RFMD » Topics » Share-Based Compensation

This excerpt taken from the RFMD 10-Q filed Nov 8, 2006.

Share-Based Compensation

On April 2, 2006 (the first day of the Company's 2007 fiscal year), the Company adopted the provisions of SFAS 123(R) using a modified prospective application.  Under SFAS 123(R), share-based compensation cost is measured at the grant date, based on the estimated fair value of the award using an option pricing model, and is recognized as expense over the

 

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

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

employee's requisite service period.  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. 

Under the modified prospective method of adoption for SFAS 123(R), the compensation cost recognized by the Company beginning in fiscal 2007 includes (a) compensation cost for all equity incentive awards granted prior to, but not yet vested as of April 2, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all equity incentive awards granted subsequent to April 2, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).  In addition, under the modified prospective application, prior periods are not revised for comparative purposes.  The Company uses the straight-line attribution method to recognize share-based compensation costs over the service period of the award for awards granted subsequent to the adoption of SFAS 123(R).  For options issued prior to the adoption of SFAS 123(R), the Company uses the accelerated attribution method to recognize share-based compensation costs over the service period of the award, amortizing each separately vesting portion of the award as a unique award.

Total pre-tax share-based compensation expense recognized in the Condensed Consolidated Statements of Operations was $9.3 million and $14.8 million for the three and six months ended September 30, 2006, respectively.  For the three and six months ended September 30, 2005, the total pre-tax share-based compensation expense recognized was $2.2 million and $3.2 million, respectively.  Amounts recorded in the three and six months ended September 30, 2005 primarily represented expenses related to restricted stock awards since no expense was recognized for stock options.  In addition, as of September 30, 2006, $0.9 million of share-based compensation expense was capitalized into inventory. 

Prior to the adoption of SFAS 123(R), certain options were subject to variable accounting and $1.9 million of compensation expense related to the variable accounting was capitalized into inventory as of March 31, 2006.  This amount was recognized in cost of goods sold in the six months ended September 30, 2006.  The options that were previously subject to variable accounting treatment are now subject to the provision of SFAS 123(R) and are no longer accounted for as variable awards.

As a result of adopting SFAS 123(R), and therefore no longer applying variable accounting in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), the Company's income from continuing operations, income before income taxes and net income for the three months ended September 30, 2006, are each $2.2 million higher than if it had continued to account for share-based compensation under APB 25.  For the six months ended September 30, 2006, the Company's income from continuing operations, income before income taxes and net income are each $20.2 million lower than if it had continued to account for share-based compensation under APB 25. 

Basic and diluted earnings per share for the three months ended September 30, 2006 are each $0.02 higher than if the Company had continued to account for share-based compensation under APB 25.  For the six months ended September 30, 2006, basic and diluted earnings per share are each $0.10 lower than if the Company had continued to account for share-based compensation under APB 25.

Cash flow from operations and cash flow from financing activities did not change as a result of adopting SFAS 123(R) because the Company did not recognize any excess tax benefit.  SFAS 123(R) requires that the cash flows resulting from the tax benefits created by the tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) be classified as financing cash flows. 

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

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

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