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RF Micro Devices 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2

 

 
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C 20549

FORM 10-Q

                   (Mark One)

                   [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                           SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005
 

Or
 

                   [   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                           SECURITIES EXCHANGE ACT OF 1934  

 

 

For the transition period from_______ to_________


 

Commission file number 0-22511


RF Micro Devices, Inc.

(Exact name of registrant as specified in its charter)


 

North Carolina
(State or other jurisdiction of
incorporation or organization)

56-1733461
(I.R.S. Employer
   Identification No.)


7628 Thorndike Road

Greensboro, North Carolina
(Address of principal executive offices)



27409-9421
(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 [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. 
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):
                                                                                                                        
Large accelerated filer [X]                            Accelerated filer [  ]                                   Non-accelerated filer [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes [  ]     No [X]

As of January 27, 2006, there were 189,384,122 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 December 31, 2005
    and March 31, 2005



3

   
    Condensed Consolidated Statements of Operations for the three months
    ended December 31, 2005 and 2004



4

  
    Condensed Consolidated Statements of Operations for the nine months
    ended December 31, 2005 and 2004



5

   
    Condensed Consolidated Statements of Cash Flows for the nine months
    ended December 31, 2005 and 2004



6

   
    Notes to Condensed Consolidated Financial Statements


7


ITEM 2.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



14


ITEM 3.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



19


ITEM 4.


CONTROLS AND PROCEDURES


20

 

 

 

PART II -

OTHER INFORMATION

 

 

 

 

ITEM 1

LEGAL PROCEEDINGS

20

 

 

 

ITEM 6.

EXHIBITS

20

 

 

 

                                                                                                                              

 

2



 


 

 

 

PART I - FINANCIAL INFORMATION
ITEM 1.     


RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)


DECEMBER 31,
2005

 


MARCH 31,
2005

(Unaudited)

 

ASSETS

Current assets:

        Cash and cash equivalents

 $

70,057  

 $

26,016  

        Short-term investments

71,798 

134,828 

        Accounts receivable, net of allowances of
           $559 at December 31, 2005 and $566 at
           March 31, 2005



99,403 



74,545 

        Inventories (Note 3)

105,627 

75,090 

        Prepaid expenses

5,551 

5,190 

        Other current assets

14,192 

10,780 

   Total current assets

366,628 

326,449
 

Property and equipment, net of accumulated
depreciation of $265,044 at December 31, 2005
and $227,134 at March 31, 2005



334,985 



339,624 

Goodwill (Note 7)

115,911 

119,694 

Investment in Jazz Semiconductor, Inc.

59,265 

59,265 

Long-term investments

292 

365 

Intangible assets (Note 7)

11,306 

11,316 

Other non-current assets

3,544 

3,033 

   Total assets

$

891,931 

 $

859,746 


LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

Current liabilities:

        Accounts payable

$

55,744  

$

44,545  

        Accrued liabilities

31,364 

30,139 

        Other current liabilities

89 

4,968 

   Total current liabilities

87,197 

79,652 
 

Long-term debt, net of unamortized discount of
$3,305 at December 31, 2005 and $3,832 at
March 31, 2005



226,695 



226,168 

Other long-term liabilities

5,062 

5,876 

   Total liabilities

318,954 

311,696 


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; 189,298 and 188,063 shares issued
and outstanding at December 31, 2005 and
March 31, 2005, respectively

457,944 

454,712 

Additional paid-in capital

82,754 

78,511 

Deferred compensation

(10,781)

(10,620)

Accumulated other comprehensive income,
net of tax (Note 4)


25 


310 

Retained earnings

43,035 

25,137 

   Total shareholders' equity

572,977 

548,050 

  
 Total liabilities and shareholders' equity


$


891,931  


$


859,746  


See accompanying Notes to Condensed Consolidated Financial Statements.

3





RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
(Unaudited)

 

THREE MONTHS ENDED

 

DECEMBER 31,
 2005

 

DECEMBER 31,
 2004


Revenue


 $


207,974  

 
$


168,917   


Operating costs and expenses:

        Cost of goods sold

132,993 

110,550 

        Research and development

38,650 

38,848 

        Marketing and selling

11,906 

11,971 

        General and administrative

6,919 

6,594 

        Other operating expense

380 

Total operating costs and expenses  

190,848 

167,963 

Income from operations

17,126 

954 

       
        Interest expense


(1,036)


(1,025)

        Interest income

1,279 

755 

        Other income (expense), net

55 

137


Income before income taxes


17,424 


821


Income tax expense   (Note 6)


(2,746)


(239)

Net income

 $

14,678  

 $

582   


Net income per share (Note 2):

        Basic

$

0.08  

$

0.00   

        Diluted

$

0.07  

$

0.00   


Shares used in per share calculation:

        Basic

189,236 

187,384   

        Diluted

222,565 

192,002   

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)

 

NINE MONTHS ENDED

 

DECEMBER 31,
 2005

 

DECEMBER 31,
 2004

Revenue

 $

544,362  

 $

483,798   


Operating costs and expenses:

        Cost of goods sold

351,322 

311,477 

        Research and development

116,824 

111,337 

        Marketing and selling

36,041 

34,510 

        General and administrative

20,084 

17,768 

        Other operating (income) expense

(304)

7,056 

Total operating costs and expenses  

523,967 

482,148 

Income from operations

20,395 

1,650 


        Interest expense


(3,129)


(5,416)

        Interest income

3,092 

2,936 

        Loss in equity method investee

(1,761)

        Other income (expense), net

888 

(17)


Income (loss) before income taxes


21,246 


(2,608)


Income tax expense   (Note 6)


(3,348)


(464)


Net income (loss)


 $


17,898  

 
$


(3,072)  


Net income (loss) per share (Note 2):

        Basic

$

0.09   

$

(0.02)   

        Diluted

$

0.09   

$

(0.02)   


Shares used in per share calculation:

        Basic

188,575  

186,801  

        Diluted

191,678  

186,801  

See accompanying Notes to Condensed Consolidated Financial Statements.

5




 

RF MICRO DEVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


                                                                                                            

NINE MONTHS ENDED

DECEMBER 31,
2005

 

DECEMBER 31,
2004

         Cash flows from operating activities:

         Net income (loss) 

$

17,898 

$

(3,072)

         Adjustments to reconcile net income (loss) to net cash
           provided by operating activities:

               Depreciation

47,606 

42,029 

               Amortization

2,325 

7,825 

               Deferred income taxes

1,353 

-  

               Acquired in-process research and development cost

6,201 

               Foreign currency adjustments

(692)

(23)

               Loss on disposal of assets, net

133 

968 

               Loss from equity method investee

1,761 

               Amortization of deferred compensation

                       4,080

 

                      4,148

               Changes in operating assets and liabilities:

                  Accounts receivable, net

(24,845)

11,085

                  Inventories

(30,539)

(22,006)

                  Prepaid expense and other current and
                     non-current assets


(2,159)


(907)

                  Accounts payable and accrued liabilities

12,075 

5,724 

                  Other liabilities

(410)

(96)

         Net cash provided by operating activities

26,825 

53,637 

        
         Investing activities:

                 Purchase of property and equipment

(43,463)

(68,374)

                 Proceeds from sale of property and equipment

196 

881 

                 Proceeds from maturities of securities
                    available-for-sale


173,868 


276,575 

                 Purchase of securities available-for-sale

(111,208)

(230,521)

                 Purchase of license

(525)

(1,112)

                 Purchase of business, net of cash received

(4,905)

(10,133)

         Net cash provided by (used in) investing activities

13,963 

(32,684) 

         Financing activities:

                 Repurchase of 3.75% convertible subordinated notes

(100,000)

                 Proceeds from exercise of stock options, warrants
                    and employee stock purchases


3,234 


3,480 

                 Repayment of capital lease obligations

(42)

(173)

         Net cash provided by (used in) financing activities

3,192 

(96,693)

         Net increase (decrease) in cash and cash equivalents

43,980 

(75,740)

         Effect of exchange rate changes on cash

61 

90

         Cash and cash equivalents at the beginning of the period

26,016 

102,965 

         Cash and cash equivalents at the end of the period

$

70,057 

$

27,315 


See accompanying Notes to Condensed Consolidated Financial Statements.

6





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 (SEC).  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.  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 fiscal year ended March 31, 2005.

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.   

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 on June 30, September 30 and December 31, respectively. 

Reclassifications
For comparative purposes, certain fiscal 2005 amounts have been reclassified to conform to fiscal 2006 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. 

Certain auction rate securities have been reclassified from cash equivalents to short-term investments.  Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days.  The Company's auction rate securities have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, ranging from 28 days to 360 days.  They trade at par and are callable at par on any interest payment date at the option of the issuer.  Interest paid during a given period is based upon the interest rate determined during the prior auction.  Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided through the interest rate reset.  The Company had historically classified these instruments as cash equivalents if the period between interest rate resets was 90 days or less, which was based on the Company's ability to either liquidate its holdings or roll its investment over to the next reset period.

Based upon the Company's re-evaluation of the maturity dates associated with the underlying bonds, the Company has reclassified its auction rate securities, previously classified as cash equivalents, as short-term investments in the amount of $72.0 million as of December 31, 2004.  In addition, "Purchase of available-for-sale securities" and "Proceeds from maturities of available-for-sale securities," included in the accompanying statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities for the nine months ended December 31, 2004.

Stock-Based Compensation
The Company accounts for employee stock options, employee restricted stock and its employee stock purchase plan 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 or for the employee stock purchase plan, which are non-compensatory under APB 25.  For restricted shares granted at exercise prices below quoted market value, the Company records deferred compensation expense for the difference between the price of the underlying shares and the market value.  Deferred compensation expense is amortized ratably over the vesting period of the shares of restricted stock.  In addition, to the


 

7





RF MICRO DEVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


1.   BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)  

extent that stock options or restricted stock were subject to the stock option exchange offer discussed below, such options and restricted stock were subject to variable accounting treatment.

During the second quarter of fiscal 2006 at the Company's annual meeting, the Company's shareholders approved a stock option exchange program for eligible Company employees, excluding the Company's five most highly compensated officers, members of its Board of Directors, consultants, and former and retired employees.  Under the exchange program, eligible employees were given the opportunity to exchange certain of their outstanding stock options previously granted to them at exercise prices ranging from $5.38 to $87.50, for new options to be granted on or as soon as practicable after the first business day after expiration of the exchange program.  The ratio of exchanged eligible options to new options was two-to-one, meaning that one new option share was issued in exchange for every two canceled option shares.  As a result of the exchange program, approximately 9.4 million old options were canceled (with exercise prices ranging from $6.84 to $87.50) on August 5, 2005 and approximately 4.7 million new options were granted under the Company's 2003 Stock Incentive Plan on August 8, 2005 with an exercise price of $6.06 (the closing price of the Company's common stock as reported by the Nasdaq National Market on the trading date immediately preceding the date the new options were granted).  The new options generally will vest and become exercisable over a two-year period, with 25% of each new option generally becoming exercisable after each six-month period of continued service following the grant date. 

As a result of the exchange program and in accordance with the guidance of Financial Accounting Standards Board (FASB) Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" (FIN 44), the Company is required to apply variable accounting prospectively to these new options (and to any options granted with a lower exercise price than the canceled options in the six-month look-back and look-forward periods) until the options are exercised, cancelled or expire.  In addition, in accordance with the guidance of the FASB's EITF Issue No. 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44," the options that were retained by eligible employees who did not participate in the exchange program are also subject to variable accounting until the options in question are exercised, forfeited or expire unexercised.  The Company will be required to prospectively apply variable accounting to these options in this context until the Company adopts SFAS 123 (R) beginning with the first quarter of fiscal year 2007. 

For the three and nine months ended December 31, 2005, the Company recognized a credit to compensation expense of approximately $0.3 million and a charge to compensation expense of $0.0 million, respectively, in the Consolidated Statements of Operations as a result of variable accounting.  If the quoted price for the Company's common stock at March 31, 2006 exceeds $5.38, variable accounting treatment will result in a charge to stock-based compensation for the fourth quarter of fiscal 2006.  If the quoted price for the Company's common stock at March 31, 2006 is at or below $5.38, there will be no charge to stock-based compensation for the fourth quarter of fiscal 2006.  The amount of the potential charge to stock-based compensation is dependent on the quoted price for the Company's common stock and the number of outstanding stock options subject to variable accounting (adjusted for exercises and cancellations), neither of which can be accurately predicted.

Beginning on April 1, 2006, the Company will prepare its financial statements in accordance with SFAS 123 (R) using the modified-prospective method, and as a result, options that were previously subject to variable accounting treatment will become subject to the provisions of SFAS 123 (R) and will no longer be accounted for as variable awards.

SFAS 123, "Accounting for Stock-Based Compensation," 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, employee stock purchase plans and similar equity instruments.  Companies that continue to account for stock-based compensation arrangements under APB 25 are required by SFAS 123 to disclose the pro forma effect on net income (loss) and net income (loss) per share as if the fair-value-based method prescribed by SFAS 123 had been applied.  The Company has continued to account for stock-based compensation using the provisions of APB 25 and presents the information required by SFAS 123, as amended by SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure."


 

8




RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


1.     BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

During the fourth quarter of fiscal 2005, the Company accelerated the vesting of all unvested and "out-of-the-money" stock options.  As a result of this action, options to purchase approximately 10.2 million shares of the Company's common stock that would otherwise have vested at various times within the next four years became fully vested.  The decision to accelerate the vesting, which the Company believes was in the best interest of the Company and its shareholders, was made primarily to reduce compensation expense that might be recorded in future periods following the Company's adoption of SFAS 123 (R). 

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, awards and employee stock purchase plan using the fair value method of SFAS 123, as amended by SFAS 148. 

The Company's pro forma information follows (in thousands, except per share data):

THREE MONTHS ENDED

 

NINE MONTHS
ENDED

DECEMBER 31,

 

DECEMBER 31,

2005

2004

 

2005

2004

Net income (loss), as reported

 $

14,678 

 $

582

 $

17,898 

 $

(3,072)

Non-cash stock-based compensation
     included in net income (loss)


862 


1,336 


4,082 


4,148 

Pro forma stock-based
     compensation cost


(5,038)


(9,358)


(10,919)


(33,233)

   Pro forma net income (loss)

 $

10,502 

 $

(7,440)

 $

11,061 

 $

(32,157)

Basic net income (loss) per share,
     as reported

 
 $


0.08 


 $


0.00


 $


0.09 


 $


(0.02)

Diluted net income (loss) per share,
     as reported

 
 $


0.07 


 $


0.00


 $


0.09 

 
 $


(0.02)

Pro forma basic net income (loss)
     per share

 
 $


0.06 


 $


(0.04)

 
 $


0.06 


 $


(0.17)

Pro forma diluted net income (loss)
     per share

 
 $


0.05 

 
 $


(0.04)

 
 $


0.06 


 $


(0.17)

In December 2004, the FASB issued SFAS 123 (R), which is a revision of SFAS 123.  SFAS 123 (R) supersedes APB 25 and amends SFAS 95, "Statement of Cash Flows."  Generally, the approach in SFAS 123 (R) is similar to the approach in SFAS 123.  However, SFAS 123 (R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements based on the estimated fair value of those options using an acceptable valuation technique.  Pro forma disclosure will no longer be an alternative.  SFAS 123 (R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee stock purchase plans. 

The pro forma compensation costs presented in the table above and in prior filings have been calculated using a Black-Scholes option pricing model and may not be indicative of amounts that will be reported in future periods.  As of the date of this filing, the Company is still evaluating the option pricing model that it will use to estimate the fair value of its options when SFAS 123 (R) becomes effective. 

SFAS 123 (R) is effective for public companies for annual periods that begin after June 15, 2005 and the Company will prepare its financial statements in accordance with SFAS 123 (R) beginning on April 1, 2006.  If the Company had applied the provisions of SFAS 123 (R) to the financial statements for the three and nine months ended December 31, 2005, net income would have been reduced by approximately $4.2 million and $6.8 million, respectively, based on the Black-Scholes option pricing model.  In accordance with SFAS 123 (R), companies may elect to use either the modified-prospective or modified-retrospective transition method.  The Company currently intends to use the modified-prospective transition method.   Under this method, compensation cost is recognized for all awards granted, modified or settled after the adoption date as well

9




RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


1.     BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

as for any awards that were granted prior to the adoption date for which the requisite service has not yet been rendered.

2.        NET INCOME (LOSS) PER SHARE

The following table sets forth a reconciliation of the numerators and denominators in the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

DECEMBER 31,

 

DECEMBER 31,

         2005

 

2004

 

         2005

 

2004

  Numerator for basic and diluted net

      income (loss) per share:

     Net income (loss) available to
        common shareholders -
        Numerator for basic

 $

14,678

 $

582

 $

17,898 

 $

(3,072)

     Plus: Income impact of assumed
        conversions for interest on
        1.50% convertible notes

1,036 

  Net income (loss) plus assumed
        conversion of notes -
        Numerator for diluted

 $

15,714 

 $

582 

 $

17,898 

 $

(3,072)


  Denominator for basic net income
        (loss) per share - weighted
        average shares

189,236 

187,384 

188,575 

186,801 

     Effect of dilutive securities:

        Stock options

3,185

4,618 

3,103 

        Assumed conversion of 1.50%
           convertible notes

30,144 

  Denominator for diluted net income
        (loss) per share - adjusted
        weighted average shares
        and assumed conversions

222,565 

192,002 

191,678 

186,801 


  Basic net income (loss) per share

 $

0.08

 $

0.00      

 $

0.09

 $

(0.02)

  Diluted net income (loss) per share

 $

0.07

 $

0.00      

 $

0.09

 $

(0.02)


In the computation of diluted net income per share for the three months ended December 31, 2005 and December 31, 2004, outstanding stock options to purchase approximately 18.8 million shares and 15.2 million shares, respectively, were excluded, and for the nine months ended December 31, 2005, outstanding stock options to purchase approximately 15.8 million shares were excluded because the exercise price of the options was greater than the average market price of the underlying common stock and the effect of their inclusion would have been anti-dilutive.  In the computation of diluted net loss per share for the nine months ended December 31, 2004, all outstanding stock options were excluded because the effect of their inclusion would have been anti-dilutive. 

The computation of diluted net income per share assumed the conversion of the Company's 1.50% convertible subordinated notes due 2010 for the three months ended December 31, 2005.  The computation of diluted net income per share for the nine months ended December 31, 2005 and the computation of net income (loss) per share for the three and nine months ended December 31, 2004 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 that it committed to sell the notes was $5.78.


 

10




RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

2.        NET INCOME (LOSS) PER SHARE (continued)

On August 15, 2004, the Company called for the redemption of the remainder of its outstanding 3.75% convertible subordinated notes.  As an alternative to redemption, the holders of the notes were entitled to convert the notes at a price of $45.09 per share.  However, on the date that the redemption was announced (July 27, 2004), the closing price of the Company's common stock was $5.92.  Accordingly, all of the 3.75% convertible subordinated notes were surrendered by the holders for redemption.   

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):

DECEMBER 31,
 2005

 

MARCH 31,
2005

                Raw materials

 $

37,106 

 $

26,340 

                Work in process

47,249 

32,828 

                Finished goods

41,687 

38,375 

126,042 

97,543 

                Inventory reserve

(20,415)

(22,453)

                                Total inventories

 $

105,627 

 $

75,090 

4.        OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) for the Company consists of accumulated unrealized gains and (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

 

NINE MONTHS ENDED

DECEMBER 31,

 

DECEMBER 31,

2005

2004

2005

2004

Net income (loss)

 $

14,678 

 $

582

 $

17,898 

 $

(3,072)

    Unrealized gain (loss) on
     marketable securities


24 


90


59 


(246)

    Foreign currency translation
     gain (loss)


(76)


145


(344)


132 

Comprehensive income (loss),
     net of tax

 
$


14,626 


 $


817

 
$


17,613 

 
$


(3,186)


5.        LONG-TERM DEBT

During August 2004, the Company repurchased all of its outstanding 3.75% convertible subordinated notes due 2005.  These notes were redeemed for $100.0 million plus accrued interest of $1.9 million.  The Company also recorded a charge of $0.6 million related to the repurchase for unaccreted discounts and unamortized issuance costs in interest expense.

The Company's 1.50% convertible subordinated notes had a fair value of $210.5 million as of December 31, 2005 on the Private Offerings, Resale and Trading Through Automated Linkages (PORTAL) Market.

11



 

RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6.        INCOME TAXES

Income tax expense for the third quarter of fiscal 2006 and fiscal 2005 was $2.7 million and $0.2 million, respectively, primarily representing foreign income taxes on international operations and the recognition of certain acquired tax benefits.  Income tax expense for the nine months ended December 31, 2005 and December 31, 2004 was $3.3 million and $0.5 million, respectively, primarily representing foreign income taxes on international operations and the recognition of certain acquired tax benefits.  The effective combined domestic income tax rate was 0.0% for both the third quarter of fiscal 2006 and the third quarter of fiscal 2005.  The Company's overall tax rate for the third quarter of fiscal 2006 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 third 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.

The annual effective tax rate is estimated to be 15.7% for fiscal year 2006, excluding the potential impact of variable accounting, compared to (0.9%) for fiscal year 2005.  The increase in the annual effective tax rate from fiscal year 2005 to fiscal year 2006 is due to the expiration at December 31, 2004 of a tax holiday in a particular foreign jurisdiction.  Additionally, the Company anticipates the partial recognition of certain acquired tax benefits that were subject to a valuation allowance at the time of acquisition, the realization of which requires a reduction in goodwill instead of a reduction in tax expense.

At December 31, 2005, the Company had outstanding net operating loss carryforwards (NOLs) for federal domestic tax purposes of approximately $104.6 million, which will begin to expire in 2012, if unused, and state losses of approximately $114.0 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 Company's acquisition of Resonext Communications, Inc. and Silicon Wave, Inc.  The utilization of acquired assets may be subject to certain annual limitations as required under Internal Revenue Code Section 382.  In accordance with SFAS 109, "Accounting for Income Taxes," a valuation allowance of $68.2 million related to domestic operating losses and credit carryforwards has been established as it is management's opinion that it is more likely than not that some portion of the deferred tax assets will not be realized.  Of the valuation allowance, $6.9 million was recorded against equity to offset the tax benefit of employee stock options recorded in equity and $7.1 million was recorded against goodwill to offset the tax benefit of net operating losses, credits and other deductions recorded in goodwill.

7.     GOODWILL AND INTANGIBLE ASSETS

On May 24, 2004, the Company completed the acquisition of Silicon Wave, Inc., a privately held San Diego-based supplier of highly integrated Bluetooth® solutions for wireless personal area networks.  The results of operations of Silicon Wave are included in the Company's consolidated financial statements as of May 25, 2004.  The Company paid approximately $16.8 million in cash for all outstanding shares of Silicon Wave capital stock with available cash on hand at the closing date and in addition, the Company agreed to pay earn-out consideration to the former Silicon Wave stockholders upon achievement of revenue goals for certain Silicon Wave products for the period from April 4, 2004 to April 1, 2006.  As of March 31, 2005, total revenue derived from certain Silicon Wave products triggered recognition of a liability and purchase price adjustment of approximately $4.9 million, which was paid during the first quarter of fiscal 2006.  If the Company's revenue derived from certain 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 these Silicon Wave products during this period up to a maximum of $75.0 million.  Based on the current backlog and anticipated orders of these Silicon Wave products, along with the amount of materials that are in production, we do not believe that the revenue derived from these certain Silicon Wave products will exceed the $25.0 million threshold and, therefore, do not anticipate the payment of the contingent consideration for fiscal 2006.

 

12





RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


7.     GOODWILL AND INTANGIBLE ASSETS (continued)

The change in the carrying amount of goodwill for the nine months ended December 31, 2005 is as follows (in thousands):

Balance as of March 31, 2005

 $

119,694 

Adjustments during the period

(3,783)

Balance as of December 31, 2005

 $

115,911 


The reduction to goodwill for the nine months ended December 31, 2005 is related to the recognition of a portion of the deferred tax assets for which no benefit was previously recognized for businesses acquired.  The remaining portion of the valuation allowance for these pre-acquisition deferred tax assets for which subsequently recognized tax benefits may be applied to reduce goodwill is approximately $7.1 million at December 31, 2005.

The components of identifiable intangible assets are as follows (in thousands):


DECEMBER 31, 2005

 


MARCH 31, 2005

     Gross
   Carrying
    Amount


Accumulated
Amortization

    Gross
  Carrying
   Amount


Accumulated
Amortization

Technology licenses

 $

13,360 

 $

5,575 

 $

12,121 

 $

4,777 

Acquired product technology
     and other


7,142 


3,621 


7,142 


3,170 

Total

 $

20,502 

 $

9,196 

 $

19,263 

 $

7,947 

During the first quarter of fiscal 2006, the Company reversed accrued contract expense related to the discontinuation of its internal WLAN chipset development efforts.  The accrued contract expense was related to a commitment to acquire a license for intellectual property of $1.0 million that was originally recorded in the fourth quarter of fiscal 2005.  During the first quarter of fiscal 2006, the license agreement was renegotiated to allow the technology to be used for non-WLAN related products. 

Intangible asset amortization expense was $0.4 million and $1.2 million for the three and nine months ended December 31, 2005 and $1.7 million and $5.0 million for the three and nine months ended December 31, 2004.  Amortization expense for the Company's identifiable intangible assets as of December 31, 2005 is estimated to be $0.5 million for the remainder of fiscal 2006, $1.9 million in fiscal 2007, $1.5 million in fiscal 2008, $1.3 million in fiscal 2009 and $1.2 million in fiscal 2010.

8.     RESTRUCTURING CHARGES

During fiscal 2005, the Company discontinued its internal WLAN chipset development efforts as a result of the Company's difficulties in bringing competitive WLAN chipset solutions to market in a timely manner.  The Company will continue to support its WLAN component business, which includes transceivers for gaming and other applications as well as its WLAN power amplifiers (PAs) and front-end modules for all WLAN markets.

During the first quarter of fiscal 2006, the Company reversed accrued contract expense related to the discontinuation of its internal WLAN chipset development efforts (See Note 7 above).  In the second and third quarters of fiscal 2006 additional expenses related to the discontinuation of the Company's internal WLAN chipset development efforts totaled $0.6 million.  These expenses and credits are recorded in "Other Operating Expense" in the Company's consolidated financial statements. 

13




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, our assembly facility and our test, tape and reel 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;

•         Variability in operating results;

•         Variability in production yields, raw material costs and availability;

•         Dependence on a limited number of customers for a substantial portion of our revenues;

•         Dependence on gallium arsenide (GaAs) heterojunction bipolar transistor (HBT) for the majority of our
     products;

•         Our ability to reduce costs and improve margins by implementing innovative technologies in response to
     declining average selling prices;

•         Our ability to adjust production capacity in a timely fashion in response to changes 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;

•         Dependence on consignment sales through customer inventory hubs, including the risk that the associated
     variability in the timing of revenue recognition may impact our ability to accurately forecast quarterly
     revenue;

•         Currency fluctuations, tariffs, trade barriers, taxes and export license requirements and health and security
     issues associated with our foreign operations;

•         Our ability to integrate acquired companies, including the risk that we may not realize expected synergies from
     our business combinations;

•         The variability of future stock-based compensation charges or credits during the remainder of fiscal 2006 as a
     result of our stock option exchange program as well as the adoption of SFAS 123 (R) in fiscal 2007;

•         Our ability to obtain patents, trademarks and copyrights, maintain trade secret protection and operate our
     business without infringing on the proprietary rights of other parties; and

•         Our ability to comply with changes in environmental laws.

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.

 

 

14



 

OVERVIEW

The following Management's Discussion and Analysis (MD&A) is intended to help the reader understand the results of operations and financial condition of RF Micro Devices, Inc.  MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes.

We design, develop, manufacture and market proprietary radio frequency (RF) components and system level solutions for wireless communications products and applications.  We are the leading supplier of PAs, one of the most critical RF components in cellular phones.  We are also the leading manufacturer of GaAs HBT, which offers distinct advantages over other technologies for the manufacture of current- and next-generation PAs.  Our products are included primarily in cellular phones, base stations, WLANs, cable television modems and global positioning systems (GPS).  We derive revenue from the sale of standard and custom-designed products.  We offer a broad array of products including amplifiers, mixers, modulators/demodulators, single-chip transmitters, Bluetooth® products and receivers and transceivers, all of which represent a substantial majority of the products required in wireless devices.  Our goal is to be the premier supplier of low-cost, high-performance integrated circuits and solutions for applications that enable wireless connectivity.

THIRD QUARTER FISCAL 2006 FINANCIAL AND OPERATIONAL HIGHLIGHTS:

• Quarterly revenue increased by 23.1% as compared to the corresponding quarter of fiscal 2005 primarily due to sales growth in PAs, transmit modules and cellular transceiver chipsets for global system for mobile communications (GSM)/ general packet radio system (GPRS) and GSM/GPRS/Enhanced Data for Global Evolution (EDGE) applications as well as an increase in sales volume of our Bluetooth® solutions.

• Gross margin for the quarter was 36.1% as compared to 34.6% in the corresponding quarter of fiscal 2005 due primarily to overall sales growth and gross profit margin improvement initiatives, offset in part by the costs associated with the use of outsourced components in certain new products.

• Operating income for the quarter increased to 8.2% of revenue as compared to 0.6% in the corresponding quarter of fiscal 2005.

• Inventory totaled $105.6 million at December 31, 2005, resulting in 5.0 turns for the quarter as compared to $80.8 million and 5.5 turns at December 31, 2004.  The increase in inventory is primarily related to transmit modules and POLARIS™ TOTAL RADIO™ transceiver solutions in support of the increase in sales volumes we anticipate during the March quarter.

• In December 2005, we announced that our Board of Directors approved the expansion of our internal assembly operations, which are located in Beijing, China.  We believe this expansion, which is projected to be completed during our first quarter of fiscal 2007, will significantly strengthen our supply chain and reduce manufacturing costs.

• Our Board of Directors approved increasing our wafer fabrication capacity in order to meet anticipated demand.

We are expecting continued growth in shipments of our POLARIS™ TOTAL RADIO™ transceiver solutions and we are also continuing to ramp our next-generation transmit modules, which include the PA and pseudomorphic high electron mobility transistor (pHEMT) switch.  We are also anticipating continued revenue growth of our Bluetooth® solutions, driven primarily by sales into handsets, accessories and other markets.

We plan to continue to increase our total addressable market by expanding our current product portfolios for handsets and selectively introducing products for additional wireless markets that leverage our competitive strengths and core RF expertise.




 

 

15



 


 

 

 


REVENUE


Three Months Ended
December 31,


 


Nine Months Ended
December 31,


 
 

(In thousands, except
percentages)


2005


2004

Percentage
Change


2005


2004

Percentage
Change


Revenue

 
$


207,974 

 
$


168,917


23.1%

 
$


544,362

 
$


483,798


12.5%

Our revenue for the three months ended December 31, 2005 increased primarily due to sales growth in PAs, transmit modules and cellular transceiver chipsets for GSM/GPRS and GSM/GPRS/EDGE applications as well as an increase in sales volume of our Bluetooth® solutions.

Our revenue increase for the nine months ended December 31, 2005 was primarily due to sales growth in PAs, transmit modules and cellular transceiver chipsets for GSM/GPRS and GSM/GPRS/EDGE applications, as well as an increase in sales volume of PAs for wideband code division multiple access (WCDMA) applications and Bluetooth® solutions.

International shipments (based on the "bill to" address of the customer) were $180.7 million and accounted for 86.9% of revenue for the three months ended December 31, 2005, compared to $149.7 million, or 88.6% of revenue, for the three months ended December 31, 2004.  For the nine months ended December 31, 2005, international shipments were $452.4 million, or 83.1% of revenue, compared to $406.4 million, or 84.0% of revenue, for the nine months ended December 31, 2004.

 

GROSS PROFIT
 

Three Months Ended
December 31,

 

Nine Months Ended
December 31,

 

(In thousands, except
percentages)


2005


2004

Percentage
Change


2005


2004

Percentage
Change


Gross profit

 
$


74,981   


 $


58,367   


28.5%    

 
$


193,040   

 
$


172,321   


12.0%    

As a percent of
     revenue


36.1%


34.6%


1.5 ppt 


35.5%


35.6%


(0.1)ppt

Our increase in gross profit for the three and nine months ended December 31, 2005 was the result of sales growth in PAs, transmit modules and cellular transceiver chipsets for GSM/EDGE applications, as well as an increase in sales volume of PAs for WCDMA applications, improved test yields and lower costs during the period for silicon wafers and surface mount devices. 

Our cost reduction initiatives during the December 2005 quarter included increasing assembly of PA modules in our internal module packaging production line in Beijing, China, improving yields, specifically final test yields, and improving capacity utilization rates. 

The following factors will continue to impact our gross margins: (1) capacity utilization; (2) product test yields; (3) costs of externally sourced materials and services; and (4) cost efficiencies of internally-sourced materials and services, including our assembly operation in Beijing, China.

RESEARCH AND DEVELOPMENT
 

Three Months Ended
December 31,

 

Nine Months Ended
December 31,

 

(In thousands, except
percentages)


2005


2004

Percentage
Change


2005


2004

Percentage
Change


Research and
     development

 

$



 38,650     



 $



38,848     

 
 
    (0.5)%



$

 

116,824   

 

$



111,337   

   
 
    4.9%

As a percent of
     revenue


18.6% 


23.0%


(4.4)ppt

           21.5%

    
   23.0%


(1.5)ppt  

Research and development expenses for the three months ended December 31, 2005 were relatively flat as compared to the three months ended December 31, 2004 as our investments in new product development were offset by the reduction in WLAN expenses.  The increase for the nine months ended December 31, 2005 as compared to the nine months ended December 31, 2004 was primarily attributable to increased headcount and related personnel expenses, including salaries and benefits related to our cellular chipset development efforts and the Silicon Wave acquisition.  We acquired Silicon Wave on May 24, 2004, and as a result, there were approximately thirty-one weeks of Silicon Wave expenses included in our financial statements during the first nine months of fiscal 2005.  We expect that research and development expenses will continue to increase as we introduce new products to increase our dollar content per cellular handset. 

16



 

MARKETING AND SELLING
 

Three Months Ended
December 31,

 

Nine Months Ended
December 31,

 

(In thousands, except
percentages)


2005


2004

Percentage
Change


2005


2004

Percentage
Change


Marketing and
     selling

 

$



11,906     



 $



11,971    

 

   (0.5)%

 

$



36,041    

 

$



34,510     

   
   
     4.4%   

As a percent of
     revenue


5.7%


7.1%


(1.4)ppt


6.6%


7.1%


(0.5)ppt 

Marketing and selling expenses for the three months ended December 31, 2005 remained relatively unchanged as compared to the three months ended December 31, 2004.  The increase for the nine months ended December 31, 2005 as compared to the nine months ended December 31, 2004 was primarily due to increased headcount and related personnel expenses.  We expect that marketing and selling expenses will continue to increase in absolute dollars in future periods.

GENERAL AND ADMINISTRATIVE
 

Three Months Ended December 31,

 

Nine Months Ended December 31,

 

(In thousands, except
percentages)


2005


2004

Percentage
Change


2005


2004

Percentage
Change


General and
     administrative

 

$



6,919     

 

$



6,594     

  

     4.9%   

 

$



20,084     

 

$



17,768     



13.0%

As a percent of
     revenue


3.3%  


3.9%


(0.6)ppt


3.7%


3.7%

 
           -    

The increase in general and administrative expenses for the three and nine months ended December 31, 2005 was primarily due to increased headcount and related personnel expenses.  We expect that general and administrative expenses will continue to increase in absolute dollars in future periods.


OTHER OPERATING (INCOME) EXPENSE

Three Months Ended
December 31,

 

Nine Months
Ended December 31,

 

(In thousands, except
percentages)


2005


2004

Percentage
Change


2005


2004

Percentage
Change


Other operating
   (income) expense

 

$



380     



$



         -



-      

 

$



(304)  



$



7,056    



 (104.3)% 

As a percent of
    revenue


0.2%


   -        


0.2ppt


(0.1)%


1.5%


 (1.5)ppt

During the three months ended December 31, 2005, we incurred approximately $0.4 million of expenses related to the discontinuation of our internal WLAN chipset development efforts.  These expenses, along with $0.2 million which was recorded in the prior quarter, partially offset the $1.0 million reversal of the accrued contract expense recorded in the first quarter of fiscal 2006. 

During the first quarter of fiscal 2005, we recorded a $6.2 million charge in accordance with SFAS 141 for acquired in-process research and development associated with the Silicon Wave acquisition that the Company, with the assistance of an independent valuation firm, determined had no alternative future use.  As of December 31, 2005, the estimated cost to complete this project is approximately $1.5 million with an estimated completion date during fiscal 2007.   Also included in other operating expense for the nine months ended December 31, 2004 was $0.9 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. 

OTHER (EXPENSE) INCOME AND INCOME TAXES
 


Three Months Ended
December 31,

 


Nine Months Ended
December 31,

2005

 

2004

 

2005

 

2004

Interest expense

 $

(1,036)

 $

(1,025)

 $

(3,129)

 $

(5,416)

Interest income

1,279

755

3,092

2,936

Loss in equity method investee

-

-

-

(1,761)

Other income (expense), net

55

137

888

(17)

Income taxes

(2,746)

(239)

(3,348)

(464)


 

17




Interest Expense
Interest expenses for the three months ended December 31, 2005 remained relatively unchanged as compared to the three months ended December 31, 2004.  The decrease for the nine months ended December 31, 2005 as compared to the nine months ended December 31, 2004 was primarily due to lower outstanding debt during the period as well as the write-off of the unaccreted discounts and unamortized issuance costs resulting from the repurchase of the remaining $100.0 million principal amount of outstanding 3.75% convertible subordinated notes during August 2004.

Loss in Equity Method Investee
Prior to our acquisition of Silicon Wave, we recorded 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).

Income Taxes
Our annual effective tax rate is estimated to be 15.7% for fiscal year 2006, excluding the potential impact of variable accounting, compared to (0.9%) for fiscal year 2005.  The increase in the annual effective tax rate from fiscal year 2005 to fiscal year 2006 is due to the expiration at December 31, 2004 of a tax holiday in a particular foreign jurisdiction.  Additionally, we anticipate the partial recognition of certain acquired tax benefits that were subject to a valuation allowance at the time of acquisition, the realization of which requires a reduction in goodwill instead of a reduction in tax expense.

STOCK-BASED COMPENSATION

We will continue to apply variable accounting to those options outstanding at March 31, 2006 which were either deemed modified or considered replacement options as a result of our option exchange program.  If the quoted price for our common stock at March 31, 2006 exceeds $5.38, variable accounting treatment will result in a charge to stock-based compensation for the fourth quarter of fiscal 2006.  If the quoted price for our common stock at March 31, 2006 is at or below $5.38, there will be no charge to stock-based compensation for the fourth quarter of fiscal 2006.  The amount of the potential non-cash charge to stock-based compensation is dependent on the quoted price for our common stock and the number of outstanding stock options subject to variable accounting (adjusted for exercises and cancellations), neither of which can be accurately predicted.  For the purposes of comparison, if our stock price at March 31, 2006 were to remain unchanged from the closing price on February 7, 2006 ($7.01) and no options were exercised or cancelled, we estimate that the non-cash charge for stock-based compensation due to variable accounting in the quarter ending March 31, 2006 would be approximately $8.5 million.  The impact of a potential non-cash variable accounting charge would not change our tax expense.  However, the estimated annual effective tax rate would increase as a result of the potential charge.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations to date through revenue from product sales, sales of equity and debt securities, bank borrowings and capital equipment leases.  Through public and Rule 144A securities offerings, we have raised approximately $687.0 million, net of offering expenses.  As of December 31, 2005, our working capital was $279.4 million, including $70.1 million in cash and cash equivalents, compared to working capital at December 31, 2004 of $300.0 million. 

Operating activities for the nine months ended December 31, 2005 generated $26.8 million in cash, compared to generating $53.6 million in cash for the nine months ended December 31, 2004.  This year over year decrease was primarily attributable to:  (1) changes in operating assets and liabilities that resulted in a year over year increase of cash used of $39.7 million; and (2) the decrease in adjustments to net income primarily due to the $6.2 million charge recorded in accordance with SFAS 141 during the first quarter of fiscal 2005 for acquired in-process research and development associated with the Silicon Wave acquisition that the Company, with the assistance of an independent valuation firm, determined had no alternative future use.  The decrease in cash provided by operating activities for the nine months ended December 31, 2005 was primarily the result of an increase in accounts receivable balance, which was largely driven by (i) an increase in sales volume over the fourth fiscal quarter of 2005; (ii) the timing associated with the shipment of products; and (iii) an increase in the inventory balance which was primarily related to transmit modules and POLARIS™ TOTAL RADIO™ transceiver solutions in support of the increase in sales volumes we anticipate during the March quarter.

Net cash provided by investing activities for the nine months ended December 31, 2005 was $14.0 million, compared to net cash used in investing activities of $32.7 million in the prior year, due primarily to higher purchases of property, plant and equipment and securities available-for-sale during the nine months ended December 31, 2004.

Net cash provided by financing activities for the nine months ended December 31, 2005 was $3.2 million, compared to a use of cash of $96.7 million for the nine months ended December 31, 2004, due primarily to the repurchase of the $100.0 million outstanding principal amount of our 3.75% convertible subordinated notes.


 

18



 


COMMITMENTS AND CONTINGENCIES

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.  On August 15, 2004, the Company redeemed the remainder of the outstanding principal amount of the 3.75% convertible subordinated notes for $100.0 million plus accrued interest with cash flow from operations and cash on hand. 

Capital Commitments  At December 31, 2005, we had long-term capital commitments of approximately $28.7 million, consisting of approximately $27.0 million for the expansion of our manufacturing capacity and the remainder for general corporate requirements.

Business Combination Contingency  We agreed to pay earn-out consideration to former Silicon Wave stockholders upon achievement of certain revenue goals for the period from April 4, 2004 to April 1, 2006.  If our revenue derived from certain Silicon Wave products for the period from April 4, 2004 to April 2, 2005 exceeded $6.0 million, we agreed to pay an aggregate cash amount equal to one-half of the revenue derived from these Silicon Wave products during that period.  As of April 2, 2005, total revenue derived from certain Silicon Wave products triggered recognition of a liability and purchase price adjustment of approximately $4.9 million, which was paid during the first quarter of fiscal 2006.  If our revenue derived from certain Silicon Wave products for the period from April 3, 2005 to April 1, 2006 exceeds $25.0 million, we will pay an additional aggregate cash amount equal to the revenue derived from these Silicon Wave products during this period up to a maximum of $75.0 million.  Based on the current backlog and anticipated orders of these Silicon Wave products, along with the amount of materials that are in production, we do not believe that the revenue derived from these certain Silicon Wave products will exceed the $25.0 million threshold and, therefore, do not anticipate the payment of the contingent consideration for fiscal 2006.

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 fiscal 2004 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 significant decrease in demand for our products, or in the event that growth is faster than we had 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, enter into sale-leaseback transactions 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, if at all.

Legal  The Company is involved in various legal proceedings and claims that have arisen in the ordinary course of its business that have not been fully adjudicated.  These actions, when finally concluded and determined, will not, in the opinion of management, have a material adverse effect upon the consolidated financial position or results of operations of the Company.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk
The Company's interest rate risk relating to our short-term and long-term investments as well as our convertible debt and capital lease obligations has not changed significantly from the disclosure in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2005.

Foreign Currency Risk
The Company has limited exposure to currency exchange fluctuations, as we manage the sensitivity of our international sales, purchases of raw materials and equipment by denominating most transactions in U.S. dollars.  The Company has operations in Beijing, China, where domestic sales are denominated in renminbi.  The recent change in the Chinese government's exchange

19




rate policies may increase the risk of adverse changes in the dollar/renminbi exchange rate.  We do not currently engage in foreign currency hedging transactions.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company's Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of the Company's disclosure controls and procedures in accordance with Rule 13a-15 under the Exchange Act.  Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to enable the Company to record, process, summarize and report in a timely manner the information that the Company is required to disclose in its Exchange Act reports.

There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

We have 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 United States District Court for the District of Arizona by Lemelson Medical, Education & Research Foundation, LP.  The suit alleges that we have infringed claims of a total of at least 17 and possibly 18 patents, including "machine vision" claims of 12 patents, "bar code" claims of seven patents (some of which are the same as the 12 "machine vision" patents) and "integrated circuit" claims of three or four patents and seeks injunctive relief, damages for the alleged infringements and payment of the plaintiff's attorneys' fees.  This case was stayed pending resolution of one of two related actions to which we are not a party.  This case was stayed before any discovery and is in its very preliminary stages.  In one of the related actions, a U.S. District Judge ruled that claims of 14 patents (each patent being among those patents at issue in the Company's litigation) were unenforceable and invalid.  On September 9, 2005, the Federal Circuit upheld the U.S. District Judge's ruling that claims of the 14 patents are unenforceable. On December 22, 2005, the plaintiff, Lemelson Medical, Education & Research Foundation, LP, filed a motion with the United States District Court for the District of Arizona to dismiss the case as to the 14 patents that have been held unenforceable by the Federal Circuit.  There are four patents remaining at issue in the litigation.  We have not been notified that the stay has been lifted.


ITEM 6.   EXHIBITS

       10.1

Form of Stock Option Agreement for Nonemployee Directors pursuant to the 2003
Stock Incentive Plan of RF Micro Devices, Inc. *
 

            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.

*  Executive compensation plan or agreement

20



 


SIGNATURES

 

                 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

RF Micro Devices, Inc.

Date:  February 9, 2006

 


/s/ William A. Priddy, Jr.

 

William A. Priddy, Jr.

 

Chief Financial Officer and

 

Vice President, Finance and Administration
(Principal Financial Officer)

    

Date:  February 9, 2006

 


/s/ Barry D. Church

 

Barry D. Church

 

Vice President and Corporate Controller

 

(Principal Accounting Officer)

 

 

21

 

 



EXHIBIT INDEX

      10.1

Form of Stock Option Agreement for Nonemployee Directors pursuant to the 2003
Stock Incentive Plan of RF Micro Devices, Inc. *
 

            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.

*  Executive compensation plan or agreement

 

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