory deemed obsolete is required by Company policy to be
carried for a period not to exceed one year so that customers may be notified
and find a suitable replacement. Once the one-year period is complete, the
inventory will be disposed of or destroyed and the inventory value and related
reserve will be written off the Company's books.
4. COMPREHENSIVE (LOSS) INCOME
Accumulated comprehensive (loss) income for the Company consists entirely of
accumulated unrealized gains on marketable securities for fiscal 2001, and
fiscal 2002 additionally includes the fair value of a cash flow hedge related to
the Company's synthetic lease (Note 5). The amount is a separate component of
shareholders' equity. The components of comprehensive (loss) income, net of tax,
are as follows (in thousands):
Three Months Ended Six Months Ended
------------------------------------------- ----------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
-------------------- ------------------- ------------------- ----------------
Net income (loss) $ 1,532 $ 17,733 ($ 26,854) $ 33,975
Comprehensive (loss) income:
Unrealized gains on
marketable securities 20 512 644 2,058
Changes in fair value of
cash flow hedge (1,984) - (5,687) -
-------------------- ------------------- ------------------- ----------------
Accumulated comprehensive
(loss)income ($ 432) $ 18,245 ($ 31,897) $ 36,033
==================== =================== =================== ================
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. DERIVATIVE FINANCIAL INSTRUMENTS
On April 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." The standard establishes a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. Adoption of SFAS 133 did not have a significant impact on the
Company's reported consolidated financial position, results of operations or
cash flows.
Objectives and Strategies
Interest Rate Management - The Company uses an interest rate swap agreement to
effectively convert the $95.0 million notional amount of a variable rate
synthetic lease to a fixed rate basis, thus reducing the impact of interest rate
changes on future income commencing April 2001 through November 2004.
Financial Reporting Policy
The interest rate swap discussed above is a cash flow hedge and is recorded on
the consolidated balance sheet at its fair value of $8.5 million as of September
30, 2001, which is included in other long-term liabilities and comprehensive
loss, net of tax, with no impact on earnings.
The terms and provisions of the interest-rate swap and $95.0 million of the
hedged item (synthetic lease) exactly match, enabling the Company to use the
hypothetical method of accounting for derivatives as defined by SFAS 133. This
hedge is an amortizing swap that is perfectly effective in offsetting changes in
expected cash flows due to fluctuations in the variable interest rate over the
term of the lease since the notional amount reduction exactly matches the
principal reduction in the synthetic lease transaction. This agreement involves
the receipt of the variable rate amounts in exchange for a fixed rate interest
payment over the life of the agreement without exchange of the underlying
notional amounts. The differential in rates results in cash to be paid or
received and is recognized as an adjustment to interest expense or income for
the reporting period.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company reviews long-lived assets for
impairment based on changes in circumstances that indicate their carrying
amounts may not be recoverable due to the extent and manner the assets are now
used by the Company. During the quarter ended June 30, 2001, the Company
recognized an impairment charge totaling $6.8 million related to assets to be
held and used, as well as to assets to be disposed of, which is presented on the
condensed consolidated statements of operations as "Impairment of long-lived
assets."
Assets to be held and used
During the quarter ended June 30, 2001, management made a decision to outsource
all module production packaging and transition the Company's packaging line to a
dedicated research and development ("R&D") facility, which resulted in a $4.0
million asset impairment charge. As a result of the transition to an all R&D
facility, the Company identified certain excess capacity and determined that the
estimated future cash flows for an R&D line did not support the carrying value
of the assets related to the full capacity initially invested by the Company.
The impaired assets are module assembly packaging equipment for surface mount
devices, die attach, wire-bond and molding processes. The fair market value of
these assets was estimated based on the historical selling prices for used
equipment of a similar type and the carrying values were adjusted accordingly.
Assets to be disposed of
During the quarter ended June 30, 2001, management identified a customer demand
shift from MMICs to more complex, highly integrated multi-chip module power
amplifiers, which created an impairment of the $3.1 million carrying value of
the Company's MMIC gravity feed test handlers. The impairment charge of the test
handlers totaled $2.8 million, with a $0.3 million residual value remaining.
Assets to be disposed of are measured at the lower of carrying amount or fair
value less cost to sell. Disposal of the impaired assets is expected to occur by
the end of fiscal 2002.
Impact of Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes SFAS 121 and
establishes a single accounting model for long-lived assets to be disposed of by
sale as well as resolved implementation issues related to SFAS 121. The Company
will adopt SFAS 144 for fiscal 2003, which may result in additional disclosures.
Adoption of SFAS 144 in fiscal 2003 is not expected to have a significant impact
on the Company's consolidated financial position, results of operations or cash
flows.
7. OTHER OPERATING EXPENSES
Other operating expenses consist of start-up costs associated with preparing the
Company's second wafer fabrication facility located in Greensboro, NC and the
proposed facility in Beijing, China for normal production capacity. These 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."
8. INCOME TAX
The total income tax benefit for the six months ended September 30, 2001 was
$4.9 million, which included current federal benefits, current state benefits,
and deferred expense of $5.3 million, $0.3 million, and $0.8 million,
respectively. The Company's effective tax rate was 15% for the six months ended
September 30, 2001, compared to 37.0% for the same period of fiscal 2001. This
rate differs from the statutory rate of 35% primarily due to the change in the
valuation allowance for deferred tax assets.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. SUBSEQUENT EVENTS
Acquisition of RF Nitro Communications, Inc.
On October 15, 2001, the Company announced that it had agreed to acquire RF
Nitro Communications, Inc., a privately held company with advanced materials and
products in broadband wireless and wireline (fiber-optic) markets in a business
combination to be accounted for as a purchase. The transaction was completed on
October 23, 2001, with consideration consisting of shares of the Company's
common stock and cash.
China Test and Tape and Reel Facility
On November 8, 2001 the Company broke ground on a test and tape and reel
facility in Beijing, China. The Company expects to spend approximately $20.0
million to have this facility operational by the fall of 2002.
10. COMMITMENTS
Strategic Alliance with Agere
The Company entered into a strategic alliance with Agere Systems Inc. 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. The alliance was designed to provide the Company
a guaranteed source of supply and favorable pricing of silicon wafers.
Synthetic Lease
In August 1999, as modified effective December 1999 and August 2001, the Company
entered into a $100.0 million synthetic lease with a financial institution. A
synthetic lease is an asset-based financing structured to be treated as an
operating lease for accounting purposes, but as a capital lease for tax
purposes. Prior to December 31, 1999, the synthetic lease transaction was
largely secured by cash collateral. The modification effective December 31, 1999
resulted in the release of the cash collateral and the synthetic lease is now
secured by substantially all of the Company's personal property assets. The
modification in August 2001 resulted in expansion of financial covenants, which
require the maintenance of minimum levels of tangible net worth, liquidity and
debt service coverage and prohibits the payment of dividends. The lease has a
term expiring November 3, 2004. At the end of the term, the lease can be
extended upon the agreement of the parties or the Company may buy out the lease.
The interest rates or yield rates embedded in the lease (and used to calculate
lease payments) are either:
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. COMMITMENTS (continued)
o The "Eurodollar Rate" (described below) plus margins varying from 150 basis
points to 325 basis points per annum (based on certain quarterly financial
covenant testing and depending on whether the underlying source of funding
is in the form of a promissory note or an equity certificate), or
o At the Company's election and under certain other circumstances where
funding based on the Eurodollar Rate is not available, the "ABR Rate"
(described below) plus margins varying from 25 basis points to 200 basis
points per annum (based on certain quarterly financial covenant testing and
depending on whether the underlying source of funding is in the form of a
promissory note or an equity certificate).
The Eurodollar Rate is a rate of interest determined under the lease documents
by reference to one or more sources for the London inter-bank offered rate, or
LIBOR. The ABR Rate is a rate of interest determined under the lease documents
equal to the greater of (a) the prime lending rate of the primary lender or its
successor (as determined under the lease documents) or (b) the federal funds
effective rate (as determined under the lease documents) plus 0.5%.
The Company also has provided for a contingent residual value guarantee in
relation to the synthetic lease. This guarantee provides that in the event the
assets are sold to a third party at the end of the lease term, the Company
unconditionally promises to pay to the lessor the lesser of (1) the deficiency
balance, which is equal to the excess, if any, of the cost of the assets over
the aggregate sale price paid by the third party, or (2) the maximum residual
guarantee amount, which is equal to 85% of the "Property Cost" (aggregate
outstanding loans and holder advances) for all of the assets subject to the
synthetic lease. Amortization equal to 1.7111% per month of the equipment
portion of the synthetic lease reduces the asset cost and thus the Company's
contingent residual value guarantee.
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 "expects,"
"anticipates," "intends," "plans," "believes," and "estimates," and variations
of such words and similar expressions, identify such forward-looking statements.
The Company's business is subject to numerous risks and uncertainties, including
variability in quarterly operating results, the rate of growth and development
of wireless markets, risks associated with the operation of wafer fabrication
facilities, our ability to manage rapid growth and to attract and retain skilled
personnel, variability in production yields, raw material availability,
manufacturing capacity constraints, dependence on a limited number of customers
and dependence on third parties. 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 consolidated statement of operations data
expressed as a percentage of total revenue for the periods indicated:
Three Months Ended Six Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
-------------- ------------- -------------- --------------
Revenue 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses
Cost of goods sold 63.0 49.3 75.9 48.9
Research and development 17.3 14.4 19.6 14.5
Marketing and selling 6.9 7.4 7.9 7.4
General and administrative 3.5 3.3 4.0 3.5
Other operating expense 6.2 - 6.6 -
Impairment of long-lived assets - - 4.0 -
-------------- ------------- -------------- --------------
Total operating costs and expenses 96.9 74.4 118.0 74.3
Income (loss) from operations 3.1 25.6 (18.0) 25.7
Interest income 3.6 3.5 4.4 2.3
Interest expense (4.3) (2.0) (4.9) (1.1)
Other, net (0.5) - (0.3) -
-------------- ------------- -------------- --------------
Income (loss) before income taxes 1.9 27.1 (18.8) 26.9
Income tax (expense) benefit (0.3) (9.8) 2.9 (9.9)
-------------- ------------- -------------- --------------
Net income (loss) 1.6% 17.3% (15.9)% 17.0%
============== ============= ============== ==============
REVENUE
Revenue for the quarter ended September 30, 2001 decreased 3.9% to $98.3
million, compared to $102.2 million for the quarter ended September 30, 2000.
For the six months ended September 30, 2001, revenue decreased 16.0% to $168.3
million from $200.4 million for the same period ended September 30, 2000. These
decreases in year-over-year revenue were due primarily to excess inventories
among manufacturers resulting from an overly optimistic forecast for the growth
of the handset market and continued downward pressure on average selling prices,
especially in our mature products. Second quarter revenue increased sequentially
40.3% from $70.1 million for the quarter ended June 30, 2001, primarily as a
result of increased order activity from leading original equipment manufacturers
(OEMs) and the ramp of our module products for next-generation global system for
mobile communications (GSM) handsets.
International shipments accounted for $65.3 million, or 66.5% of revenue, in the
second quarter of fiscal 2002, compared to $58.2 million, or 57.0% of revenue,
in the second quarter of fiscal 2001. For the six months ended September 30,
2001, international shipments were $110.9 million, or 65.9% of revenue, up from
$110.0 million, or 54.9% of revenue, for the six months ended September 30,
2000. Sales to customers located in South Korea totaled $22.4 million, or 22.8%
of revenue, for the second quarter of fiscal 2002, compared to $12.2 million, or
11.9% of revenue, for the second quarter of fiscal 2001. Year-to-date shipments
to South Korea totaled $32.8 million, or 19.5% of revenue, in fiscal 2002 and
$23.7 million, or 11.8% of revenue, in fiscal 2001. Shipments to this market may
continue to fluctuate from the prior year, as the South Korean market remains
unstable. We continue to see variations between geographic regions
year-over-year due to our largest customer shifting production to its Korean
facility.
GROSS PROFIT
Gross profit for the three months ended September 30, 2001 decreased 29.9% to
$36.4 million, or 37.0% of revenue, compared to $51.9 million, or 50.7% of
revenue, in the comparable period of the prior year. For the six months ended
September 30, 2001, gross profit decreased 60.4% to $40.5 million, or 24.1% of
revenue, compared to $102.4 million, or 51.1% of revenue, for the six months
ended September 30, 2000. These decreases in gross profit were the result of
increases in inventory reserves due to reduced sales forecasts associated with
MMIC products and raw materials, continued declines in average selling prices on
mature products, initial higher cost of goods sold associated with our module
products and greater than normal yield losses associated with the module
business. Our increased inventory reserves are attributable primarily due to
recent customer demand shift from microwave monolithic integrated circuits
(MMIC) to more complex, highly integrated multi-chip module power amplifiers.
The industry volatility and lower forecasts for handset sales during the first
part of fiscal 2002 increased our overall inventory risk associated with
predictability of future sales and management's reliance on sales forecasts. In
order to focus on inventory reserve issues, we have utilized a leading material
requirement planning system, implemented planning strategies for each product
and maintain an inventory management team. During the first two quarters of
fiscal 2002, our gross inventories have decreased $14.5 million, which
management believes demonstrates the effectiveness of our focus on supply chain
management through the implementation of new planning strategies and an
inventory management team. During fiscal year 2000 and the first two quarters of
fiscal 2001 gross inventories grew consistent with sales. As sales began to
decline in the last two quarters of fiscal 2001, inventory levels began to grow
disproportionate with sales. Our response to industry trends and corresponding
implementation of new production planning strategies did not impact gross
inventory levels until the second quarter of fiscal 2002, resulting in the
reserve adjustment in the first quarter.
We have historically experienced significant fluctuations in gross profit
margins, which have caused fluctuations in our quarterly operating results, and
we cannot be certain operating results will not be similarly affected in the
future. We expect continued downward pressure on margins due to the factors
described above, as well as costs associated with our new wafer fabrication
facility. The new wafer fabrication facility is not expected to qualify for
production and obtain economic value until third quarter of fiscal 2002. Once
this occurs, the associated expenses will transition from start-up costs to cost
of goods sold.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended September 30, 2001
increased 15.1% to $17.0 million, or 17.3% of revenue, compared to $14.7
million, or 14.4% of revenue, for the three months ended September 30, 2000. For
the six months ended September 30, 2001, research and development expenses were
$33.0 million, or 19.6% of revenue, compared to $28.9 million, or 14.5% of
revenue, in the comparable period of the prior year. These increases were
primarily attributable to increased headcount and related expenses including
salaries, benefits and equipment, increased development wafers and mask sets and
prototyping expenses. We plan to continue to make substantial investments in
research and development.
MARKETING AND SELLING
Marketing and selling expenses for the second quarter of fiscal 2002 were $6.8
million, compared to $7.6 million for the second quarter of fiscal 2001, a
decrease of 10.1%. For the six-month periods ended September 30, marketing and
selling expenses were $13.4 million and $14.9 million in fiscal 2002 and fiscal
2001, respectively. These decreases in fiscal 2002 were primarily attributable
to reduced sales commissions associated with the decline in revenue and shifts
in revenue from third party commission-based accounts to in-house accounts.
Marketing and selling expenses, as a percentage of revenue, were 6.9% and 7.4%
for the three months ended September 30, 2001 and 2000, respectively, and 7.9%
and 7.4%, respectively, for the six months then ended. We plan to continue to
make investments in marketing and selling and expect that such expenses will
increase in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended September 30, 2001
increased 4.1% to $3.5 million, or 3.5% of revenue, compared to $3.3 million, or
3.3% of revenue, for the quarter ended September 30, 2000. For the six-month
period ended September 30, 2001, general and administrative expenses were $6.7
million, or 4.0% of revenue, compared to $7.1 million, or 3.5% of revenue, for
the comparable period ended September 30, 2000. The increase for the quarter was
primarily attributable to increased consulting for tax strategy planning and
donations to the American Red Cross related to the tragic events of September
11, 2001. The decrease for the year to date was due to decreased legal and
accounting expenses compared to fiscal 2001, which included nonrecurring charges
related to the convertible debt offering.
IMPAIRMENT OF LONG-LIVED ASSETS
We evaluate our long-lived assets for impairment whenever indicators of
impairment exist. During the six months ended September 30, 2001, we recognized
an impairment charge totaling $6.8 million related to impairment of certain
property and equipment. With respect to assets to be held and used, management
made a decision to outsource module production packaging and transition our
packaging line to a dedicated R&D facility, which resulted in a $4.0 million
asset impairment charge during the six months ended September 30, 2001. As a
result of the transition to an R&D facility, management identified certain
excess capacity and determined that the estimated future cash flows for an R&D
line did not support the carrying value of the assets related to the full
capacity initially invested. The fair market value of these assets was estimated
based on the historical selling prices for used equipment of a similar type and
the carrying values were adjusted accordingly. With respect to assets to be
disposed of, management identified a customer demand shift from MMICs to more
complex, highly integrated multi-chip module power amplifiers, which created an
impairment of the $3.1 million carrying value of our MMIC gravity feed test
handlers. The impairment charge of the test handlers totaled $2.8 million, with
a $0.3 million residual value remaining. Assets to be disposed of are measured
at the lower of carrying amount or fair value less cost to sell. Disposal of the
impaired assets is expected to occur by the end of fiscal 2002.
INTEREST INCOME
For the quarter ended September 30, 2001, interest income was $3.5 million,
compared to $3.5 million in the same quarter during the prior year. Interest
income for the six-month periods ended September 30, 2001 and 2000 was $7.5
million and $4.7 million, respectively. Interest income for the six-month period
has increased due to a higher average cash balance in fiscal 2002 as a result of
the August 2000 convertible debt offering. The lack of growth in interest income
in the quarter ended September 30, 2001 was due to lower prevailing interest
rates, driven by the Federal Reserve cuts to the federal funds rate. We expect
interest income to continue to decline over the remainder of fiscal year 2002
compared to 2001 due to the lower interest rate environment.
INTEREST EXPENSE
Interest expense for the quarter ended September 30, 2001 was $4.2 million
compared to $2.0 million in the same quarter during the prior year. For the
six-month periods ended September 30, 2001 and 2000, interest expense was $8.2
million and $2.3 million, respectively. These increases in interest expense are
attributable to the August 2000 convertible subordinated notes and the interest
rate swap that modifies the interest characteristics of our synthetic lease from
a variable to a fixed rate basis.
INCOME TAX
The effective tax rate for the six months ended September 30, 2001 was 15.0%,
compared to 37.0% for the six months ended September 30, 2000. This rate differs
from the statutory rate of 35% primarily due to the change in the valuation
allowance for deferred tax assets.
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 offerings and Rule 144A offerings, we have raised
approximately $462.0 million, net of offering expenses. As of September 30,
2001, working capital was $427.9 million, including $185.3 million in cash and
cash equivalents, compared to working capital at March 31, 2001 of $463.3
million. Operating activities for the first six months of fiscal 2002 generated
$24.4 million in cash compared to $28.6 million in the first six months of
fiscal 2001. This year-over-year decrease was primarily attributable to a
decrease in net income of $60.8 million partially offset by a year-over-year
change in inventory of $47.9 million, which includes a $15.3 million inventory
reserve adjustment for fiscal 2002. The $32.6 million cash provided from changes
in inventories was due to an increased focus on supply chain management which
has decreased the need to build inventory to meet delivery schedules.
Adjustments to reconcile net (loss) income for non-cash operating items
increased cash provided by operating activities of $17.1 year-over-year due to
an increase in depreciation, amortization, impairment of long-lived assets and
tax benefits from exercise of employee stock options. Cash provided by changes
in accounts payable and liabilities in fiscal 2002 was $1.1 million, as opposed
to cash provided of $16.3 million in fiscal 2001. The decrease in cash provided
by changes in accounts payable was due primarily to a change from
vendor-specified terms in fiscal 2001 to uniform terms for all vendors in fiscal
2002.
Cash used in investing activities for the six months ended September 30, 2001
was $108.5 million, compared to $81.8 million in the prior year. Uses of cash in
fiscal 2002 included purchases of securities available for sale of $142.6
million, which primarily accounted for the increase, and the purchase of capital
equipment/leasehold improvements of $22.6 million. Proceeds from maturities of
securities provided cash of $56.9 million partially offsetting the cash used.
Cash provided by financing activities for the six months ended September 30,
2001 was $3.3 million, compared to cash provided of $293.7 million for the six
months ended September 30, 2000. The net proceeds from the convertible debt
offering in fiscal 2001 represent the increased amount in prior year.
At September 30, 2001, we had long-term capital commitments of approximately
$40.6 million, consisting of approximately $14.2 million for the deployment of
manufacturing equipment pursuant to a strategic alliance with Agere Systems,
Inc. ("Agere"), approximately $12.0 million for the expansion of our molecular
beam epitaxy (MBE) facility, approximately $8.3 million for equipment for the
second wafer fabrication facility, approximately $3.8 million for construction
and equipment for a facility in Beijing, China, approximately $0.7 million for
our first wafer fabrication facility, and the remainder for general corporate
requirements. We entered into a strategic alliance with 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. This alliance was designed to provide us a guaranteed
source of supply and favorable pricing of silicon wafers. We broke ground
November 8, 2001 on a test and tape and reel facility in Beijing, China, and
expect to spend approximately $20.0 million to have this facility operational by
the fall of 2002. We expect to fund our commitments through a combination of
cash on hand, capital leases and other forms of financing.
Due to lower forecasted demand levels, the expanded capacity in our first wafer
fabrication facility is expected to be sufficient to address initial demand for
next generation products through the latter portion of calendar 2001.
Accordingly, we now plan to ramp production in our second wafer fabrication
facility consistent with increased demand for these products.
The funding for the first phase of our second wafer fabrication facility came
primarily from a synthetic lease arrangement that we entered into in August
1999, as modified effective December 1999 and August 2001. A synthetic lease is
an asset-based financing structured to be treated as an operating lease for
accounting purposes, and a capital lease for tax purposes. Prior to December 31,
1999, the synthetic lease transaction was largely secured by cash collateral.
The modification effective December 31, 1999 resulted in the release of the cash
collateral and the synthetic lease is now secured by substantially all of RFMD's
personal property assets. The modification in August 2001 resulted in expansion
of financial covenants, which require the maintenance of minimum levels of
tangible net worth, liquidity and debt service coverage and prohibits the
payment of dividends. The lease has a term expiring November 3, 2004. At the end
of the term, the lease can be extended upon the agreement of the parties or we
may buy out the lease. The interest rates or yield rates embedded in the lease
(and used to calculate lease payments) are either:
o The "Eurodollar Rate" (described below) plus margins varying from 150 basis
points to 325 basis points per annum (based on certain quarterly financial
covenant testing and depending on whether the underlying source of funding
is in the form of a promissory note or an equity certificate), or
o At our election and under certain other circumstances where funding based
on the Eurodollar Rate is not available, the "ABR Rate" (described below)
plus margins varying from 25 basis points to 200 basis points per annum
(based on certain quarterly financial covenant testing and depending on
whether the underlying source of funding is in the form of a promissory
note or an equity certificate).
The Eurodollar Rate is a rate of interest determined under the lease documents
by reference to one or more sources for the London interbank offered rate, or
LIBOR. The ABR Rate is a rate of interest determined under the lease documents
equal to the greater of (a) the prime lending rate of the primary lender or its
successor (as determined under the lease documents) or (b) the federal funds
effective rate (as determined under the lease documents) plus 0.5%.
We also have provided for a contingent residual value guarantee in relation to
the synthetic lease. This guarantee provides that in the event the assets are
sold to a third party at the end of the lease term, we unconditionally promise
to pay to the lessor the lesser of (1) the deficiency balance, which is equal to
the excess, if any, of the cost of the assets over the aggregate sale price paid
by the third party, or (2) the maximum residual guarantee amount, which is equal
to 85% of the "Property Cost" (aggregate outstanding loans and holder advances)
for all of the assets subject to the synthetic lease. Amortization equal to
1.7111% per month of the equipment portion of the synthetic lease reduces the
asset cost and thus our contingent residual value guarantee.
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 to new and existing facilities, technological advances and our
relationships with suppliers and customers. We believe our cash requirements
will be adequately met from the combination of the debt offering and normal
operating results during fiscal 2002. If existing resources and cash from
operations are not sufficient to meet our future requirements, we may seek
additional debt or equity financing or additional credit facilities. We cannot
be sure that any additional financing will not be dilutive to holders of our
common stock. Also, we cannot be sure that additional equity or debt financing,
if required, will be available on favorable terms.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named a defendant in a patent infringement lawsuit,
captioned Lemelson Medical, Education & Research Foundation, LP v. Broadcom
Corporation; RF Micro Devices, Inc.; SanDisk Corporation; TransSwitch
Corporation; WJ Communications, Inc., filed August 3, 2001 in the U.S. District
Court for the District of Arizona by Lemelson Medical, Education and Research
Foundation, LP. The suit alleges that the Company has infringed 12 "machine
vision" patents, seven "bar code" patents and three semiconductor patents owned
by the plaintiff and seeks injunctive relief, damages for the alleged
infringements and payment of the plaintiff's attorneys' fees. Management is
currently conducting an initial assessment of these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held on July 24, 2001. At the meeting,
our shareholders elected five directors for one-year terms and until their
successors are duly elected and qualified. Votes cast by our shareholders at the
meeting were as follows:
Nominees for Director Shares Voted in Favor Shares Withheld
- --------------------- --------------------- ----------------
Erik H. van der Kaay 148,520,459 348,607
David A. Norbury 126,046,830 22,822,236
Albert E. Paladino 148,516,645 352,421
William J. Pratt 126,065,753 22,803,313
Walter H. Wilkinson, Jr. 148,516,208 352,858
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amendment to Articles of Incorporation (previously filed)
4.1 Rights Agreement, dated August 10, 2001, between RF Micro Devices, Inc.
and First Union National Bank, as Rights Agent (incorporated by
reference to the exhibit filed with our Registration Statement on Form
8-A filed with the Securities and Exchange Commission on August 14,
2001)
10.1 Second Amendment to Certain Operative Agreements, dated as of August
13, 2001, among RF Micro Devices, Inc., as the Construction Agent and
as the Lessee; Wells Fargo Bank Northwest, National Association
(formerly First Security Bank, National Association), not individually,
except as expressly stated therein, but solely as the Owner Trustee
under the RFMD Real Estate Trust 1999-1; the Various Banks and Other
Lending Institutions which are Parties Thereto from time to time, as
the Holders; the Various Banks and Other Lending Institutions which are
Parties Thereto from time to time, as the Lenders; First Union National
Bank, as the Agent for the Lenders and Respecting the Security
Documents, as the Agent for the Lenders and the Holders, to the extent
of their interests; and Credit Suisse First Boston, as Syndication
Agent (previously filed)
(b) Reports on Form 8-K
During the quarter ended September 30, 2001, the Company filed the following
reports on Form 8-K:
On August 13, 2001, a Form 8-K was filed to disclose that we announced on August
10, 2001 that our board of directors had adopted a shareholders' rights plan.
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: February 11, 2002
/s/ William A. Priddy, Jr.
--------------------------
WILLIAM A. PRIDDY, JR. Vice
President,Finance and Administration and
Chief Financial Officer
Dated: February 11, 2002
/s/ Barry D. Church
-------------------
BARRY D. CHURCH
Corporate Controller
(Principal Accounting Officer)