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 (together, the “Company” or “RFMD”) 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 29, 2014
.
The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company uses a 52- or 53-week fiscal year ending on the Saturday closest to March 31 of each year. The first fiscal quarter of each year ends on the Saturday closest to June 30, the second fiscal quarter of each year ends on the Saturday closest to September 30 and the third fiscal quarter of each year ends on the Saturday closest to December 31. Fiscal 2015 is a 52-week year and fiscal 2014 was a 52-week year.
2. NET INCOME PER SHARE
The following table sets forth a reconciliation of the numerators and denominators in the computation of basic and diluted net income per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 28, 2014
|
|
June 29, 2013
|
|
Numerator:
|
|
|
|
|
Numerator for basic and diluted net income per share — net income available to common shareholders
|
$
|
38,647
|
|
|
$
|
1,561
|
|
|
Denominator:
|
|
|
|
|
Denominator for basic net income per share — weighted average shares
|
286,257
|
|
|
280,788
|
|
|
Effect of dilutive securities:
|
|
|
|
|
Share-based awards
|
8,380
|
|
|
6,317
|
|
|
Denominator for diluted net income per share — adjusted weighted average shares and assumed conversions
|
294,637
|
|
|
287,105
|
|
|
Basic net income per share
|
$
|
0.14
|
|
|
$
|
0.01
|
|
|
Diluted net income per share
|
$
|
0.13
|
|
|
$
|
0.01
|
|
|
In the computation of diluted net income per share for the
three
months ended
June 28, 2014
and three months ended
June 29, 2013
, outstanding stock options to purchase less than
0.1 million
shares and approximately
8.9 million
shares, respectively, were excluded because the exercise price of the options was greater than the average market price of the underlying common stock and the effect of their inclusion would have been anti-dilutive.
The computation of diluted net income per share does not assume the conversion of the Company’s
$175 million
initial aggregate principal amount of convertible subordinated notes (the "2014 Notes"). The 2014 Notes became due on April 15, 2014, and the remaining principal balance of
$87.5 million
was paid with cash on hand (see Note 4).
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. INVENTORIES
Inventories are stated at the lower of cost or market determined using the average cost method. The components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 28, 2014
|
|
March 29, 2014
|
Raw materials
|
$
|
33,757
|
|
|
$
|
32,927
|
|
Work in process
|
65,628
|
|
|
51,544
|
|
Finished goods
|
43,524
|
|
|
41,232
|
|
Total inventories
|
$
|
142,909
|
|
|
$
|
125,703
|
|
4. DEBT
Convertible Debt
The 2014 Notes became due on April 15, 2014, and the remaining principal balance of
$87.5 million
plus interest of
$0.4 million
was paid with cash on hand.
Credit Agreement
In March 2013, the Company and certain material domestic subsidiaries of the Company (the “Guarantors”) entered into a four-year senior credit facility with Bank of America, N.A., as Administrative Agent and a lender, and a syndicate of other lenders (the “Credit Agreement”). The Credit Agreement includes a
$125.0 million
revolving credit facility, which includes a
$5.0 million
sublimit for the issuance of standby letters of credit and a
$5.0 million
sublimit for swingline loans. The Company may request, at any time and from time to time, that the revolving credit facility be increased by an amount not to exceed
$50.0 million
. The revolving credit facility is available to finance working capital, capital expenditures and other corporate purposes. The Company’s obligations under the Credit Agreement are jointly and severally guaranteed by the Guarantors. On August 15, 2013, the Credit Agreement was amended to revise the definition of "Eurodollar Base Rate" and a provision regarding restricted payments. The Company currently has
no
outstanding amounts under the Credit Agreement and is in compliance with the financial covenants associated with the Credit Agreement as of
June 28, 2014
.
5. INCOME TAXES
Income Tax Expense
The Company’s provision for income taxes for the three months ended
June 28, 2014
and
June 29, 2013
has been calculated by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the three months ended
June 28, 2014
and
June 29, 2013
.
The Company’s income tax expense was
$7.4 million
for the three months ended
June 28, 2014
and
$0.6 million
for the three months ended
June 29, 2013
. The Company’s effective tax rate was
16.1%
for the three months ended
June 28, 2014
and
28.2%
for the three months ended
June 29, 2013
. The Company's effective tax rate for both the first quarter of fiscal 2015 and the first quarter of fiscal 2014 differed from the statutory rate primarily due to tax rate differences in foreign jurisdictions, state income taxes, domestic tax credits generated, adjustments to the valuation allowance limiting the recognition of the benefit of domestic deferred tax assets, the domestic production activity deduction (for fiscal 2015 only), and adjustments to reduce the carrying value of United Kingdom (U.K.) deferred tax assets (for fiscal 2014 only).
Deferred Taxes
The valuation allowance against net deferred tax assets has decreased in fiscal 2015 by
$10.0 million
from the
$143.3 million
balance as of the end of fiscal 2014, with the change primarily arising from a decrease in domestic deferred tax assets as a result of generating current year domestic taxable income. The Company intends to maintain a valuation allowance against its domestic net deferred tax assets until sufficient positive evidence exists to support its full or partial reversal. The amount of the deferred tax assets actually realized could vary depending upon the amount of taxable income the Company is able to generate in the various taxing jurisdictions in which the Company operates. It is reasonably possible that with continued profitability in the U.S. during the remainder of fiscal 2015, a significant portion of the valuation allowance related to domestic deferred tax assets may be released once the weight of available evidence supports the conclusion that it is more likely than not that the domestic deferred tax assets can be realized.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The valuation allowance against deferred tax assets related to U.K. tax losses was increased during the first quarter of fiscal 2014 as manufacturing operations at the U.K. manufacturing facility were in process of being phased out and U.K. tax loss carryovers can only be used to offset income generated by the same trade or business from which they arose.
The Company has outstanding domestic federal and state tax net operating loss (“NOLs”) carry-forwards that began or will begin to expire in fiscal 2019 and fiscal 2015, respectively, if unused. The use of the NOLs that were acquired in prior year acquisitions is subject to certain annual limitations under Internal Revenue Code Section 382 and similar state tax provisions.
Uncertain Tax Positions
The Company’s gross unrecognized tax benefits increased from
$39.4 million
as of the end of fiscal 2014 to
$39.5 million
as of the end of the first quarter of fiscal 2015, with the change arising from a
$0.1 million
increase related to tax positions taken with respect to the current fiscal year.
6. INVESTMENTS AND FAIR VALUE MEASUREMENTS
Available-For-Sale
The following is a summary of available-for-sale securities as of
June 28, 2014
and
March 29, 2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated Fair
Value
|
June 28, 2014
|
|
|
|
|
|
|
|
U.S. government/agency securities
|
$
|
102,064
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
102,064
|
|
Auction rate securities
|
2,150
|
|
|
—
|
|
|
—
|
|
|
2,150
|
|
Money market funds
|
38,808
|
|
|
—
|
|
|
—
|
|
|
38,808
|
|
|
$
|
143,022
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
143,022
|
|
March 29, 2014
|
|
|
|
|
|
|
|
U.S. government/agency securities
|
$
|
133,064
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
133,065
|
|
Auction rate securities
|
2,150
|
|
|
—
|
|
|
—
|
|
|
2,150
|
|
Money market funds
|
48,800
|
|
|
—
|
|
|
—
|
|
|
48,800
|
|
|
$
|
184,014
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
184,015
|
|
The estimated fair value of available-for-sale securities was based on the prevailing market values on
June 28, 2014
and
March 29, 2014
. We determine the cost of an investment sold based on the specific identification method.
The gross realized gains and losses recognized on available-for-sale securities for the three months ended
June 28, 2014
and
June 29, 2013
, were insignificant.
No available-for-sale investments were in a continuous unrealized loss position as of
June 28, 2014
and
March 29, 2014
.
The amortized cost of available-for-sale investments in debt securities with contractual maturities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2014
|
|
March 29, 2014
|
|
Cost
|
|
Estimated
Fair Value
|
|
Cost
|
|
Estimated
Fair Value
|
Due in less than one year
|
$
|
140,872
|
|
|
$
|
140,872
|
|
|
$
|
181,864
|
|
|
$
|
181,865
|
|
Due after ten years
|
2,150
|
|
|
2,150
|
|
|
2,150
|
|
|
2,150
|
|
Total investments in debt securities
|
$
|
143,022
|
|
|
$
|
143,022
|
|
|
$
|
184,014
|
|
|
$
|
184,015
|
|
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Fair Value Measurements
On a quarterly basis, the Company measures the fair value of its marketable securities, which are comprised of U.S. government/agency securities, auction rate securities (ARS), and money market funds. Marketable securities are reported at fair value in cash and cash equivalents, short-term investments and long-term investments on the Company’s Condensed Consolidated Balance Sheet. The related unrealized gains and losses are included in accumulated other comprehensive loss, a component of shareholders’ equity, net of tax.
Recurring Fair Value Measurements
The fair value of the financial assets measured at fair value on a recurring basis was determined using the following levels of inputs as of
June 28, 2014
and
March 29, 2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices In
Active Markets For
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
June 28, 2014
|
|
|
|
|
|
|
U.S. government/agency securities
|
$
|
102,064
|
|
|
$
|
102,064
|
|
|
$
|
—
|
|
|
Auction rate securities
|
2,150
|
|
|
—
|
|
|
2,150
|
|
|
Money market funds
|
38,808
|
|
|
38,808
|
|
|
—
|
|
|
|
$
|
143,022
|
|
|
$
|
140,872
|
|
|
$
|
2,150
|
|
|
March 29, 2014
|
|
|
|
|
|
|
U.S. government/agency securities
|
$
|
133,065
|
|
|
$
|
133,065
|
|
|
$
|
—
|
|
|
Auction rate securities
|
2,150
|
|
|
—
|
|
|
2,150
|
|
|
Money market funds
|
48,800
|
|
|
48,800
|
|
|
—
|
|
|
|
$
|
184,015
|
|
|
$
|
181,865
|
|
|
$
|
2,150
|
|
|
ARS are debt instruments with interest rates that reset through periodic short-term auctions. The Company’s Level 2 ARS are valued at par based on quoted prices for identical or similar instruments in markets that are not active. As of
June 28, 2014
and
March 29, 2014
, the Company did not have any Level 3 securities.
Nonrecurring Fair Value Measurements
The Company's non-financial assets, such as intangible assets and property and equipment, are measured at fair value when there is an indicator of impairment, and recorded at fair value only when an impairment charge is recognized. The Company did not have any material non-financial assets or liabilities measured at fair value during the three months ended
June 28, 2014
. During the first quarter of fiscal 2014, the Company recorded a
$1.7 million
impairment of certain property and equipment as a result of the phase out of manufacturing and the then-pending sale of its U.K. manufacturing facility. As of June 29, 2013, the fair value of these impaired assets was estimated to be
$0.8 million
using a significant Level 3 unobservable input (market valuation approach). The market valuation approach uses prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as the Company's experience. During the second quarter of fiscal 2014, the Company sold its U.K. manufacturing facility, which resulted in a loss on these impaired assets of
$0.6 million
.
Other Fair Value Disclosures
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate fair values because of the relatively short-term maturities of these instruments.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-12,
"Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period."
ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption is permitted. The Company will adopt the provisions of ASU 2014-12 in the first quarter of fiscal 2017, and is currently evaluating the impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
"Revenue from Contracts with Customers (Topic 606),"
which amends the guidance in former Accounting Standards Codification ("ASC") Topic 605,
Revenue Recognition,
and provides a single, comprehensive revenue recognition model for all contracts with customers. ASU 2014-09 contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The entity will recognize revenue to reflect the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. The Company will adopt the provisions of ASU 2014-09 in the first quarter of fiscal 2018, and is currently evaluating the impact on its consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08,
"Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)
:
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity."
ASU 2014-08 includes amendments that change the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. This guidance is effective for companies for any new disposals and new classifications of assets held for sale in annual periods beginning on or after December 15, 2014. The Company will adopt the provisions of ASU 2014-08 in the first quarter of fiscal 2016 and the adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11,
“Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”
ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction of a deferred tax asset or a tax credit carryforward, excluding certain exceptions. This ASU was effective for the Company beginning in the first quarter of fiscal 2015 and the adoption did not have a material impact on the Company's consolidated financial statements.
8. OPERATING SEGMENT INFORMATION
RFMD’s operating segments as of
June 28, 2014
are its Cellular Products Group (CPG), Multi-Market Products Group (MPG) and Compound Semiconductor Group (CSG).
CPG is a leading global supplier of cellular radio frequency (RF) solutions which perform various functions in the cellular front end section. The cellular front end section is located between the transceiver and the antenna. These RF solutions include power amplifier (PA) modules, transmit modules, PA duplexer modules, antenna control solutions, antenna switch modules, switch filter modules, switch duplexer modules and RF power management solutions. CPG supplies its broad portfolio of cellular RF solutions into a variety of mobile devices, including smartphones, handsets, notebook computers, and tablets.
MPG is a leading global supplier of a broad array of RF solutions, such as PAs, low noise amplifiers, variable gain amplifiers, high power gallium nitride transistors, attenuators, mixers, modulators, switches, voltage-controlled oscillators (VCOs), phase locked loop modules, circulators, isolators, multi-chip modules, front end modules, and a range of military and space components (amplifiers, mixers, VCOs and power dividers). Major communications applications include mobile wireless infrastructure, (second generation (2G), third generation (3G) and fourth generation (4G)), point-to-point and microwave radios, WiFi (infrastructure and mobile devices), and cable television (CATV) wireline infrastructure. Industrial applications include Smart Energy/Advanced Metering Infrastructure (AMI), private mobile radio, and test and measurement equipment.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Aerospace and defense applications include military communications, radar and electronic warfare, as well as space communications.
CSG is a business group established to leverage RFMD’s compound semiconductor technologies and related expertise in RF and non-RF end markets and applications.
As of
June 28, 2014
, the Company’s reportable segments are CPG and MPG. CSG does not currently meet the quantitative threshold for an individually reportable segment under ASC 280-10-50-12 and is therefore included in the “Other operating segment” line in the following tables. CPG and MPG are separate reportable segments based on the organizational structure and information reviewed by the Company’s Chief Executive Officer, who is the Company’s chief operating decision maker (or CODM), and are managed separately based on the end markets and applications they support. The CODM allocates resources and assesses the performance of each operating segment primarily based on non-GAAP operating income (loss) and non-GAAP operating income (loss) as a percentage of revenue.
The “All other” category includes operating expenses such as share-based compensation, amortization of purchased intangible assets, acquisition- and integration-related costs, intellectual property rights (IPR) litigation costs, restructuring and disposal costs, certain consulting costs, and other miscellaneous corporate overhead expenses that the Company does not allocate to its reportable segments because these expenses are not included in the segment operating performance measures evaluated by the Company’s CODM. The CODM does not evaluate operating segments using discrete asset information. The Company’s operating segments do not record inter-company revenue. The Company does not allocate gains and losses from equity investments, interest and other income, or taxes to operating segments. Except as discussed above regarding the “All other” category, the Company’s accounting policies for segment reporting are the same as for RFMD as a whole.
The following tables present details of the Company’s reportable segments and a reconciliation of the “All other” category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 28,
2014
|
|
June 29,
2013
|
|
Net revenue:
|
|
|
|
|
CPG
|
$
|
261,116
|
|
|
$
|
237,713
|
|
|
MPG
|
55,187
|
|
|
55,283
|
|
|
Other operating segment
|
18
|
|
|
—
|
|
|
Total net revenue
|
$
|
316,321
|
|
|
$
|
292,996
|
|
|
Income from operations:
|
|
|
|
|
CPG
|
$
|
69,616
|
|
|
$
|
21,950
|
|
|
MPG
|
10,871
|
|
|
6,861
|
|
|
Other operating segment
|
(1,572
|
)
|
|
(823
|
)
|
|
All other
|
(32,795
|
)
|
|
(24,753
|
)
|
|
Income from operations
|
46,120
|
|
|
3,235
|
|
|
Interest expense
|
(474
|
)
|
|
(1,509
|
)
|
|
Interest income
|
35
|
|
|
41
|
|
|
Other income
|
384
|
|
|
408
|
|
|
Income before income taxes
|
$
|
46,065
|
|
|
$
|
2,175
|
|
|
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 28,
2014
|
|
June 29,
2013
|
|
Reconciliation of “All other” category:
|
|
|
|
|
Share-based compensation expense
|
$
|
(9,169
|
)
|
|
$
|
(9,433
|
)
|
|
Amortization of intangible assets
|
(6,966
|
)
|
|
(7,217
|
)
|
|
Acquisition and integration related costs
|
(8,453
|
)
|
|
(130
|
)
|
|
Restructuring and disposal costs
|
(1,315
|
)
|
|
(4,842
|
)
|
|
IPR litigation costs
|
(6,014
|
)
|
|
(824
|
)
|
|
Certain consulting expense
|
—
|
|
|
(2,200
|
)
|
|
Other expenses ((loss) gain on property and equipment, and start-up costs)
|
(878
|
)
|
|
(107
|
)
|
|
Loss from operations for “All other”
|
$
|
(32,795
|
)
|
|
$
|
(24,753
|
)
|
|
9. MERGER AGREEMENT
On February 22, 2014, RFMD and TriQuint Semiconductor, Inc. ("TriQuint") entered into an Agreement and Plan of Merger and Reorganization providing for the business combination of RFMD and TriQuint under a new holding company currently named Rocky Holding, Inc. During the first quarter of fiscal 2015, the Company incurred acquisition costs of
$2.5 million
and integration costs of
$6.0 million
associated with the proposed business combination. The acquisition and integration costs are being expensed as incurred and are presented in the Condensed Consolidated Statement of Operations as "Other operating expense (income)." Certain fees are contingent on the transaction closing. Consummation of the business combination with TriQuint is subject to, among other things, the separate approvals of both RFMD shareholders and TriQuint shareholders at each company's special meeting of shareholders on September 5, 2014 and regulatory approvals. We currently anticipate the merger will be completed during the second half of calendar year 2014.
RF MICRO DEVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
10. SUBSEQUENT EVENTS
On July 22, 2014, we announced that we had entered into a confidential settlement and license agreement with Peregrine Semiconductor Corporation under which both parties agreed to cross license certain patents to each other, settle all outstanding claims between them and dismiss all related litigation, including patent infringement proceedings pending in the United States District Court for the Southern District of California.