FORWARD-LOOKING STATEMENTS
Certain statements in this Form
10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, and Section 21E of the Securities Exchange Act of 1934. The words estimate, plan, intend, expect,
anticipate, believe and similar expressions are intended to identify forward-looking statements. These forward-looking
statements are found at various places throughout this report and in the documents incorporated herein by reference. Agere disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe
that our expectations are based on reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause
our actual results to differ from estimates or projections contained in the forward-looking statements are described in Item 1A.
PART I
We are a leading provider of
integrated circuit solutions for a variety of applications, including high-density storage, mobile wireless communications and enterprise and
telecommunications networks. These solutions form the building blocks for a broad range of computing and communications applications. Some of our
solutions include related software and reference designs. Our customers include manufacturers of hard disk drives, mobile phones, high-speed
communications systems and personal computers.
Integrated circuits, or chips,
are made using semiconductor wafers imprinted with a network of electronic components. They are designed to perform various functions such as
processing electronic signals, controlling electronic system functions and processing and storing data. Reference designs are complete specifications
for products that a customer can use to build an end product, including components, board layouts and software. By using one of our reference designs,
a customer can reduce the amount of product design it must perform and the amount of time required to introduce a new product into the
market.
We have operating segments that
focus on four target markets: Storage, Mobility, Enterprise and Networking and Telecommunications. We have two reportable segments for financial
reporting purposes, Consumer Enterprise and Telecommunications. The Consumer Enterprise segment includes the Storage, Mobility and Enterprise and
Networking operating segments. Information about each of these groups is provided below. We also have an operations group that manages our
manufacturing and supply chain activities.
In fiscal 2005 and fiscal 2004,
17% of our revenue was generated in the United States and 83% was generated outside the United States. See We conduct a significant amount of our
sales activity and manufacturing efforts outside the United States, which subjects us to additional business risks and may adversely affect our results
of operations due to increased costs in Item 1A. See Item 8 for financial information about our reportable segments and geographic financial
information.
In the fourth quarter of fiscal
2005, we ceased operations at our Orlando, Florida, manufacturing facility and sold substantially all of the semiconductor manufacturing equipment at
the facility.
We have research and development
and manufacturing sites in the United States, Australia, Canada, China, Germany, India, Ireland, Israel, Japan, Korea, Singapore, Spain, Taiwan,
Thailand and the United Kingdom. As of September 30, 2005, we had approximately 6,200 employees worldwide, including approximately 500 employees who
were expected to go off-roll as a result of the closure of our Orlando, Florida manufacturing facility. We were incorporated in Delaware in 2000 as
part of the plan of Lucent Technologies Inc. to spin off its microelectronics business to its stockholders. Lucent completed our spin-off in June
2002.
On May 27, 2005, we reclassified
our Class A common stock and Class B common stock into a new, single class of common stock and effected a 1-for-10 reverse stock
split.
We maintain an Internet website
at http://www.agere.com. We make available free of charge on our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our
current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of
1934
as soon as practicable after
we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Information on our website is not incorporated by
reference into this report.
In March 2005, our Chief
Executive Officer submitted to the New York Stock Exchange an annual certification stating that he was not aware of any violations of the New York
Stock Exchanges corporate governance listing standards.
Consumer Enterprise Segment
We sell integrated circuits for
hard disk drives, which are used to store data in personal computers, corporate network servers and consumer electronics products such as digital video
recorders, digital media players, mobile phones and game consoles.
Our TrueStore® family of
storage electronics includes read channels, preamplifiers, motor controllers, disk controllers and firmware, as well as systems-on-a-chip. These are
the critical chips required to read, write and protect data.
Read channels convert analog
signals that are generated by reading the stored data on the hard disk into digital signals. Analog refers to a transmission technique employing a
continuous signal that varies in amplitude, frequency or phase of the transmission. Digital refers to a method of transmitting, storing and processing
data that uses distinct electronic or optical pulses to represent the binary digits 0 and 1. We also sell pre-amplifiers, or preamps, which are used to
amplify the initial signal from the hard disk so the signal can be processed by the read channel. Together, these components are critical to
determining the overall performance of a hard disk drive.
Our disk controllers are used to
control signal processing and communications functions within the disk drive. We also sell motor controllers, which are used to control functions
related to the spinning of the physical storage media.
A storage system-on-a-chip is an
integrated circuit that combines the functionality of a read channel and a disk controller in a small, high-performance, low-power and cost-effective
package. With these devices, manufacturers of hard disk drives get the performance and design flexibility needed to develop drives with outstanding
storage capacity, speed, reliability and power savings.
Consumers are increasingly in
need of more storage to manage their digital content whether it is MP3 files, home videos, digital photographs or downloaded video. As disk
drives reach a capacity ceiling using current longitudinal recording techniques, design innovations are required in a disk drives heads, media
and electronics to deliver more storage. Perpendicular recording increases the amount of storage possible on a disk drives platter. In fiscal
2005, we introduced our TrueStore CE family of integrated circuits targeting hard disk drives for portable consumer electronics. These integrated
circuits support both horizontal and perpendicular recording, at a performance level that enables hard disk drives to store more data than competing
solutions.
Mobility
We sell integrated circuits for
use in mobile phones and other wireless data and voice communications products. We offer integrated wireless solutions that include:
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Digital baseband processors for speech compression and encoding
and transmission of voice and data; |
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Conversion signal processors to convert signals between
frequencies used in digital signal processors and frequencies used for radio transmission; and |
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Software that controls the communication process. |
Several different standards exist
for mobile phones. The most prevalent standards are commonly referred to as second generation, or 2G, standards. Carriers are deploying
advancements to their 2G networks that provide customers with higher data rates, thereby enabling services like Internet surfing and e-mail. Some
carriers are also beginning to deploy networks based on third generation, or 3G, standards. These networks offer even higher data
throughput, enabling revenue-generating applications, like streaming video, that require higher data rates than 2G networks can
provide.
2
Our mobile phone products support
a number of protocols, including General Packet Radio Service, or GPRS, which operates on the second generation Global System for Mobile
Communications, or GSM, standard. GPRS provides enhanced data transmission capabilities for GSM mobile phones. We also provide integrated circuits for
an extension of GPRS called EDGE. GPRS and EDGE are often referred to as 2.5G solutions because of the enhanced data rates they provide. We
are sampling products that support the wideband Code Division Multiple Access, or W-CDMA, standard. W-CDMA is a third generation, or 3G,
standard. In March 2005, we acquired Modem-Art Ltd., a privately-held developer of advanced processor technology for 3G mobile phone devices as part of
our effort to develop 3G solutions. Because it is costly for a carrier to replace its network infrastructure to support 3G service, we expect that many
carriers will choose to replace their infrastructure only in high usage areas, and to retain 2.5G infrastructure in lower use areas. To address this,
we are developing a 3G solution which is designed to support both W-CDMA and EDGE and to enable consumers to experience 3G data rates in a 3G service
area, while providing 2.5G data rates outside of 3G coverage.
In fiscal 2005, we introduced a
new generation solution for mainstream EDGE feature phones and Smartphones. This is a dual-core, multi-processor solution that separates communications
and applications processing to deliver improved handling of advanced multimedia tasks while ensuring that voice calling is continuously maintained. It
delivers high-quality video and audio without requiring costly applications processors or multimedia companion chips. We have been sampling this
solution and expect it will be available for volume production in late 2005.
Enterprise and Networking
The majority of our revenue from
products used in enterprise and networking applications is derived from the sale of integrated circuits that are custom developed for our customers.
These integrated circuits incorporate our intellectual property or combine our intellectual property with the intellectual property of our customers or
other third parties to create a customized solution for these customers. For some customers, we design and manufacture the integrated circuit while the
key intellectual property belongs solely to our customers.
Our systems-level knowledge and
integrated circuit design methodologies allow us to turn our customers design concepts into a systems solution quickly and effectively. Our
intellectual property gives our customers the flexibility to customize their products to meet their individual cost and performance
objectives.
Networking
Products
We sell custom-designed
integrated circuits for use in storage area networks, Ethernet networks and wireless and wireline telecommunications applications. We are developing a
family of standard products for high speed data networking applications. These products are intended to address enterprise and client applications for
gigabit Ethernet, a high-speed data networking standard that operates at data rates of one billion bits, or one gigabit, per second. We are currently
in production with five different products: our single and octal physical layer devices, our fully and lightly managed 48-port switches and our
physical layer device controller.
Client Access
Products
We sell integrated circuits and
associated software for modem products, primarily to leading manufacturers of personal computers, modems and other electronic equipment. We also offer
integrated circuits and software for use in packet telephony products that provide access to converged voice and data communications
networks.
We sell high speed input/output
products primarily to manufacturers of computers, peripheral equipment and communications equipment. Input/output refers to the transfer of data within
and between computers; peripheral equipment, such as printers, scanners and digital cameras; and data networks. Our products support established
connectivity and transmission standards known as Universal Serial Bus, or USB, and IEEE-1394.
We also sell integrated circuits
for use in computer printing and imaging applications.
Other
Products
We sell custom-designed
integrated circuits for use in satellite digital radio receivers. Our integrated circuits process signals received from satellites and ground-based
repeaters. In fiscal 2005, we introduced new media server chips that can be used in digital media servers and network-attached storage devices in homes
and small businesses
3
to provide central data
storage capabilities at a lower cost than a computer server. We also sell integrated circuits for use in other computing applications.
Telecommunications Segment
We offer solutions targeting
wireless and wireline access and multiservice communications networks. Our products encompass integrated circuits, software and reference designs that
facilitate the transmission and traffic management of voice, video and data signals within communications networks and are used primarily in the
following types of equipment:
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Wireline telecommunications equipment, including: |
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Network communications equipment, which facilitates the
transmission and management of data and voice traffic within communications networks; and |
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Network access equipment, such as data communications equipment,
which allows devices to connect with communications networks. |
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Wireless telecommunications equipment, such as a cellular base
station, which transmits and receives data and voice communications through radio waves. |
We sell integrated circuit
solutions that include integrated circuits supporting SONET/SDH communication standards, broadband aggregation devices, network processing and traffic
management devices and digital signal processing (DSP) devices, each of which is described below.
Wireline Telecommunications
Equipment Solutions
We sell products designed for
wired communications infrastructure. These products are used in high-speed transport networks and in the equipment used to access and interconnect
these networks.
Multiservice Network
Processing and Traffic Management Devices. Multiservice network processing and traffic management devices ensure that
quality of service and service level agreement specifications are adhered to within wide area networks. Quality of service and service level agreements
provide for reliable delivery of voice, video and data services to business and residential customers. These devices process data being sent over the
network, providing for classification, traffic policing, queuing, scheduling and shaping of multiservice data.
Broadband Aggregation
Devices. Broadband is a general term that refers to high-speed data transmission. Our broadband access integrated circuits,
or mappers, support data transport between central offices and enterprise sites by aggregation and termination. Aggregation refers to the combining of
many low-speed, or tributary, data signals from enterprises into higher speed, or trunk, data signals for transmission to a central office. Termination
refers to the separation of trunk data signals into lower-speed, tributary data signals.
Our products support data
transport for T-carrier data transport in North America. T-carrier is a digital transmission service from a common carrier. We support similar services
worldwide. These services are referred to as J-carrier in Japan and E-carrier in Europe. T-carrier services such as T1 and T3 lines are widely used to
create point-to-point networks for use by enterprises. T1 and T3 lines refer to different levels of T-carrier service that transmit data at 1.544
megabits per second and 44.736 megabits per second, respectively. A megabit is a unit of measurement for data and is equal to approximately one million
bits.
SONET/SDH Network
Devices. Synchronous optical networks, which are typically referred to as SONET, and synchronous digital hierarchy standard
networks, or SDH, carry data, voice and video traffic through a network by combining lines carrying traffic at slower speeds with lines carrying
traffic at higher speeds. This process is known as multiplexing, and involves directing traffic from the individual lines into designated time slots in
the higher speed lines, and those lines into still higher speed lines. The SONET/SDH equipment that handles the directing of traffic into slower speed
and faster speed lines is the add-drop multiplexer. Add-drop multiplexers handle the addition and removal of traffic from a SONET/SDH communication
transmission. We offer single-chip integrated circuit solutions, or framers, for add-drop multiplexing of data and voice traffic. In addition, our
framers are used in high-speed routers within optical networks. A router is an interface, or link, between two networks.
Wireless Telecommunications
Equipment
Wireless Infrastructure
Devices. We sell integrated circuit solutions used in wireless infrastructure products, which are primarily cellular base
stations and cellular base transceiver stations. Our solutions include digital signal processors for speech compression and encoding and transmission
of voice and data and networking products that
4
connect cellular equipment to the wired communications
network. Some of these products are standard offerings that are sold to multiple customers and some are customized for a particular customer. The
customized offerings may combine our intellectual property with intellectual property from our customer. Many of the multiservice networking devices
used in wireline communications infrastructure, including network processors and asynchronous transfer mode, or ATM, traffic management devices, are
also used in wireless infrastructure.
In fiscal 2005, we introduced a new telecommunications
product platform, TrueAdvantage, to serve as a building block for intelligent converged access networks and services. The TrueAdvantage family
includes hardware and software development tools, application software and reference designs that are intended to help telecommunications equipment
makers reduce product development costs, increase their products revenue-generating capabilities and accelerate time-to-market. We also announced
new TrueAdvantage wireless access solutions that can simultaneously support current and future wireless systems over a single network.
Customers, Sales And Distribution
Customers
We have a globally diverse base
of customers, consisting primarily of manufacturers of computer and communications equipment. In fiscal 2005, we sold our products directly to
approximately 260 end customers and indirectly, through distributors, to approximately 339 end customers. For some end customers, we deliver the
product to, and are paid by, a third party associated with the customer, such as their contract manufacturer. Our top 20 end customers in fiscal 2005,
based on revenue, accounted for approximately 80% of our revenue and our top 10 end customers in fiscal 2005, based on revenue, accounted for
approximately 67% of our revenue. These amounts include both product revenue and revenue from the licensing of intellectual property. Our top ten end
customers in fiscal 2005 were:
Apple Computer,
Inc. |
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NEC
Corporation |
Cisco Systems,
Inc. |
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Nokia Corporation |
Hitachi Global
Storage Technologies |
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Samsung Electronics Co., Ltd. |
Lucent
Technologies Inc. |
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Seagate Technology, Inc. |
Maxtor
Corp. |
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Toshiba Corporation |
In fiscal 2005, our sales to
Maxtor represented 15% of our total revenue, our sales to Seagate represented 15% of our total revenue and our sales to Samsung represented 14% of our
total revenue. No other customer accounted for 10% or more of our total revenue in fiscal 2005.
Sales and
Distribution
We have a worldwide sales
organization with approximately 300 employees as of September 30, 2005, located in seven U.S. sales offices and 16 sales offices outside the U.S. We
sell our products globally primarily through our direct sales force. To complement our direct sales force, we also sell our products through
distributors, which sales in fiscal 2005 represented approximately six percent of our revenue.
We aim to have our customers
incorporate our products into the end products they design and develop. Typically, manufacturers of computer and communications equipment conduct a
competitive process to select suppliers for the parts that they will include in their end products. Our sales, marketing and technical personnel work
with customers to demonstrate our products ability to satisfy any specific requirements. We call winning the competitive process a design
win. A design win is important because it allows us to establish a long-term relationship with the customer, at least through the life cycle of
the product. We generally do not, however, enter into written agreements with our customers after achieving a design win. A customer could terminate
its relationship with us or discontinue developing the product. Most of our revenue originates from sales that are the result of design
wins.
After we achieve a design win and
negotiate the terms of the sale, we deliver our products to our end customers in a number of ways. Our end customers typically have us ship our
products to their facilities directly. In some instances, however, our customer may use a contract manufacturer to manufacture and assemble its end
product. When our product is being incorporated into an end product being manufactured by a contract manufacturer, we often ship our product directly
to the contract manufacturer and receive payment from that contract manufacturer. To determine our sales to particular customers, however, we recognize
this type of transaction as a sale to, and revenue from, the end customer. Sometimes a customer for whom we have achieved a design win will have us
sell
5
that product to a distributor
or trading company from whom the customer then buys our product. We recognize these transactions as indirect sales.
Manufacturing
We had three facilities located
in two countries devoted to manufacturing integrated circuits as of September 30, 2005. These sites utilized approximately 687,000 square feet of space
dedicated to manufacturing. As of September 30, 2005, we had joint venture wafer fabrication operations in Singapore, while our assembly and test
operations were in Singapore and Thailand. Prior to September 30, 2005, we also conducted wafer fabrication operations in Orlando, Florida. As of
September 30, 2005, we had approximately 3,100 employees in manufacturing and other functions involved in delivering products to customers. Included in
this amount are approximately 500 people who were expected to go off-roll as a result of the closure of the Orlando facility.
Because of the high cost of
implementing new manufacturing processes, we have decided to use foundry partners, rather than internal manufacturing capabilities, to produce
integrated circuits using newer processes. Our primary foundry partners are Chartered Semiconductor Manufacturing, Ltd. and Taiwan Semiconductor
Manufacturing Corporation. We believe that our internal assembly and test operations provide us with a competitive advantage and intend to continue
operating those facilities.
We have a joint venture, called
Silicon Manufacturing Partners, with Chartered Semiconductor Manufacturing Ltd., that operates a 54,000 square foot integrated circuit manufacturing
facility in Singapore. We are entitled to 51% of the managed wafer capacity of the facility. The joint venture agreement may be terminated by either
party upon two years written notice, but may not be terminated prior to February 2008. The agreement may also be terminated for material breach,
bankruptcy or insolvency of either party.
Competition
We sell products designed for
communications, consumer electronics and computer equipment manufacturers. Our customers products are sold in market segments that are intensely
competitive and characterized by:
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Rapid technological change; |
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Short product life cycles; and |
There are many competitors for
our products. We expect the intensity of competition in the market segments we serve to continue to increase in the future as existing competitors
enhance and expand their product offerings and as our customers attempt to limit the number of suppliers from which they buy. Increased competition may
result in price reductions, reduced revenues and loss of market share. We cannot assure you that we will be able to compete successfully against
existing or future competitors. Some of our customers and companies with which we have strategic relationships also are, or may be in the future,
competitors of ours.
Our primary competitors are
listed in the table below.
Storage
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Mobility
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Enterprise and Networking
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Telecommunications
|
Infineon Technologies AG Marvell Technology Group Ltd. STMicroelectronics N.V. Texas Instruments Incorporated |
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Broadcom Corp. Koninklijke Philips Electronics N.V. Freescale Semiconductor, Inc. QUALCOMM Inc. Skyworks Solutions,
Inc. STMicroelectronics N.V. Telefonaktiebolaget LM Ericsson Texas Instruments Incorporated |
|
Broadcom Corp. Conexant Systems International Business Machines LSI Logic Corp. Marvell Technology Group Ltd. Texas
Instruments Incorporated |
|
Applied Micro Circuits Corp. Infineon Technologies AG Intel Corp. Freescale Semiconductor, Inc. PMC-Sierra, Inc.
STMicroelectronics N.V. Vitesse Semiconductor Corporation Wintegra, Inc. |
6
Our competitive position varies
depending on the market and product areas within these markets. For example, we are number one or two, based on revenue, in many of our product areas,
including read channels and systems-on-a-chip for hard disks used in consumer electronics products, integrated circuits for notebook computer modems,
digital signal processors for wireless infrastructure, SONET/SDH integrated circuits and wired communications integrated circuits. However, our
competitive position is not as strong in the gigabit Ethernet product area, which is a new area for us. While improving our position in many of the
product areas where our position is less well-established is an objective of ours, we cannot assure you that we will be able to accomplish this goal.
Further, because we expect to face increasing competitive pressures from both current and future competitors in the product areas we serve, we may not
be able to maintain our position in the product areas in which we are currently a leader.
We believe competition in our
industry is based on the following factors:
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Performance and reliability; |
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Compatibility of products with other products and communications
standards used in communications networks; |
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Ability to offer integrated solutions; |
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Breadth of product line; |
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Logistics and planning systems; and |
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Quality of manufacturing processes. |
While we believe we are
competitive on the basis of all the factors listed above, we believe some of our competitors compete more favorably on the basis of price and on
delivering products to market more quickly. However, we feel we are particularly strong in offering integrated solutions, our broad product lines, our
customer support and our logistics and planning systems.
Research and development
As of September 30, 2005, our
product development team consisted of approximately 2,000 employees. Our research and development expenditures were $462 million, $496 million and $467
million for fiscal 2005, 2004 and 2003, respectively. We anticipate that we will continue to make significant research and development expenditures to
maintain our competitive position with a continuing flow of innovative products and technology.
Patents, Trademarks And Other Intellectual
Property
We own or have rights to a number
of patents, trademarks, copyrights, trade secrets and other intellectual property directly related to and important to our business. We have
approximately 5,875 U.S. patents and patent applications and their corresponding foreign patents and patent applications. These patents include patents
related to the following technologies:
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Integrated circuit and optoelectronic manufacturing
processes; |
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Modems, digital signal processors, wireless communications,
network processors and communication protocols; and |
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Optoelectronic products including lasers, optical modulators,
optical receivers and optical amplifiers. |
The patents described above
include patents of all ages ranging from pending applications, which will have a duration of 20 years from their filing dates, through patents soon to
expire.
We indemnify our customers for
some of the costs and damages of patent infringement in circumstances where our product is the primary factor creating the customers infringement
exposure. We generally exclude coverage where infringement arises out of the combination of our products with products of others.
7
We protect our products and
processes by asserting our intellectual property rights where appropriate and prudent. We also obtain licenses to patents, copyrights and other
intellectual property rights used in connection with our business when practicable and appropriate.
Government Regulation
Many of our customers end
products that include our products are subject to extensive telecommunications-based regulation by the United States and foreign laws and international
treaties. We must design and manufacture our products to ensure that our customers are able to satisfy a variety of regulatory requirements and
protocols established to, among other things, avoid interference among users of radio frequencies and to permit interconnection of
equipment.
Each country has different
regulations and a different regulatory process. In order for our customers products to be used in some jurisdictions, regulatory approval and, in
some cases, specific country compliance testing may be required. The delays inherent in this regulatory approval process may force our customers to
reschedule, postpone or cancel the incorporation of our products into their products, which may result in significant reductions in our sales. The
failure to comply with current or future regulations or changes in the interpretation of existing regulations in a particular country could result in
the suspension or cessation of sales in that country by us or our customers. It also may require us to incur substantial costs to modify our products
to aid our customers in complying with the regulations of that country. Changes in our regulatory environment that generally result from our expansion
into new areas or changes in current regulations could increase the cost of manufacturing our products because we must continually modify our products
to respond to these changes.
In addition, domestic and
international authorities continue to regulate the allocation and auction of the radio frequency spectrum. These regulations have a direct impact on us
because many of our customers licensed products can be marketed only if permitted by suitable frequency allocations, auctions and regulations.
The implementation of these regulations may delay our end-users in deploying their systems, which could, in turn, lead to delays in orders of our
products by our customers and end users.
Employees
As of September 30, 2005, we had
approximately 6,200 full-time employees, including approximately 500 employees who were expected to go off-roll as a result of the closure of our
Orlando manufacturing facility in September 2005. As of September 30, 2005, we had approximately 450 U.S. union-represented employees covered by
collective bargaining agreements. Three hundred and seventy of these employees had been assigned to our Orlando manufacturing facility and were
expected to go off-roll as a result of the closure of that facility.
On May 27, 2003, we entered into
a collective bargaining agreement with local unions 1522, 1560, 1898 and 2000 of the International Brotherhood of Electrical Workers. This agreement,
which covers our U.S. union-represented employees, will be effective until May 31, 2006, unless the parties reach a mutual agreement to amend the
terms.
We believe that we generally have
good relationships with our employees and the unions that represent them.
Backlog
Our backlog, which represents the
aggregate of the sales price of orders received from customers for delivery within six months, but not yet recognized as revenue, was approximately
$311 million and $447 million on September 30, 2005 and September 30, 2004, respectively. The majority of these orders are fulfilled within three
months. All orders, however, are subject to possible rescheduling by customers. Our customers often change their orders two or three times between
initial order and delivery. Our customers frequent changes usually relate to quantities or delivery dates, but sometimes relate to the
specifications of the products we are shipping. Although we believe that the orders included in the backlog are firm, generally orders may be cancelled
by the customer without penalty. We also may elect to permit cancellation of orders without penalty where we believe it is in our interest to do so.
For these reasons, we believe that our backlog at any given date may not be a reliable indicator of future revenues.
8
Environmental, Health And Safety
Matters
We are subject to a wide range of
laws and regulations relating to protection of the environment and employee health and safety. Our manufacturing facilities have undergone regular
internal audits relating to environmental, health and safety requirements. Most of those facilities also are regularly audited and certified by an
independent and accredited third party registrar, such as Lloyds Register Quality Assurance, as conforming to the internationally recognized ISO
14001 standard relating to environmental management. In addition, our non-U.S. manufacturing facilities conform to BS 8800, the British standard for
occupational health and safety management systems. Based upon these reviews, we believe that our manufacturing facilities are in substantial compliance
with all applicable environmental, health and safety requirements.
Set forth below are some of the
risks and uncertainties that, if they were to occur, could materially adversely affect our business or that could cause our actual results to differ
materially from the results contemplated by the forward-looking statements contained in this report and other public statements we
make.
Because our sales are concentrated on a limited number
of key customers, our revenue may materially decline if one or more of our key customers do not continue to purchase our existing and new products in
significant quantities.
Our customer base is highly
concentrated. Our top 10 end customers accounted for approximately 67% of our revenue in fiscal 2005. If any one of our key customers were to decide to
purchase significantly less from us or to terminate its relationship with us, our revenue may materially decline. Because we have a long product design
and development cycle for most of our products, we may be unable to replace these customers quickly or at all. We could lose our key customers or
significant sales to our key customers because of factors beyond our control, such as a significant disruption in our customers businesses
generally or in a specific product line.
If we fail to keep pace with technological advances in
our industry or if we pursue technologies that do not become commercially accepted, customers may not buy our products and our results of operations
may be adversely affected.
The demand for our products can
change quickly and in ways we may not anticipate because our industry is generally characterized by:
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rapid, and sometimes disruptive, technological
developments; |
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evolving industry standards; |
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changes in customer requirements; |
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limited ability to accurately forecast future customer
orders; |
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frequent new product introductions and enhancements;
and |
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short product life cycles with declining prices over the life
cycle of the product. |
If we fail to make sufficient
investments in research and development programs in order to develop new and enhanced products and solutions, or if we focus on technologies that do
not become widely adopted, new technologies could render our current and planned products obsolete, resulting in the need to change the focus of our
research and development and product strategies and disrupting our business significantly.
The integrated circuit industry is intensely
competitive, and our failure to compete effectively could result in reduced revenue.
The market for integrated
circuits is intensely competitive and subject to rapid and disruptive technological change. We expect the intensity of competition to continue to
increase as existing competitors enhance and expand their product offerings and as new participants enter the market. Increased competition may result
in price reductions, reduced gross margins and loss of market share. We may not be able to compete successfully against existing or future competitors,
which may result in reduced revenue.
9
The size and number of our
competitors vary across our product areas, as do the resources we have allocated to the segments we target. Therefore, many of our competitors have
greater financial, personnel, production capacity and other resources than we have in a particular market segment or overall. Competitors with greater
financial resources may be able to offer lower prices, additional products or services or other incentives that we cannot match or offer. These
competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. They
also may adopt more aggressive pricing policies and make more attractive offers to potential customers, employees and strategic partners. These
competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with third parties to increase their
ability to gain market share.
Further, some of our competitors
are currently selling commercial quantities of products that we are sampling to our customers, that are still in the initial stages of development or
that we may develop in the future. By being able to offer these products in commercial quantities before we do, our competitors can establish
significant market share, acquire design wins in customer equipment programs and create a market position that we may be unable to overcome once we
have completed development and testing of our product.
Our revenue and operating results may fluctuate because
we derive most of our revenue from semiconductor devices and the integrated circuits industry is highly cyclical, and because of other characteristics
of our business, and these fluctuations may cause our stock price to fall.
We expect to derive most of our
revenue from the sale of integrated circuits. Because the integrated circuits industry is highly cyclical, we may experience declines in our revenue
that are primarily related to industry conditions and not our products. This industry has experienced significant downturns, often in connection with,
or in anticipation of, excess manufacturing capacity worldwide, maturing product cycles and declines in general economic conditions.
We focus primarily on winning
competitive selection processes to develop products for use in our customers equipment. These selection processes can be lengthy. After winning a
product design for a customer, that customer may not begin volume production of their equipment for a period of up to two years, if at all. Due to this
lengthy design and development cycle, we may experience delays from the time we begin incurring expenses until the time we generate revenue from our
products. We have no assurances that our customers will ultimately market and sell their equipment or that such efforts by our customers will be
successful. Thus, we may never generate any revenue from our products after incurring significant design and development expenditures.
If we are not selected by a
customer to provide a product, we may experience significantly lower revenue later, as compared to prior periods with more revenue from earlier design
wins. In addition, sales of our products for specific customer projects often begin and end abruptly, so revenue may increase rapidly and later
decrease just as quickly. The relative timing of the beginning and end of our sales and design processes can make our revenues less
predictable.
Fluctuations in our revenue or
operating results could cause our stock price to decline, even if our results meet expectations. Further, stock prices in our industry have recently
been highly volatile for reasons that sometimes are unrelated to the performance of the companies in the industry. These broad fluctuations could
adversely affect our stock price.
If we do not achieve adequate manufacturing utilization,
yields or volumes or sufficient product reliability, our gross margins will be reduced.
Because the manufacturing costs
at our owned and joint venture manufacturing facilities are relatively fixed, efficient utilization of manufacturing facilities and manufacturing
yields are critical to our results of operations. If we do not experience adequate utilization of our manufacturing facilities, our results of
operations may be adversely affected. In addition, from time to time, we may have to pay to reserve capacity at third-party manufacturers. If this is
the case and we overestimate demand for our products, we may have to pay for capacity that we do not use, and our results of operations may be
adversely affected.
The manufacture of our products
involves highly complex and precise processes, requiring production in highly controlled and clean environments. Changes in our manufacturing processes
or those of our suppliers or contractors, or the inadvertent use of defective or contaminated materials, could significantly reduce our manufacturing
yields and product reliability. Lower than expected manufacturing yields could adversely affect our results of operations and delay product
shipments.
10
Because we are subject to order and shipment
uncertainties, any significant cancellations or deferrals could cause our revenue to decline or fluctuate.
We generally sell products
pursuant to purchase orders that customers may cancel or defer on short notice without incurring a significant penalty. Cancellations or deferrals
could cause us to hold excess inventory, which could adversely affect our results of operations. If a customer cancels or defers product shipments, we
may incur unanticipated reductions or delays in our revenue. If a customer refuses to accept shipped products or does not pay for these products in a
timely manner, we could incur significant charges against our income, which could materially and adversely affect our results of
operations.
A joint venture and third parties manufacture all of our
wafers for us. If these suppliers are unable to fill our orders on a timely and reliable basis, our revenue may be adversely
affected.
The integrated circuit
manufacturing industry has a history of developing new manufacturing processes. We believe that the costs associated with implementing new processes,
including acquiring the necessary equipment and building appropriate facilities, are increasing with each generation of manufacturing processes. We
have not wanted to make the significant financial investments necessary for new processes and in the last few years we have relied on contract
manufacturers to fabricate products using processes that we did not have internally or at our joint venture manufacturer. We recently discontinued
operations at our last wholly-owned wafer fabrication facility and now rely on our joint venture and third-party manufacturers to fabricate all of our
wafers. To the extent we rely on joint ventures and third-party manufacturing relationships, we face the following risks:
|
|
that they may not be able to develop manufacturing methods
appropriate for our products; |
|
|
that manufacturing costs will be higher than
planned; |
|
|
that reliability of our products will decline; |
|
|
that they may be unwilling to devote adequate capacity to
produce our products; |
|
|
that they may not be able to maintain continuing relationships
with our suppliers; and |
|
|
that we may have reduced control over delivery schedules and
costs of our products. |
If any of these risks were to be
realized, we could experience an interruption in supply or an increase in costs, which could adversely affect our results of
operations.
In the event of an increase in
demand, failure to increase our manufacturing volumes or obtain capabilities from third parties may result in our not being able to meet customer
demand for our products, which could hurt our relationships with our customers and result in our recording lower revenues than would be the case if we
had greater manufacturing capacity.
Because many of our current and planned products are
highly complex, they may contain defects or errors that are detected only after deployment in commercial applications, and if this occurs, it could
harm our reputation and result in reduced revenues or increased expenses.
Our products are highly complex
and may contain undetected defects, errors or failures. These products can only be fully tested when deployed in commercial applications and other
equipment. Consequently, our customers may discover errors after the products have been deployed. The occurrence of any defects, errors or failures
could result in:
|
|
cancellation of orders; |
|
|
product returns, repairs or replacements; |
|
|
diversion of our resources; |
|
|
legal actions by our customers or our customers
end-users; |
|
|
increased insurance costs; and |
|
|
other losses to us or to our customers or end-users. |
Any of these occurrences could
also result in the loss of or delay in market acceptance of our products and loss of sales, which would harm our business and adversely affect our
results of operations. We have from time
11
to time experienced defects
in our products and expect to experience defects in the future. Because the trend in our industry is moving toward even more complex products in the
future, this risk will intensify over time and may result in increased expenses.
We are expanding, and may seek in the future to expand,
into new areas, and if we are not successful, our results of operations may be adversely affected.
We are currently developing
products in new areas, including wireless communications infrastructure, high-speed networking and consumer electronics. We may seek to expand into
additional areas in the future. We may expand through internal development efforts, through acquisitions of companies or technologies, or a combination
of these methods.
Our efforts may not result in
sales that are sufficient for us to recoup our investment, and we may experience higher costs than we anticipated. For example, we may not be able to
manufacture our products at a competitive cost, may need to rely on new suppliers or may find that the development efforts are more costly or time
consuming than we had anticipated. Our products may support protocols that are not widely adopted. Where we choose to develop capabilities by acquiring
another company, we may not be able to integrate the other company successfully into our operations, which may mean that we have difficulty retaining
employees from the acquired company or integrating its technology into our products. We may have difficulties entering markets where competitors have
strong market positions.
We have recently upgraded our enterprise financial
management system, and it is possible that we may have a defect in the design of the system that may result in the generation of incorrect financial
information, an adverse impact on the processing of customer orders or some other adverse impact on our business.
We recently upgraded the
enterprise-wide computer system that we use to control activities such as the processing of customer orders and accounts, the generation of financial
data used in the preparation of financial statements and the handling of employee expense and payroll information. The system is extremely complex
because of the wide range of processes that it integrates. Because of the complex nature of the system, it is possible that we will have a flaw in our
design of the upgrade that has an adverse impact on our business. While we tested the system before implementing the upgrade, we cannot assure you that
our testing would uncover every defect in the design or implementation of the upgrade that might be made. If such a defect did exist in the system
after the upgrade, it could have a significant impact on how we conduct our business and we may not be able to mitigate that impact through other
actions.
A widespread outbreak of an illness or other health
issue could negatively affect our manufacturing, assembly and test, design or other operations, making it more difficult and expensive to meet our
obligations to our customers, and could result in reduced demand from our customers.
A widespread outbreak of an
illness such as severe acute respiratory syndrome, or SARS, or avian influenza, or bird flu, could adversely affect our operations as well as demand
from our customers. A number of countries in the Asia/Pacific region have experienced outbreaks of SARS and/or bird flu. As a result of such an
outbreak, businesses can be shut down temporarily and individuals can become ill or quarantined. We have assembly and test and back-office operations
as well as our joint venture wafer fabrication facility in Singapore, assembly and test and back-office operations in Thailand and design operations in
China, countries where outbreaks of SARS and/or bird flu have occurred. If our operations are curtailed because of health issues, we may need to seek
alternate sources of supply for manufacturing or other services and alternate sources can be more expensive. Alternate sources may not be available or
may result in delays in shipments to our customers, each of which would affect our results of operations. In addition, a curtailment of our design
operations could result in delays in the development of new products. If our customers businesses are affected by health issues, they might delay
or reduce purchases from us, which could adversely affect our results of operations.
We may be subject to intellectual property litigation
and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products. If we are unable to protect our
intellectual property rights, our business and prospects may be harmed.
Like other companies in the
semiconductor industry, we are frequently involved in disputes regarding patent and other intellectual property rights. From time to time, we receive
notices from third-parties of potential infringement and receive claims of potential infringement when we attempt to license our intellectual property
to
12
others. Defending these
claims could be costly and time consuming and would divert the attention of management and key personnel from other business issues. The complexity of
the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement also
might require us to enter into costly royalty or license agreements. However, we may be unable to obtain royalty or license agreements on terms
acceptable to us or at all. In addition, third-parties may attempt to appropriate the confidential information and proprietary technologies and
processes used in our business, which we may be unable to prevent and which would harm our business and prospects.
We have relatively high gross margin on the revenue we
derive from the licensing of our intellectual property, and a decline in this revenue would have a greater impact on our net income than a decline in
revenue from the sale of our integrated circuits products.
The revenue we generate from the
licensing of our intellectual property has a higher gross margin compared to the revenue we generate from the sale of our integrated circuits products.
Although we derive less than 10% of our total revenue from the licensing of intellectual property, a decline in this licensing revenue would have a
greater impact on our profitability than a similar decline in revenues from the sale of our integrated circuit products.
If our customers do not qualify our products or
manufacturing lines or the manufacturing lines of our third-party suppliers for volume shipments, our results of operations may be adversely
affected.
Some customers will not purchase
any of our products, other than limited numbers of evaluation units, until they qualify the manufacturing line for the product. We may not always be
able to satisfy the qualifications. Delays in qualification may cause a customer to discontinue use of our products and result in a significant loss of
revenue.
We conduct a significant amount of our sales activity
and manufacturing efforts outside the United States, which subjects us to additional business risks and may adversely affect our results of operations
due to increased costs.
In fiscal 2005, we derived
approximately 83% of our revenue from sales of our products shipped to locations outside the United States. We also manufacture a significant portion
of our products outside the United States and are dependent on non-U.S. suppliers for many of our parts. We intend to continue to pursue growth
opportunities in both sales and manufacturing outside the United States. Operations outside the United States are subject to a number of risks and
potential costs, which could adversely affect our revenue and results of operations, including:
|
|
our brand may not be recognized locally, which may cause us to
spend significant amounts of time and money to build a brand identity; |
|
|
unexpected changes in regulatory requirements; |
|
|
inadequate protection of intellectual property in some countries
outside of the United States; |
|
|
currency exchange rate fluctuations; |
|
|
international trade disputes; |
|
|
political and economic instability; and |
|
|
disruptions in international air transport systems. |
If we fail to attract, hire and retain qualified
personnel, we may not be able to develop, market or sell our products or successfully manage our business.
In some of our fields of
operation, there are only a limited number of people in the job market who possess the requisite skills. In the past we have experienced difficulty in
identifying and hiring sufficient numbers of qualified engineers in parts of our business as well as in retaining employees. The loss of the services
of any key personnel or our inability to hire new personnel with the requisite skills could restrict our ability to develop new products or enhance
existing products in a timely manner, sell products to our customers or manage our business effectively.
The development and evolution of markets for our
integrated circuits are dependent on factors over which we have no control. For example, if our customers adopt new or competing industry standards
with which our products are not compatible or fail to adopt standards with which our products are compatible, our existing products would become less
desirable to our customers and our sales would suffer.
The emergence of markets for our
integrated circuits is affected by a variety of factors beyond our control. In particular, our products are designed to conform to current specific
industry standards. Our customers may not adopt or continue to follow these standards, which would make our products less desirable to our customers
and
13
reduce our sales. Also,
competing standards may emerge that are preferred by our customers, which could also reduce our sales and require us to make significant expenditures
to develop new products. To the extent that we are not able to effectively and expeditiously adapt to new standards, our business will
suffer.
Class action litigation due to stock price volatility or
other factors could cause us to incur substantial costs and divert our managements attention and resources.
In the past, securities class
action litigation often has been brought against a company following periods of volatility in the market price of its securities. Companies in the
integrated circuit industry and other technology industries are particularly vulnerable to this kind of litigation due to the high volatility of their
stock prices. Accordingly, we may in the future be the target of securities litigation. Any securities litigation could result in substantial costs and
could divert the attention and resources of our management.
Item 1B. |
|
Unresolved Staff Comments |
Not applicable.
As of September 30, 2005, we
operated three manufacturing facilities in Singapore and Thailand. We also operated an additional 50 facilities, including research and development
facilities and design centers. We had facilities in a total of 20 countries. Our manufacturing facilities were located in Singapore and Thailand. We
also have a 51% interest in our Silicon Manufacturing Partners joint venture located in Singapore, which is predominantly used as a manufacturing
site.
Our facilities have an aggregate
floor space of approximately 5.5 million square feet, of which approximately 3.9 million square feet, including all of our manufacturing facilities
other than our assembly and test facility in Singapore, is owned and approximately 1.6 million square feet is leased. Our lease terms range from
monthly leases to ten years. We believe that all of our facilities and equipment are in good condition and are well maintained and able to operate at
present levels. We are currently not utilizing approximately 3.1 million of our 5.5 million square feet of this space due to our previous facility
consolidation efforts.
Item 3. |
|
Legal Proceedings |
Not applicable.
Item 4. |
|
Submission of Matters to a Vote of Security
Holders |
During the fourth quarter of
fiscal 2005, no matter was submitted to a vote of our security holders.
14
Executive Officers of the
Registrant
Our executive officers as of
December 1, 2005 were as follows:
Name
|
|
|
|
Age
|
|
Position
|
Richard L.
Clemmer |
|
|
|
53 |
|
President and Chief Executive Officer |
Peter
Kelly |
|
|
|
48 |
|
Executive Vice President and Chief Financial Officer |
Denis P.
Regimbal |
|
|
|
44 |
|
Executive Vice President, Mobility |
Samir F.
Samhouri |
|
|
|
33 |
|
Executive Vice President, Telecom and Enterprise and Networking |
Ruediger
Stroh |
|
|
|
43 |
|
Executive Vice President, Storage |
Richard L. Clemmer has
been our President and Chief Executive Officer since October 2005. Mr. Clemmer has also been a member of our Board of Directors since October 2002.
Mr. Clemmer has over 30 years of experience in the technology industry, where he has held a variety of executive, financial and management positions.
Between June 2004 and October 2005, he was an active partner at Shelter Capital Partners, a private investment fund. Between 2003 and October 2005, he was
Chairman and President of Venture Capital Technology LLC, which was focused on investing in and consulting for technology companies, primarily involved
as Chairman of uNav Microelectronics, an emerging global positioning systems chipset company. Between May 2001 and January 2003, he was on the Board
and served as an executive at PurchasePro.com, Inc., a provider of electronic procurement and strategic sourcing solutions. Between 1996 and May 2001,
Mr. Clemmer was Executive Vice President, Finance and Chief Financial Officer of Quantum Corp., which was a provider of hard disk drives and other
storage solutions. Prior to Quantum, Mr. Clemmer served at Texas Instruments Incorporated for over 20 years, including between 1988 and 1996 as Senior
Vice President and Chief Financial Officer of Texas Instruments Semiconductor Group. Mr. Clemmer is a director of i2 Technologies,
Inc.
In September 2002, while Mr.
Clemmer was Chairman, Chief Executive Officer and Chief Financial Officer of PurchasePro, having been asked to take over from prior management,
PurchasePro filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in connection with an agreement to sell substantially all
of its assets.
Peter Kelly has been our
Chief Financial Officer since August 2005. Prior to that, he had been Executive Vice President, Operations Group, since October 2001 and Vice President
of Operations for Integrated Circuits from September 2000 to October 2001. Mr. Kelly joined the business in 2000 from Fujitsu-ICL Systems Inc., a joint
venture of ICL and Fujitsu that provided computer systems and services to retailers and banks, where he was Executive Vice President and Chief
Operating Officer. Mr. Kelly had been with Fujitsu-ICL for six years. Mr. Kelly is a director of Plexus Corp.
Denis P. Regimbal has been
the head of our Mobility group since December 2005. Prior to that, he was the head of our Telecommunications group from August 2004 to December 2005,
Vice President and General Manager of the Media Connectivity Division from July 2003 to July 2004, Vice President of Strategy for the Client Systems
Group from March 2003 to July 2003, Vice President of sales and applications for Europe, Middle East and Africa from September 2001 to March 2003 and
General Manager of the Wireless Infrastructure Division from 1999 to September 2001. Prior to joining the business in 1988, Mr. Regimbal held several
management positions with Analog Devices, Inc. and Intel Corporation.
Samir F. Samhouri has been
the head of our Telecommunications group since December 2005 and the head of our Enterprise and Networking group since September 2005. Previously, Mr.
Samhouri was the head of our Ethernet Division from December 2004 to September 2005, Vice President of marketing, applications and product line
management for the Telecommunications Division from January 2002 to December 2004 and General Manager for network communications intellectual property
from 2000 to January 2002.
Ruediger Stroh has been
the head of our Storage group since November 2005. Since August 2004, he has been a director, and from August 2004 until November 2005, he was Chief
Executive Officer, of Intematix Inc., a nano and thin film
materials design and manufacturing company. From November 2003 to November 2005, he was
an active principal of RST Partners, a technology consulting firm. From February 2003 through November 2003, he was President and Chief Executive
Officer and a director of Trebia Networks Inc., a storage area networking chipset company. From April 2001 to January 2003, Mr. Stroh was President and
Chief Executive Officer and a director of Systemonic Inc., a wireless local area networking chipset company. Prior to that, he held a number of
management positions at Infineon Technologies Corporation.
Officers are not elected for a
fixed term of office but hold office until their successors have been elected.
15
PART II
Item 5. |
|
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities. |
Price
Range of Common Stock
On May 27, 2005, we reclassified
our Class A common stock and Class B common stock into a new, single class of common stock and effected a 1-for-10 reverse stock split. The new class
of common stock trades under the symbol AGR on the New York Stock Exchange. The high and low sale prices for our common stock for each
quarter during our last two full fiscal years are set forth below, as reported in the consolidated transaction reporting system and as adjusted to give
retroactive effect to our 1-for-10 reverse stock split:
Fiscal 2004
|
|
|
|
High
|
|
Low
|
Quarter ended
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
Class A common
stock |
|
|
|
$ |
44.50 |
|
|
$ |
27.00 |
|
Class B common
stock |
|
|
|
$ |
37.50 |
|
|
$ |
25.60 |
|
Quarter ended
March 31, 2004
|
|
|
|
|
|
|
|
|
|
|
Class A common
stock |
|
|
|
$ |
41.40 |
|
|
$ |
28.90 |
|
Class B common
stock |
|
|
|
$ |
38.80 |
|
|
$ |
28.30 |
|
Quarter ended
June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
Class A common
stock |
|
|
|
$ |
34.60 |
|
|
$ |
19.80 |
|
Class B common
stock |
|
|
|
$ |
33.30 |
|
|
$ |
18.90 |
|
Quarter ended
September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
Class A common
stock |
|
|
|
$ |
23.00 |
|
|
$ |
10.00 |
|
Class B common
stock |
|
|
|
$ |
21.70 |
|
|
$ |
8.90 |
|
|
Fiscal
2005
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
Class A common
stock |
|
|
|
$ |
15.40 |
|
|
$ |
10.70 |
|
Class B common
stock |
|
|
|
$ |
14.90 |
|
|
$ |
10.40 |
|
Quarter ended
March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
Class A common
stock |
|
|
|
$ |
16.90 |
|
|
$ |
12.60 |
|
Class B common
stock |
|
|
|
$ |
16.90 |
|
|
$ |
12.50 |
|
Quarter ended
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
Class A common
stock (April 1, 2005 through May 27, 2005) |
|
|
|
$ |
14.60 |
|
|
$ |
11.00 |
|
Cass B common
stock (April 1, 2005 through May 27, 2005) |
|
|
|
$ |
14.30 |
|
|
$ |
11.00 |
|
Common stock
(May 31, 2005 through June 30, 2005) |
|
|
|
$ |
13.65 |
|
|
$ |
10.85 |
|
Quarter ended
September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
Common
stock |
|
|
|
$ |
12.98 |
|
|
$ |
9.63 |
|
As of November 28, 2005, there
were approximately 1.85 million record and beneficial holders of our common stock.
Dividend
Policy
We have never declared or paid
and we do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain our future earnings for use
in the operation and expansion of our business.
See Item 12 for information about
our equity compensation plans.
16
Item 6. |
|
Selected Financial Data |
The following table sets forth
selected financial information for our company. The financial information for the years ended September 30, 2005, 2004, and 2003, and as of September
30, 2005 and 2004, has been derived from our audited financial statements included elsewhere in this report. The financial information for the year
ended September 30, 2002 and 2001 and as of September 30, 2003, 2002 and 2001 has been derived from our audited financial statements not included in
this report. The historical selected financial information may not be indicative of our future performance and should be read in conjunction with the
information contained in Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and the
consolidated financial statements and the related notes in Item 8.
|
|
|
|
Year
Ended September 30,
|
|
(Dollars
in millions except per share amounts)
|
|
|
|
2005 (1)
|
|
2004 (1)
|
|
2003
|
|
2002 (2)
|
|
2001
|
Statement of operations information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
$ |
1,676 |
|
|
$ |
1,912 |
|
|
$ |
1,839 |
|
|
$ |
1,923 |
|
|
$ |
2,886 |
|
Gross
profit |
|
|
|
|
664 |
|
|
|
866 |
|
|
|
579 |
|
|
|
494 |
|
|
|
915 |
|
Loss
from continuing operations |
|
|
|
|
(8 |
) |
|
|
(90 |
) |
|
|
(371 |
) |
|
|
(803 |
) |
|
|
(1,454 |
) |
|
Basic and diluted earnings (loss) per share: (3) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.52 |
) |
|
$ |
(2.23 |
) |
|
$ |
(4.90 |
) |
|
$ |
(10.90 |
) |
Weighted average shares outstanding basic and
diluted (thousands) |
|
|
|
|
177,775 |
|
|
|
171,248 |
|
|
|
166,699 |
|
|
|
163,720 |
|
|
|
133,428 |
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002 (2)
|
|
2001
|
Balance sheet information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
|
|
$ |
1,881 |
|
|
$ |
2,272 |
|
|
$ |
2,388 |
|
|
$ |
2,864 |
|
|
$ |
6,562 |
|
Short-term debt |
|
|
|
|
|
|
|
|
147 |
|
|
|
195 |
|
|
|
197 |
|
|
|
2,516 |
|
Long-term debt |
|
|
|
|
372 |
|
|
|
420 |
|
|
|
451 |
|
|
|
486 |
|
|
|
33 |
|
(1) |
|
During fiscal 2005 and fiscal 2004 we recorded reversals of tax
and interest contingencies of $120 million and $86 million, respectively, resulting from settlements of certain prior year tax audits. This relates to
the companys tax sharing agreement with Lucent and covers periods the company operated as either a division of AT&T Corp. or Lucent. In
fiscal 2005 we also recorded a reversal of $22 million for tax and interest contingencies related to non-U.S. income tax. |
(2) |
|
During fiscal 2002, our short-term debt decreased significantly
as we repaid $2.5 billion of borrowings under a credit facility. Also, our total assets decreased significantly as we used $1.6 billion of cash on hand
to partially repay the credit facility and recorded significant impairments of property, plant and equipment, as well as goodwill and acquired
intangible assets. |
(3) |
|
On May 27, 2005, we reclassified our Class A common stock and
Class B common stock into a new single class of common stock, and effected a 1-for-10 reverse stock split. All per share and share amounts have been
restated to reflect the reverse stock split. Basic and diluted earnings (loss) per common share are calculated by dividing income (loss) from
continuing operations by the weighted average number of common shares outstanding during the period. |
(4) |
|
The weighted average number of common shares outstanding on a
historical basis includes retroactive recognition to October 1, 2000 of the 103,510,000 shares owned by Lucent prior to our initial public offering in
fiscal 2001. |
17
Item 7. |
|
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion of
our financial condition and results of operations should be read in conjunction with our financial statements and the related notes in Item 8. This
discussion contains forward-looking statements. Please see Forward-Looking Statements and Item 1A Risk Factors for a discussion of
the uncertainties, risks and assumptions associated with these statements.
Overview
We are a leading provider of
integrated circuit solutions for a variety of applications, including high-density storage, mobile wireless communications and enterprise and
telecommunications networks. These solutions form the building blocks for a broad range of computing and communications applications. Some of our
solutions include related software and reference designs. Our customers include manufacturers of hard disk drives, mobile phones, high speed
communications systems and personal computers. We also generate revenue from the licensing of intellectual property.
Our business is organized into
operating segments that focus on four key markets: Storage, Mobility, Enterprise and Networking, and Telecommunications. We have two reportable
segments, Consumer Enterprise and Telecommunications. Each segment includes product revenue and revenue from the licensing of intellectual property.
The Consumer Enterprise segment includes the Storage, Mobility and Enterprise and Networking operating segments. Storage targets computing and consumer
electronic devices that need high capacity storage and provides integrated circuit solutions for hard disk drives. Mobility targets the consumer
communications market and provides integrated circuit solutions for a variety of end-user applications such as data-enabled mobile phones. Enterprise
and Networking targets the data networking equipment market and also provides solutions for consumer communications applications. The
Telecommunications segment targets the telecommunications network equipment market and provides integrated circuit solutions for wireless and wireline
infrastructure.
On March 8, 2005, we acquired
Modem-Art Ltd., a privately held developer of advanced processor technology for third generation, or 3G, mobile communications for $144 million in
common stock and cash. We issued common stock valued at $113 million and paid $31 million in cash in exchange for all the outstanding shares of
Modem-Art. This acquisition complements our existing mobile phone products, and enhances our ability to address the rapidly evolving cellular
technologies with integrated chips and software for todays 3G market and widely anticipated future demand for High Speed Downlink Packet Access,
or HSDPA technology.
On May 27, 2005 we reclassified
our Class A common stock and Class B common stock into a new, single class of common stock and effected a 1-for-10 reverse stock
split.
On October 26, 2005, we announced
that our Board of Directors had authorized the repurchase of up to $200 million of our common stock.
Operating Environment
Our business depends in large
part on demand for personal computers and associated equipment, wireless communications equipment such as mobile phones, enterprise networking
equipment and telecommunications infrastructure equipment. Our revenues can be affected by changes in demand for any of these types of products. The
markets for these products are competitive and rapidly changing. Accordingly, significant technological changes, new customer requirements, changes in
customer buying behavior or the emergence of competitive products with new capabilities or technologies could adversely affect our revenues and
operating results. Also, several customers have each recently accounted for more than 10% of our revenues. In fiscal 2005, each of Maxtor and Seagate
represented 15% of our revenue and Samsung represented 14% of our revenue. In fiscal 2004 and 2003, sales to Maxtor represented 16% and sales to
Seagate represented 12% of our revenue.
As our revenue declined over the
last few years, we determined on several occasions that we needed to reduce our cost structure. As a result, we implemented programs to reduce our
headcount, consolidate our operations into fewer facilities and reduce our owned manufacturing capacity, including exiting our optoelectronic
components business, selling several non-core businesses and reducing our capital spending.
The integrated circuit
manufacturing industry has a history of developing new manufacturing processes. We believe that the costs associated with implementing new processes,
including acquiring the necessary equipment
18
and building appropriate
facilities, are increasing with each generation of manufacturing processes. Because we do not want to make the financial investments necessary for
future processes, we have increased our reliance on third-party contract manufacturers to make integrated circuits for us, as we transition to new
technologies. We refer to this strategy as our fab-lite strategy. We believe this strategy will lead to lower capital expenditures, fixed
costs and process development expenses than if we continued to invest in new manufacturing facilities. As part of this strategy, we have closed our
manufacturing facilities in Madrid, Spain; Orlando, Florida; and Allentown and Reading, Pennsylvania.
When we ceased operations at our
Orlando facility in September 2005 we had pre-built inventory of $28 million to meet our estimates of our customers future demand for products we
will no longer have the capability to produce. We expect to sell the majority of this inventory during fiscal 2006, with the remainder being sold by
the end of fiscal 2007.
Restructuring and Decommissioning
Activities
We implemented restructuring and
consolidation actions to improve gross profit, reduce expenses and streamline operations and, on September 30, 2005, we had restructuring reserves
related to three separate restructuring programs. The first is a resizing and consolidation of the business which began in fiscal 2001. This
restructuring is substantially complete. We undertook this restructuring in response to significant declines in our revenue, particularly from our
telecommunications network equipment customers. We believe that our customers were themselves experiencing significant declines in demand from their
customers. As part of this restructuring, we:
|
|
Sold our optoelectronic components business, including the
manufacturing facilities associated with that business; |
|
|
Reduced our total headcount by approximately 9,700
employees; |
|
|
Consolidated our operations into fewer facilities, resulting in
the closure of over 25 smaller manufacturing, administrative, support and warehouse facilities; and |
|
|
Closed integrated circuit wafer manufacturing facilities in
Allentown and Reading, Pennsylvania and Madrid, Spain. |
Our second restructuring program
was announced on September 23, 2004, and consists of a further resizing of our business to align the cost structure with revenue projections. As part
of this program, we reduced our workforce by approximately 550 employees across the business, including administrative functions, sales, marketing,
product development and manufacturing support, and exited our standalone wireless local area networking chipset, or WiFi, business, our radio-frequency
power transistor, or RF power, business, and all operations in the Netherlands. This restructuring is substantially complete.
Our third restructuring program
was announced on September 29, 2004, and relates to the closure of our Orlando wafer manufacturing facility. In September 2005, we ceased operations in
the Orlando facility. Approximately 530 people were employed at the facility on September 30, 2005, the majority of which are expected to be off roll
by December 31, 2005. We currently estimate that our costs in fiscal 2006 will be $80 million lower than if the facility was still in
operation.
As a result of our restructuring
activities, we recorded a charge of $18 million for the year ended September 30, 2005, classified within restructuring and other charges net.
The net charge for the year ended September 30, 2005 is comprised of $1 million of net charges related to workforce reductions, $2 million related to
facility lease terminations, $14 million of other charges, $11 million of which related primarily to decommissioning activity and relocation of
employees and equipment at locations other than Orlando, and $3 million of which related to Orlando decommissioning activities, $5 million of non-cash
charges related to the impairment of assets, primarily related to our Singapore operations, and $4 million related to the reversal of a non-cash charge
for a pension liability in the Netherlands. In addition, within gross margin we recorded $139 million of restructuring related charges for the year
ended September 30, 2005, of which $120 million resulted from increased depreciation, $16 million is related to inventory and purchase commitment
charges, and $3 million relates to other charges. The increased depreciation is due to the shortening of the estimated useful lives of assets resulting
from our Orlando restructuring actions. Of the inventory and purchase commitment charges, $11 million is the result of lower demand for WiFi and RF
power transistor products in connection with our decision to exit the WiFi and RF power businesses, and $5 million
19
relates to commitments
related to our Orlando facility. For additional details regarding our restructuring activities, see Note 4 to our financial statements in Item
8.
In addition, in the fourth
quarter of fiscal 2005, we developed plans to resize and discontinue some of our shared business support groups. As a result, we have recorded a charge
of $5 million related to workforce reductions within Restructuring and Other Charges net.
During fiscal 2004, we recorded a
charge of $37 million for an asset retirement obligation related to the decommissioning of our former manufacturing facilities in Allentown and
Reading, classified within restructuring and other charges net. We also recorded $160 million for net restructuring and related charges,
classified within restructuring and other charges net. The net charges for fiscal 2004 include $132 million related to workforce reductions and
$28 million related to other restructuring and related charges including facility lease terminations, asset impairments, and other charges, including
relocation of employees and equipment. In addition, within gross margin we recorded $7 million of restructuring related charges during fiscal 2004, of
which $5 million resulted from increased depreciation. This increased depreciation is due to the shortening of estimated useful lives of certain assets
in connection with our restructuring actions.
We recorded net restructuring and
related charges of $131 million within continuing operations for the year ended September 30, 2003, classified within restructuring and other charges
net. We also recorded restructuring related costs within continuing operations in gross profit of $103 million for fiscal 2003, of which $71
million resulted from increased depreciation.
To complete our first
restructuring program which began in fiscal 2001, we estimate that we will incur approximately $2 million in additional cash charges during fiscal
2006, related primarily to the relocation of employees. We also estimate that we will spend an additional $1 million for capital expenditures primarily
related to the decommissioning of our former manufacturing facility in Allentown during the first quarter of fiscal 2006. To complete our exit from
manufacturing operations at our Orlando facility, we estimate that we will have a total future cash outlay of approximately $38 million. Included in
this amount are cash charges of $31 million related to the shutdown of the facility, of which we expect to pay $25 million in fiscal 2006 and $6
million in fiscal 2007. We also estimate that we will pay $3 million in the first quarter of fiscal 2006 related to equipment disposition costs. This
amount was previously recognized in restructuring and other charges net in the fourth quarter of fiscal 2005. We will also pay approximately $4
million in the first quarter of fiscal 2006 related to purchase commitments which were previously recorded in gross margin in the fourth quarter of
fiscal 2005. We also anticipate that we will pay a total of approximately $3 million related to our 2005 business resizing, of which $2 million and $1
million are expected to be paid in fiscal 2006 and 2007, respectively. These restructuring related charges were previously recognized in restructuring
and other charges net in the fourth quarter of fiscal 2005.
On September 13, 2005, we entered
into an agreement to sell the majority of the equipment at our Orlando facility for $89 million, which is $19 million more than previously estimated.
In the fourth quarter of fiscal 2005, we incurred a non-cash charge of $19 million related to increased depreciation. This charge was $19 million lower
than previously expected as we adjusted our estimated salvage value related to the equipment as a result of the proceeds from the sale of Orlando
equipment. We are also looking for a buyer for the land and buildings at the Orlando facility and we anticipate that we will receive cash proceeds of
approximately $10 million for these assets.
We expect that our future cash
requirements to complete these restructuring and restructuring related programs will be approximately $72 million. This amount includes amounts in the
restructuring reserve at September 30, 2005 and the estimated future cash charges and payments associated with our 2001 restructuring actions, 2004
business resizing, closure of Orlando and 2005 business resizing.
On October 26, 2005, we announced
that we are considering additional actions that would further improve profitability and consolidate our operations. Although we have not finalized our
plans, we currently anticipate that we will incur additional charges of approximately $20 million to $25 million related to these actions, of which
approximately $15 million to $20 million will be cash charges.
Application of Critical Accounting Policies and
Estimates
The preparation of financial
statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial
20
statements and revenues and
expenses during the period reported. The following accounting policies involve one or more critical accounting estimates because they are
particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are
made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably
could have been used in the current period, and changes in the accounting estimates we used are reasonably likely to occur from period to period, which
may have a material impact on the presentation of our financial condition and results of operations. We review these estimates and assumptions
periodically and reflect the effects of revisions in the period that they are determined to be necessary. We have reviewed our critical accounting
policies with our audit committee.
Property, Plant and
Equipment
Property, plant and equipment
that is held and used is generally reflected in our financial statements at historical cost less an allocation for depreciation. The resulting book
value may not be reflective of its fair market value. However, we have impaired property, plant and equipment in connection with our restructuring
initiatives. Property, plant and equipment is reviewed for impairment whenever events such as a significant industry downturn, product discontinuance,
plant closures, product dispositions, technological obsolescence, or other changes in circumstances indicate that their carrying amount may not be
recoverable. We perform impairment tests on groups of assets that are related and have separately identifiable cash flows. In some cases, it may not be
practical to measure the cash flows associated with a particular asset or group of assets due to the integrated nature of our production process. When
an assets economic life is shorter than previously expected or when we plan to abandon an asset as a result of a restructuring plan or otherwise
and are unable to measure the associated cash flows, we shorten the recovery period for that asset to its remaining useful life, which would cause us
to recognize increased depreciation. If separate cash flows can be identified, we compare the carrying amount of the assets to their undiscounted
expected future cash flows. If an impairment exists, assets classified as held and used are written-down to fair value and are depreciated over their
remaining useful life, while assets classified as held for sale are written down to fair value less costs to sell. It is reasonably likely that the
actual fair value may differ from our current estimate, in which case we may under- or over-value our property, plant and equipment and under- or
over-value the related impairment charge.
Tax Valuation
Allowance
A tax valuation allowance is
established, as needed, to reduce net deferred tax assets to the amount for which recovery is more likely than not to be realized. Since 2001, we
established a full valuation allowance against our U.S. net deferred tax assets excluding deferred tax liabilities related to indefinite-lived
goodwill. We recorded a valuation allowance because of our continuing losses and our long term financial forecast has enough uncertainty that we do not
meet the standard of more likely than not that is required for measuring the likelihood of realization of net deferred tax assets. In the
event it becomes more likely than not that some or all of the deferred tax assets will be realized, we will adjust our valuation allowance. Depending
on the amount and timing of taxable income we ultimately generate in the future, as well as other factors, we could recognize no benefit from our
deferred tax assets, in accordance with our current estimate, or we could recognize some or all of their full value.
Tax
Contingencies
Tax contingencies are recorded to
address potential exposures involving tax positions we have taken that could be challenged by taxing authorities. These potential exposures result from
the varying application of statutes, rules, regulations and interpretations. Our estimate of the value of our tax contingencies contains assumptions
based on past experiences and judgments about potential actions by taxing jurisdictions. The majority of our tax contingencies were transferred to us
from Lucent as part of our separation from Lucent and reflect our potential exposures under our tax sharing agreement with Lucent. We believe our tax
contingencies are reasonable although the accruals may change in the future due to new developments with each issue. It is possible that the ultimate
resolution of these matters may be greater or less than the amount that we have accrued.
Retirement
Benefits
Postretirement liabilities are
for benefits that we expect to pay to eligible retirees. We consider various factors in determining our postretirement liability, including the number
of employees who we expect to receive benefits, the type and length of benefits they will receive, trends in health care costs and other actuarial
assumptions. If the actual postretirement benefits paid differ from our current estimate we may be over- or under-accrued.
21
We also have pension plans
covering substantially all U.S. employees, excluding management employees hired after June 30, 2003. We consider various factors in determining our
pension liability, including the number of employees who we expect to be paid, their salary levels and years of service, the expected return on plan
assets, the discount rate used to determine the benefit obligation, the timing of the payment of benefits, and other actuarial assumptions. If the
actual results and events of our pension plan differ from our current assumptions, our benefit obligations may be over- or
under-valued.
We reassess our retirement
benefit plan assumptions on an annual basis or more frequently if changes in circumstance indicate a re-evaluation of assumptions is required. The key
benefit plan assumptions are the discount rate and the expected rate of return on plan assets. These assumptions are discussed below.
To select a discount rate for our
retirement benefit plans, we use a modeling process that involves selecting a portfolio of bonds that will match the expected cash outflows of our
benefit plans. We use the average yield of this hypothetical portfolio as a discount rate benchmark. In our model, we use a portfolio of fixed-income
debt instruments rated AA- or better and with maturities matching the expected timing of the benefit obligation. We extrapolate values for any year in
which an actual bond matching the needed criteria is not available in the financial market place. In fiscal 2005, we used discount rates of 6.0% and
5.5% to determine our net periodic benefit cost and our benefit obligation, respectively. This is a decrease from the rates used in prior years. In
fiscal 2004, we used discount rates of 6.25% and 6.0% to determine our net periodic benefit cost and our benefit obligation, respectively. In fiscal
2003 we used a discount rate of 6.25% for the determination of both our net periodic benefit cost and our benefit obligation for U.S. retirement
benefit plans.
We base our salary increase
assumptions on historical experience and future expectations. The expected rate of return for our retirement benefit plans represents the average rate
of return expected to be earned on plan assets over the period that benefits included in the benefit obligation are expected to be paid. In developing
the expected rate of return, we consider long-term compound annualized returns based on historical market data, historical and expected returns on the
various categories of plan assets, and the target investment portfolio allocation between debt and equity securities. For fiscal 2005, we increased the
weighted-average long-term rate of return on assets to 8.0% and 8.25% for the represented and management pension plans, respectively. For fiscal 2004,
we reduced the weighted-average long-term rate of return on assets to 7.75% from 8.0% in fiscal 2003 for our U.S. retirement benefit plans. The target
investment policy was changed in August 2004 to a mix of 57% equity and 43% debt instruments for the management pension plan and 48% equity and 52%
debt instruments for the occupational pension plan. The weighted average target investment portfolio allocation for our U.S. management and
occupational pension plans is 53% in equity and 47% in debt investments. The portfolios equity weighting is consistent with the long-term nature
of the plans benefit obligation. For fiscal 2006, we are using an expected rate of return on plan assets of 8.0% and 8.25% for the represented
and management pension plans, respectively, consistent with the target investment portfolio allocation.
Actuarial assumptions are based
on our best estimates and judgment. Material changes may occur in retirement benefit costs in the future if these assumptions differ from actual events
or experience. We performed a sensitivity analysis on the discount rate, which is the key assumption in calculating the pension benefit obligation.
Each change of 25 basis points in the discount rate assumption would have an estimated $2 million impact on annual net retirement benefit costs and a
$47 million impact on benefit obligations. Each change of 25 basis points in the expected rate of return assumption would have an estimated $3 million
annual impact on net retirement benefit costs.
In-process research and
development
We review our acquisitions to
determine if there are any intangible assets relating to purchased in-process research and development. Projects that have not achieved technological
feasibility and have no alternative future use are valued at fair market value using a discounted cash flow analysis and are expensed in the statement
of operations on the date of acquisition. We use a discount rate that reflects the development stage of the technology and the risks associated with
attaining full technological and commercial feasibility. When we value in-process research and development, we must make a number of estimates,
including the timing and amounts of future cash flows to be generated as a result of the projects, how close the projects are to technological
feasibility and how much risk and cost is involved in finalizing the projects. It is reasonably likely that our estimates for these amounts will differ
from actual results, in which case our in-process research and development charge may be over- or under-valued, which would also result in an under- or
over-valuation of our goodwill.
22
Goodwill
Goodwill is the excess of the
purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. Goodwill is tested for
impairment at the reporting unit level annually, or more frequently if events and circumstances indicate that there may be an impairment. The test
involves a two-step process. The first step requires us to compare the fair value of the reporting unit to its carrying value including goodwill. The
fair value of the reporting unit is calculated using discounted expected future cash flows. If the fair value is less then the carrying value, a
potential impairment exits and the second step of the process is performed. The second step requires us to calculate the excess of the fair value of
the reporting unit over the fair value of the reporting units net assets other than goodwill. If this excess, referred to as the implied fair
value of the goodwill, is less than the carrying value of the goodwill, an impairment exists and is recorded. Our estimates of future cash flows are
dependent upon many factors, including general economic trends, industry trends, technological developments and customer demand. It is reasonably
likely that future cash flows associated with these assets may exceed or fall short of our current estimates, in which case a different amount for an
impairment would result. If our actual cash flows exceed our estimates of future cash flows, any impairment charge would be greater than needed. If our
actual cash flows are less than our estimates of future cash flows, we may need to recognize additional impairment charges in future periods, which
would be limited to the carrying value of the goodwill.
Purchased In-process Research and
Development
In connection with the
acquisitions of Modem-Art Ltd. and TeraBlaze, Inc., a portion of each purchase price was allocated to purchased in-process research and development. In
analyzing these acquisitions, we made decisions to buy technology that had not yet reached commercialization rather than develop the technology
internally. We relied on factors such as the amount of time it would take to bring the technology to market and our own resource allocation in making
these decisions. At the date of acquisition, the in-process research and development projects had not yet reached technological feasibility and had no
alternative future uses. Accordingly, the value allocated to these projects was immediately expensed at acquisition.
We estimated the fair value of
the in-process research and development for these acquisitions using the excess earnings method of the income approach. This method employs a
discounted cash flow analysis using the present value of the estimated after-tax cash flows expected to be generated by the purchased in-process
research and development using risk-adjusted discount rates and revenue forecasts as appropriate. The selection of the discount rates was based on
consideration of our weighted average cost of capital, as well as other factors known at the time, including the projected useful life of each
technology, profitability levels of each technology, the uncertainty of technology advances and the stage of completion of each technology. We believe
that the estimated in-process research and development amounts so determined represented fair value and did not exceed the amount a third party would
have paid for the projects.
Set forth below are descriptions
for the major acquired in-process research and development projects and our assumptions in connection with these acquisitions.
Modem-Art
Ltd.
On March 8, 2005, we acquired
Modem-Art, a developer of advanced processor technology for 3G mobile communications, for $144 million. We issued common stock valued at $113 million
and paid $31 million in cash in exchange for all the outstanding shares of Modem-Art. On the date of acquisition, we expensed $55 million of the
purchase price as in-process research and development.
At the date of acquisition,
Modem-Art did not have any developed technology. Its projects underway were a 3G single-mode chipset, a variant of the single-mode chipset, which when
combined with our software and advanced second generation, or 2.5G, chipset incorporating GPRS and Enhanced Global Rates for Global Evolution, or EDGE,
can fulfill the requirements of dual-mode 2.5G and 3G, and the development of HSDPA technology, which will be integrated in a chipset that supports
high speed data transmission from base stations to mobile phones. The in-process research and development allocated to these projects was $12 million,
$10 million and $33 million, respectively. These projects ranged from 10% to 90% complete at the time of acquisition and are expected to be completed
through fiscal 2007. Projected net cash flows attributable to these projects, assuming successful development, were discounted to net present value
using discount rates of 30% for the single-mode project, 35% for the dual-mode project and 40% for the HSDPA project.
23
The 3G single-mode chipset is
intended to permit mobile handsets to operate on a 3G network only and will not have the capability to switch to mobile phone networks based on other
technologies such as 2.5G when outside of a 3G network range. We believe there will be few stand-alone markets for 3G networks because we expect
telecommunications carriers to limit their 3G networks to high usage areas. As a result of this limited market opportunity, we anticipate that the 3G
single-mode technology will derive most of its value as a building block for other projects involving 3G technology, including our dual-mode and HSDPA
projects. We estimate that, as of the date of acquisition, the single-mode project was approximately 90% complete. As of September 30, 2005, we
estimate that this project was approximately 95% complete and our current estimate of the costs to complete the project is less than $1
million.
The dual-mode technology will
enable mobile handsets to maintain high GPRS and EDGE data rates when outside 3G coverage. This technology will also integrate baseband processing and
power management, resulting in lower power consumption. This solution is expected to be compatible with a large range of mobile handsets from
entry-level to high-end solutions, and is expected to support multimedia features such as speakerphone, music playback, video playback and memory card
capabilities. The dual-mode technology is also expected to be used in future technologies, such as HSDPA. We estimate that, as of the date of
acquisition, this project was approximately 50% complete. As of September 30, 2005 we estimate that this project was approximately 90% complete and our
current estimate of the costs to complete the research and development efforts is approximately $4 million. The remaining development effort is
primarily standards compliance and field testing the product. We expect to begin generating revenues from this product during the first half of fiscal
2006.
HSDPA technology will be an
upgrade to existing wideband CDMA networks and is being designed to support significantly higher data throughput speeds on the downlink from base
stations to mobile phones. This technology also represents a significant improvement to the dual-mode technology, with greater memory and expected data
rates. We expect that we will be able to use the HSDPA technology in future generations that target data rates of 3.6 megabits per second and higher.
We estimate that, as of the date of acquisition, this project was approximately 10% complete. As of September 30, 2005 we estimate that this project
was approximately 50% complete and our current estimate of the costs to complete the research and development efforts is approximately $5 million. The
remaining research and development efforts include layout, mask set, firmware, integration and testing the product. We anticipate we will begin
generating revenues from this product during the first half of fiscal 2007.
TeraBlaze,
Inc
On December 31, 2003, we acquired
TeraBlaze, Inc., a developer of gigabit Ethernet switching solutions, for $21 million in Agere common stock. On the date of acquisition, we expensed
$13 million of the purchase price as in-process research and development.
At the date of acquisition,
TeraBlaze did not have any developed technology. It had one project underway to develop gigabit Ethernet switching solutions. We expected to use this
switch-on-a-chip technology to provide single-chip gigabit Ethernet solutions to equipment providers addressing small office, home office and
enterprise applications. Based on the complexity and specific nature of this technology, there was no specific alternative future use for this
technology. In determining the fair value of the project we used a discount rate of 40%, which reflected the development stage of the technology and
risks associated with attaining full technological and commercial feasibility. As of the acquisition date, this project was estimated to be 70%
complete, based on time, man-months completed and functionality. This project was completed during fiscal 2005 and we began generating revenues from
this product in the fourth quarter of fiscal 2005.
Sale of Optoelectronic Components
Business
During the second quarter of
fiscal 2003, we sold a substantial portion of our optoelectronic components business to TriQuint Semiconductor, Inc. for $40 million in cash. The
transaction included the products, product warranty liabilities, technology and certain facilities related to this business; and included lasers,
detectors, modulators, passive components, arrayed waveguide-based components, amplifiers, transmitters, receivers, transceivers, transponders and
micro electro-mechanical systems.
During the second quarter of
fiscal 2003, we also sold the remainder of our optoelectronic components business, which provided cable television transmission systems, telecom access
and satellite communications components, to EMCORE Corporation for $25 million in cash. The transaction included the assets, products, product warranty
liabilities, technology and intellectual property related to this business.
24
Our exit from the optoelectronic
components business was completed as a result of these two sales. See Note 16 to our financial statements in Item 8 for additional
details.
Results of Operations
Fiscal
year ended September 30, 2005 compared to fiscal year ended September 30, 2004
The following table shows our
revenue and the change in revenue both in dollars and in percentage terms, by segment:
|
|
|
|
Year Ended September 30,
|
|
Change
|
|
|
|
|
|
2005
|
|
2004
|
|
$
|
|
%
|
|
|
|
|
(dollars in millions) |
|
Revenue by
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Enterprise:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage |
|
|
|
$ |
620 |
|
|
$ |
635 |
|
|
$ |
(15 |
) |
|
|
(2 |
)% |
Mobility |
|
|
|
|
364 |
|
|
|
496 |
|
|
|
(132 |
) |
|
|
(27 |
) |
Enterprise
& Networking |
|
|
|
|
436 |
|
|
|
513 |
|
|
|
(77 |
) |
|
|
(15 |
) |
Consumer
Enterprise |
|
|
|
|
1,420 |
|
|
|
1,644 |
|
|
|
(224 |
) |
|
|
(14 |
) |
Telecommunications |
|
|
|
|
256 |
|
|
|
268 |
|
|
|
(12 |
) |
|
|
(4 |
) |
Total
Revenue |
|
|
|
$ |
1,676 |
|
|
$ |
1,912 |
|
|
$ |
(236 |
) |
|
|
(12 |
)% |
Revenue: Revenue was $1,676 million, a decrease of 12% or $236 million from $1,912 million in fiscal 2004.
Product revenue of $1,525 million in fiscal 2005 is a decrease of $241 million versus fiscal 2004, and revenue from the licensing of intellectual
property of $151 million is an increase of $5 million versus fiscal 2004. The revenue discussion below is qualitative in nature as it pertains to
price, volume and mix analysis. Traditional price, volume and mix analysis is not practicable due to the diversity of our product lines and the rapid
evolution of technology, including the frequent integration of additional functionality on a single integrated circuit.
In the Consumer Enterprise
segment, revenue was $1,420 million in fiscal 2005, a decrease of 14% or $224 million, from $1,644 million in fiscal 2004. Product revenue was $1,300
million in fiscal 2005, a decrease of $229 million from $1,529 million in fiscal 2004. Revenue from the licensing of intellectual property was $120
million in fiscal 2005, a $5 million increase from $115 million in fiscal 2004. The components of Consumer Enterprise segment revenue are discussed
below.
In Storage, revenue was $620
million in fiscal 2005, a decrease of $15 million from $635 million in fiscal 2004. Product revenue was $576 million in fiscal 2005, an $11 million
decrease from $587 million in fiscal 2004. Revenue from the licensing of intellectual property was $44 million in fiscal 2005, a $4 million decrease
from $48 million in fiscal 2004. The product revenue decline was driven by pricing pressures across all applications, and volume decreases in disk
controllers, motor controllers and read channels, as they reached the mature stage of the product life cycle. These decreases were partially offset by
volume increases in pre-amplifiers and system-on-a-chip and improved product mix as we sold more higher-priced integrated circuit solutions as a
percentage of revenue compared to the prior fiscal year.
In Mobility, revenue was $364
million in fiscal 2005, a decrease of $132 million from $496 million in fiscal 2004. Product revenue was $326 million in fiscal 2005, a $140 million
decrease from $466 million in fiscal 2004. Revenue from the licensing of intellectual property was $38 million in fiscal 2005, an $8 million increase
from $30 million in fiscal 2004. The product revenue decrease was mainly the result of an $87 million decrease in 3G sales, primarily 3G custom
chipsets, and a $35 million decrease in WiFi sales following our decision to exit that business. We also experienced pricing declines throughout the
remaining applications.
In Enterprise and Networking,
revenue was $436 million, a decrease of $77 million from $513 million in fiscal 2004. Product revenue was $398 million in fiscal 2005, a $78 million
decrease from $476 million in fiscal 2004. Revenue from the licensing of intellectual property was $38 million in fiscal 2005, a $1 million increase
from $37 million in fiscal 2004. The decrease in product revenue was attributable to weakening demand for custom networking products, including a shift
in overall mix as we sold more lower-priced custom chips as a percentage of revenue compared to the prior fiscal year. In addition, we experienced
pricing pressures across most product applications and volume decreases in analog modem solutions. These decreases were partially offset by increased
demand for satellite radio chip-sets and custom computing and consumer solutions.
25
In the Telecommunications
segment, revenue was $256 million, a decrease of $12 million from $268 million in fiscal 2004. Product revenue was $225 million in fiscal 2005, a $12
million decrease from $237 million in fiscal 2004. Revenue from the licensing of intellectual property was $31 million in both fiscal 2005 and fiscal
2004. The decrease in product revenue was primarily attributable to volume decreases in mature aggregation and physical layer devices, digital signal
processors and multi-service switching fabrics. In addition, we experienced price declines throughout most applications. These decreases were partially
offset by improved product mix, as we sold more higher-priced integrated circuit solutions as a percentage of revenue compared to fiscal
2004.
Costs and gross
margin: Costs were $1,012 million for fiscal 2005, a decrease of $34 million from $1,046 million in fiscal 2004. Gross
margin as a percent of revenue decreased 5.7 percentage points to 39.6% in the current year from 45.3% in the prior year. The decrease in gross margin
percentage is primarily driven by an increase in restructuring related costs, primarily related to the closing of our Orlando facility of $139 million
in 2005, compared to $7 million in 2004. The increase in restructuring related costs resulted in an 8.0 percentage point decrease to gross margin in
fiscal 2005 compared to fiscal 2004. In addition, we experienced price declines throughout most of the business. These decreases in gross margin were
partially offset by lower cost of purchased material from our joint venture manufacturer, lower internal manufacturing costs, and increased revenue
from the licensing of intellectual property, which has a higher gross margin than product revenue.
Although performance measurement
and resource allocation for the reportable segments are based on many factors, the primary financial measure is segment gross margin, which excludes
restructuring related charges included in costs. See Note 15 to our financial statements in Item 8 for additional segment information. The segment
gross margin for Consumer Enterprise was 43.2% in fiscal 2005, an increase of 1.8 percentage points from 41.4% in fiscal 2004. The primary driver of
the gross margin increase was lower cost of purchased material at our manufacturing joint venture, lower internal manufacturing costs primarily
resulting from our restructuring actions announced in September 2004 and a higher percentage of revenue from the licensing of intellectual property
which has a higher gross margin than product revenue. These improvements were somewhat offset by price declines throughout the segment. The segment
gross margin for Telecommunications was 73.8% in the current year, an increase of 2.2 percentage points from 71.6% in the prior year. Improvements were
realized due to lower internal manufacturing costs, a higher percentage of total revenue from the licensing of intellectual property and lower cost of
purchased material at our manufacturing joint venture. Partially offsetting these increases to gross margin were price declines throughout most of the
segment.
Selling, general and
administrative: Selling, general and administrative expenses decreased 14% or $38 million, to $234 million in fiscal 2005
from $272 million in fiscal 2004. The decrease is due to lower salary, benefit and other expenses throughout all corporate and business support areas
due to the cost saving initiatives implemented through our restructuring programs and lower defensive litigation expenses. These decreases were
partially offset by costs incurred in the current year of $4 million for the reverse stock split, a $3 million charge recognized in connection with a
default on a lease we guaranteed, and increased bad debt expenses.
Research and
development: Research and development expenses decreased 7% or $34 million, to $462 million in fiscal 2005 from $496 million
in fiscal 2004. The reduction was driven by cost saving initiatives implemented through our restructuring programs, including $13 million of lower
design expenses resulting from the decision to exit the wireless local area networking business, $16 million of lower design expenses for
telecommunications applications, and lower information technology, test center, and design platform expenses. These decreases were partially offset by
increases in design and mask expenses for storage, ethernet and enterprise and networking applications.
Purchased in-process research
and development: In-process research and development was $55 million in fiscal 2005 due to the acquisition of Modem-Art and
$13 million in fiscal 2004 due to the acquisition of TeraBlaze. See Purchased In-Process Research and Development for additional
details.
Restructuring and other
charges net: Net restructuring and other charges decreased 88% or $173 million to $24 million in fiscal 2005 from
$197 million in fiscal 2004. See Note 4 to our financial statements in Item 8 for additional details.
Other income
net: Other income net decreased by 13% or $1 million to $7 million in fiscal 2005 compared to $8 million in the prior
year. The decrease is primarily due to a $5 million increase in our loss from our equity investment in Silicon Manufacturing Partners Pte, Ltd., or
SMP, and the absence in fiscal 2005 of a
26
$4 million gain on the sale
of an investment recognized in fiscal 2004. These decreases were almost entirely offset by an $8 million increase in interest income.
Interest
expense: Interest expense decreased 33% or $14 million, to $29 million in fiscal 2005 from $43 million in fiscal 2004. The
reduction is primarily due to the repayment of our accounts receivable securitization facility in October 2004, and to a lesser extent, due to lower
interest expense on capital lease obligations.
Provision for income
taxes: For fiscal 2005, we recorded a benefit for income taxes of $122 million on a pre-tax loss of $130 million, yielding
an effective tax rate of 94.1%. This rate differs from the U.S. statutory rate primarily due to: recording a reversal of $120 million for tax and
interest contingencies for U.S. audit settlements related to tax years that we operated as a division of AT&T Corp. or Lucent Technologies Inc.;
recording a reversal of $22 million for tax and interest contingencies related to non-U.S. income tax; recording a provision for taxes related to
profitable non-U.S. jurisdictions and non-U.S. withholding taxes; recording of deferred taxes on indefinite-lived goodwill intangibles, and; the
recording of a valuation allowance against U.S. net deferred tax assets and Singapore losses.
For fiscal 2004, we recorded a
benefit for income taxes of $60 million on a pre-tax loss from continuing operations of $150 million, yielding an effective tax rate of 40.2%. This
rate differs from the U.S. statutory rate due to: the recording of an $86 million reversal for tax and interest contingencies resulting from
settlements of certain prior year tax audits; the recording of taxes related to non-U.S. jurisdictions; the impact of non-tax deductible in-process
research and development expenditures related to the acquisition of TeraBlaze, and; the recording of a full valuation allowance against U.S. net
deferred tax assets. The $86 million reversal of tax and interest contingencies recorded in fiscal 2004 relates to our tax sharing agreement with
Lucent and covers the settlement of periods we operated as a division of either AT&T or Lucent.
Fiscal year ended September
30, 2004 compared to fiscal year ended September 30, 2003
The following table shows our
revenue and the change in revenue both in dollars and in percentage terms, by segment:
|
|
|
|
Year Ended September 30,
|
|
Change
|
|
|
|
|
|
2004
|
|
2003
|
|
$
|
|
%
|
|
|
|
|
(dollars in millions) |
|
Revenue by
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Enterprise:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage |
|
|
|
$ |
635 |
|
|
$ |
623 |
|
|
$ |
12 |
|
|
|
2 |
% |
Mobility |
|
|
|
|
496 |
|
|
|
417 |
|
|
|
79 |
|
|
|
19 |
|
Enterprise
& Networking |
|
|
|
|
513 |
|
|
|
560 |
|
|
|
(47 |
) |
|
|
(8 |
) |
Consumer
Enterprise |
|
|
|
|
1,644 |
|
|
|
1,600 |
|
|
|
44 |
|
|
|
3 |
|
Telecommunications |
|
|
|
|
268 |
|
|
|
239 |
|
|
|
29 |
|
|
|
12 |
|
Total
Revenue |
|
|
|
$ |
1,912 |
|
|
$ |
1,839 |
|
|
$ |
73 |
|
|
|
4 |
% |
Revenue: Revenue was $1,912 million, an increase of 4% or $73 million from $1,839 million in fiscal 2003.
Product revenue of $1,766 million in fiscal 2004 is a $54 million increase from fiscal 2003, and revenue from the licensing of intellectual property of
$146 million was an increase of $19 million from fiscal 2003. The revenue discussion below is qualitative in nature as it pertains to price and volume
analysis. Traditional price and volume analysis is not practicable due to the diversity of our product lines and rapid evolution of technology,
including the continuous integration of additional functionality on a single integrated circuit.
In the Consumer Enterprise
segment, revenue was $1,644 million in fiscal 2004, an increase of 3% or $44 million from $1,600 million in fiscal 2003. Product revenue was $1,529
million in fiscal 2004, a $29 million increase from $1,500 million in fiscal 2003. Revenue from the licensing of intellectual property was $115 million
in fiscal 2004, a $15 million increase from $100 million in fiscal 2003. The components of Consumer Enterprise segment revenue are discussed
below.
In Storage, revenue was $635
million in fiscal 2004, an increase of 2% or $12 million from $623 million in fiscal 2003. Revenue from the licensing of intellectual property was $48
million in fiscal 2004, an increase of $16 million from $32 million in fiscal 2003. Product revenue was $587 million in fiscal 2004, a $4 million
decrease
27
from $591 million in fiscal
2003. The decrease in product revenue was driven by a decline in the demand for pre-amplifiers and pricing pressures in our system-on-a-chip solution
for hard disk drives. The decrease was offset by a volume increase in our system-on-a-chip-solution as we completed the product ramp-up at a
significant customer.
In Mobility, revenue was $496
million in fiscal 2004, an increase of 19% or $79 million from $417 million revenue in fiscal 2003. Product revenue was $466 million in fiscal 2004, an
increase of $75 million from $391 million in fiscal 2003. The product revenue increase was driven by the continued initial deployment of custom
chipsets based on the 3G standard and an increase in demand for our GPRS-based solution. Although we had an annual increase in revenue from the sales
of 3G custom chipsets, demand for this solution fluctuated during the fiscal year and declined sequentially in the fourth quarter due to an initial
ramp to have adequate supplies of 3G chipsets available for the launch of 3G phones by our customer and then subsequent inventory issues. This increase
in demand for our mobile phone solutions was partially offset by $101 million of lower revenues in wireless local area networking, primarily as a
result of lower demand for our 802.11b solutions, and pricing pressures for our GPRS-based mobile phones solutions. Additionally, revenue from the
licensing of intellectual property was $30 million in fiscal 2004, an increase of $4 million from $26 million in fiscal 2003.
In Enterprise and Networking,
revenue was $513 million in fiscal 2004, a decrease of 8% or $47 million from $560 million in fiscal 2003. Product revenue was $476 million in fiscal
2004, a $42 million decrease from $518 million in fiscal 2003. The decrease in product revenue was driven by decreased demand for mature telephony
products. These decreases were slightly offset by volume increases in sales of satellite radio chipsets and solutions for public infrastructure, and
personal computer and wired applications. Additionally, revenue from the licensing of intellectual property was $37 million in fiscal 2004, a decrease
of $5 million from $42 million in fiscal 2003.
In the Telecommunications
segment, revenue was $268 million in fiscal 2004, an increase of 12% or $29 million from $239 million in fiscal 2003. Product revenue was $237 million
in fiscal 2004, an increase of $25 million from $212 million in fiscal 2003. The increase in product revenue was driven by volume increases in mappers,
framers and network processing devices as we saw increased demand for newer applications. We also saw volume increases in mature digital signal
processors and multi-service switching fabric product applications. These increases were offset in part by pricing pressures and volume decreases in
asynchronous transfer mode traffic management devices and pricing pressures in physical layer devices. Additionally, revenue from the licensing of
intellectual property was $31 million in fiscal 2004, an increase of $4 million from $27 million in fiscal 2003.
Costs and gross
margin: Costs were $1,046 million in fiscal 2004, a decrease of 17% or $214 million, from $1,260 million in fiscal 2003.
Gross margin as a percent of revenue increased 13.8 percentage points to 45.3% in fiscal 2004 from 31.5% in fiscal 2003. The 13.8 percentage point
improvement is the result of improved manufacturing yields, higher manufacturing utilization due to increased volumes and fewer manufacturing
facilities, and a $96 million decrease in restructuring related costs, as we completed the closure of our Allentown manufacturing facility. These
improvements were offset slightly by pricing pressures in some applications in each of the four segments.
Although performance measurement
and resource allocation for the reportable segments are based on many factors, the primary financial measure is gross margin, exclusive of
restructuring related charges included in costs. Gross margin in the Consumer Enterprise segment was 41.4% in fiscal 2004, an increase of 9.5
percentage points from 31.9% in fiscal 2003. This increase was primarily driven by higher manufacturing utilization, improved manufacturing yields and
by higher revenue from the licensing of intellectual property offset by increased product engineering cost. Gross margin in the Telecommunications
segment was 71.6% in fiscal 2004 and 72.0% in fiscal 2003. The .4 percentage point decrease is driven by higher inventory provisions which was almost
entirely offset by improvements resulting from higher manufacturing utilization.
Selling, general and
administrative: Selling, general and administrative expenses decreased 7% or $22 million to $272 million in fiscal 2004 from
$294 million in fiscal 2003. The decrease is due to expense reductions as a result of restructuring actions primarily in information technology, with
lesser reductions in worldwide sales and other corporate functions.
Research and
development: Research and development expenses increased 6% or $29 million to $496 million in fiscal 2004 from $467 million
in fiscal 2003. The increase was due to $43 million in higher design-related investments and increased headcount related to product development,
partially offset by $13 million in lower investment in silicon manufacturing process research due to our reduced focus on developing new internal
manufacturing capabilities and $6 million lower outside contractor expenses as we moved work to Agere employees.
28
Purchased in-process research
and development: Purchased in-process research and development expense for fiscal 2004 was $13 million due to our
acquisition of TeraBlaze. in the first quarter of fiscal 2004. There was no purchased in-process research and development expense for fiscal 2003. See
Note 5 to our financial statements in Item 8 for additional details.
Restructuring and other
charges net: Net restructuring and other charges increased 50% or $66 million to $197 million in fiscal 2004 from
$131 million in fiscal 2003. See Note 4 to our financial statements in Item 8 for additional details.
Gain on sale of operating
assets net. Gain on sale of operating assets net decreased $17 million to $4 million in fiscal 2004 from $21
million in fiscal 2003. In fiscal 2003 we recognized a $16 million gain on the sale of our analog line card business, which had previously been
deferred.
Other income
net: Other income net decreased 64% or $14 million to $8 million in fiscal 2004 compared to $22 million in the prior
year. The change was primarily due to an $18 million decrease in income from our equity investment in SMP, offset in part by a $4 million gain on the
sale of an investment in fiscal 2004.
Interest
expense: Interest expense decreased 9% or $4 million to $43 million in fiscal 2004 from $47 million in fiscal 2003. This
decrease is primarily due to lower interest expense related to capital lease obligations.
Provision for income
taxes: For fiscal 2004, we recorded a benefit for income taxes of $60 million on a pre-tax loss from continuing operations
of $150 million, yielding an effective tax rate of 40.2%. This rate differs from the U.S. statutory rate due to: the recording of an $86 million
reversal of tax and interest contingencies resulting from settlements of certain prior year tax audits; the recording of taxes related to non-U.S.
jurisdictions; the impact of non-tax deductible in-process research and development expenditures related to the acquisition of TeraBlaze, and; the
recording of a full valuation allowance against U.S. net deferred tax assets. The $86 million reversal of tax and interest contingencies recorded in
fiscal 2004 relate to our tax sharing agreement with Lucent and covers the settlement of periods we operated as a division of either AT&T or
Lucent. For fiscal 2003, we recorded a provision for income taxes of $46 million on a pre-tax loss from continuing operations of $325 million, yielding
an effective tax rate of (14.2)%. This rate differs from the U.S. statutory rate primarily due to the impact of recording a full valuation allowance
against U.S. net deferred tax assets and the tax effect of non-U.S. operations.
Income from discontinued
operations: For fiscal 2004, there was no income from discontinued operations. For fiscal 2003, income from discontinued
operations was $38 million, or $0.23 per share, and consisted of income from operations of $8 million and a gain on disposal of $30 million. The gain
from disposal reflects an $11 million gain from the sale to TriQuint and a $19 million gain from the sale to EMCORE.
Liquidity and Capital Resources
On September 30, 2005, our cash
and cash equivalents were $698 million, a decrease of $80 million, from September 30, 2004. During the year our accounts receivable securitization
expired and we repaid the $122 million of borrowings. At the end of the year, our $372 million of debt consisted entirely of our long-term convertible
subordinated notes due in December 2009.
Net cash provided by operating
activities was $137 million in fiscal 2005 compared with $166 million in fiscal 2004. The $29 million decrease of cash provided by operating activities
resulted primarily from lower cash collections from sales this year as sales declined by $236 million, an increase of $75 million in voluntary pension
plan contributions and we received $20 million less dividends from SMP. Offsetting these decreases were lower cash outflows resulting from initiatives
taken to reduce our cost structure and $26 million lower payments for our restructuring actions. In addition, in the prior year we paid taxes of $55
million related to tax settlements for certain years in which we operated as a division of AT&T or Lucent.
Net cash provided by operating
activities from continuing operations was $166 million in fiscal 2004 compared with $23 million cash used in fiscal 2003. The $189 million improvement
in cash provided (used) by operating activities was primarily driven by improved gross margin on higher sales volumes. In addition, in fiscal 2004 we
received $61 million in dividends from our joint venture, SMP, and had a $37 million decrease in cash payments for restructuring activities. In fiscal
2003, we had a cash outflow of $34 million related to a transitional supply agreement associated with the sale of our analog line card business. These
improvements were offset in part by a fiscal 2004 tax payment of $55 million related to tax settlements for certain years in which we operated as a
division of AT&T or Lucent and higher bonus payments of $23 million.
29
Investing activities used net
cash of $45 million in fiscal 2005 compared to $88 million in fiscal 2004 and $11 million in fiscal 2003. The $43 million improvement in cash used in
investing activities from fiscal 2004 to fiscal 2005 reflects a $93 million increase in proceeds from the sale of property, plant and equipment
primarily related to the sale of equipment at our Orlando facility. Also, we had an increase of $11 million in cash returned to us that was previously
held in trust and $3 million in proceeds from the sale of our radio frequency power business. These increases were partially offset by $34 million of
higher capital expenditures, a $26 million net outflow in connection with the acquisition of Modem-Art and a decrease of $4 million in proceeds from
the sale of investments. The $77 million increase in cash used in investing activities from fiscal 2003 to fiscal 2004 is related to the absence in
fiscal 2004 of $64 million in proceeds received in fiscal 2003 from the sale of our optoelectronic components business and $35 million of lower
proceeds from the sale or disposal of property, plant and equipment. These decreases were partially offset by $19 million of lower capital expenditures
in fiscal 2004 compared to fiscal 2003.
Financing activities used net
cash of $173 million, $44 million, and $28 million in fiscal 2005, 2004, and 2003, respectively. The fiscal 2005 use of cash primarily reflects the
repayment of $122 million upon the expiration of our accounts receivable securitization and $67 million of repayments of long-term debt, including the
repurchase of $38 million of our convertible notes, partially offset by proceeds of $16 million from the issuance of common stock under our employee
benefit plans. The fiscal 2004 use of cash primarily reflects the repayment of $53 million in long-term debt, the majority of which is related to
capital leases, and the net repayment of $32 million under our accounts receivable securitization facility, partially offset by proceeds of $41 million
from the issuance of common stock. The fiscal 2003 use of cash primarily reflects the repayment of $65 million in long-term debt, the majority of which
is related to capital leases, and the net repayment of $9 million under our accounts receivable securitization facility, partially offset by borrowings
of $20 million under an installment note and proceeds of $26 million from the issuance of common stock.
We have outstanding $372 million
of 6.5% Convertible Subordinated Notes due December 15, 2009. Interest on the notes accrues at the rate of 6.5% per annum and is payable semi-annually
on June 15 and December 15 of each year. Investors can convert the notes into shares of common stock at a conversion price of $33.075 per share,
subject to adjustment for certain events, at any time prior to maturity, unless previously redeemed or repurchased by us. We may redeem the notes in
whole or in part at any time on or after June 20, 2007. In addition, upon a fundamental change in our company, we may be required to repurchase the
notes at a price equal to 100% of the principal amount of the notes plus any accrued and unpaid interest.
We have pension plans covering
substantially all U.S. employees, excluding management employees hired after June 30, 2003. The funding requirements related to our pension plans are
dependent on many factors, including actuarial assumptions and the actual performance of our plan assets. We do not expect that we will be required to
make any contributions to our pension plans in fiscal 2006; however, we may make voluntary contributions to our pension plans of approximately $55
million.
At September 30, 2005, we do not
have any assets that have been segregated to pay for postretirement medical benefits. Previously, we had a Voluntary Employee Benefit Association
(VEBA) trust, but the net assets in the trust were depleted during fiscal 2005. In fiscal 2005, benefit payments for postretirement medical
plans, net of employee contributions, were approximately $26 million, with approximately $6 million of that amount being paid from the VEBA trust.
Since the VEBA trust has been depleted, future payments required for postretirement medical benefits will be paid out of cash on hand. Due to actions
we have taken in fiscal 2005 and 2004 to reduce benefits provided under these plans, we expect our benefit payments to decrease slightly over the next
ten years. For postretirement life benefits, we have a VEBA trust with approximately $55 million of net assets at September 30, 2005. Benefits related
to this plan will be paid out of the trust and the benefit payment amount is expected to slightly increase over the next ten years. We are exploring
the possibility of transferring net assets from the retiree life plans VEBA trust to the retiree medical plans VEBA trust, but such a
transaction would require the prior approval of the Internal Revenue Service and therefore, we can not be certain when or if this transaction will take
place. For additional details on our postretirement benefit plans, including the timing and expected amounts of future benefit payments, See Note 12 to
our financial statements in Item 8 for additional details.
Our primary source of liquidity
is our cash and cash equivalents. We believe our cash and cash equivalents, together with our cash provided from operations, will be sufficient to meet
our projected cash requirements for at least the next 12 months.
30
Contractual
Obligations
The following table summarizes
the payments due for specific contractual obligations. These amounts are as of September 30, 2005.
|
|
|
|
Fiscal Years
|
|
|
|
|
|
Total
|
|
2006
|
|
2007 and 2008
|
|
2009 and 2010
|
|
2011 and Later
|
|
|
|
|
(dollars in millions) |
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
subordinated notes |
|
|
|
$ |
372 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
372 |
|
|
$ |
|
|
Operating
leases |
|
|
|
|
92 |
|
|
|
21 |
|
|
|
33 |
|
|
|
25 |
|
|
|
13 |
|
Purchase
obligations (1) |
|
|
|
|
156 |
|
|
|
101 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
Other
long-term liabilities (2) |
|
|
|
|
12 |
|
|
|
5 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
632 |
|
|
$ |
127 |
|
|
$ |
95 |
|
|
$ |
397 |
|
|
$ |
13 |
|
(1) |
|
Purchase obligations are defined as agreements to purchase goods
or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable pricing provisions; and the approximate timing of the transactions. These obligations primarily relate to $105 million for
software licenses and maintenance, $22 million for manufacturing related agreements and $11 million for capital purchase obligations. The amounts are
based on our contractual commitments; however, it is possible we may be able to negotiate lower payments if we choose to exit these contracts
earlier. |
(2) |
|
Other long-term liabilities consist of miscellaneous
taxes. |
Our material contractual
obligations also include a commitment with SMP, a joint venture with Chartered Semiconductor. SMP operates a 54,000 square foot integrated circuit
manufacturing facility in Singapore. We own a 51% equity interest in this joint venture, and Chartered Semiconductor owns the remaining 49% equity
interest. We have an agreement with SMP under which we have agreed to purchase 51% of the managed wafer capacity and Chartered Semiconductor has agreed
to purchase the remaining 49% of the managed wafer capacity. SMP determines its managed wafer capacity each year based on forecasts provided by Agere
and Chartered Semiconductor. If we fail to purchase our commitments, we will be required to pay SMP for the fixed costs associated with the unpurchased
wafers. Chartered Semiconductor is similarly obligated with respect to the wafers allotted to it. The agreement also provides that Chartered
Semiconductor will have a right of first refusal to purchase integrated circuits produced in excess of our requirements. During the first quarter of
fiscal 2005 Agere and Chartered Semiconductor agreed to waive the take or pay agreement. The agreement may be terminated after February 2008 by either
party upon two years written notice. The agreement may also be terminated for material breach, bankruptcy or insolvency.
We have pension plans covering
substantially all U.S. employees, excluding management employees hired after June 30, 2003. Although future contributions are likely to be required,
the amount and timing of these contributions will be impacted by actuarial assumptions, the actual rate of return on plan assets, the level of market
interest rates, and the amount of voluntary contributions to the plans.
Recent Pronouncements
On December 8, 2003, President
Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Act expanded Medicare to include, for the first
time, coverage for prescription drugs. In May 2004, the Financial Accounting Standards Board, or FASB, issued Staff Position No. FAS 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 or FSP
106-2. FSP 106-2 provides guidance on the effects of the Act. We have concluded that the Act will have no effect on our financial condition or results
of operations.
In October 2004, President Bush
signed into law the American Jobs Creation Act of 2004, or AJCA. In response to the AJCA, in December 2004 the FASB issued Staff Position No. FAS
109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004, or FSP 109-1 and Staff Position No. FAS 109-2, Accounting and
Disclosure
31
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004, or FSP 109-2. FSP 109-1 clarifies that the manufacturers deduction provided for under the AJCA should be
accounted for as a special deduction in accordance with SFAS 109 and not as a tax rate reduction. We currently do not expect to realize any benefit
related to this provision. FSP 109-2 provides guidance under SFAS 109, Accounting for Income Taxes or SFAS 109 with respect to
recording the potential impact of the repatriation provisions of the AJCA on companies income tax expense and deferred tax liability. FSP 109-2
states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the AJCA on its plan for
reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. We do not plan to repatriate any foreign earnings pursuant to the
repatriation provisions of the AJCA and, therefore, we have not adjusted our tax expense or deferred tax liability to reflect these provisions of the
AJCA.
In November 2004, the FASB issued
Statement No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4, or SFAS 151, which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted material. Among other provisions, the new rule requires that items such
as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current period charges regardless of whether they
meet the criterion of so abnormal contained in Accounting Research Bulletin No. 43 Restatement and Revision of Accounting Research
Bulletins. Additionally, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by us in the
first quarter of fiscal 2006. We have completed our evaluation of the impact that adoption of SFAS 151 could have and have concluded that such impact
will not be significant to our financial position or results of operations.
In December 2004, the FASB issued
Statement No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, which replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, or
APB 25. Under the new standard, companies will no longer be allowed to account for stock-based compensation transactions using the intrinsic value
method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair value method and to recognize the
expense in the statements of operations. The adoption of SFAS 123R will require additional accounting related to the income tax effects of share-based
payment arrangements and additional disclosure of their cash flow impacts. SFAS 123R also allows, but does not require, companies to restate prior
periods. SFAS 123R is effective for periods beginning after June 15, 2005. Accordingly, we will adopt the provisions of SFAS 123R beginning October 1,
2005, using the modified prospective transition method, and will recognize share-based compensation cost on a straight-line basis over the requisite
service periods of awards. Under the modified prospective method, non-cash compensation expense will be recognized for the portion of outstanding stock
option awards granted prior to the adoption of SFAS 123R for which service has not been rendered, and for any future stock option grants. Although the
adoption of SFAS 123R is not expected to have a significant effect on our financial condition or cash flows, we expect to record substantial non-cash
compensation expense that will have a significant, adverse effect on our results of operations. We currently estimate that the effect on our results of
operations could be as much as $40 million for fiscal 2006. This is substantially less than the 2005 pro forma effect due to the full vesting in 2005
of stock options granted in fiscal 2001, and to the acceleration of certain unvested and out-of-the-money stock options in the fourth
quarter of fiscal 2005. See Notes 2 and 10 to our financial statements in Item 8 for additional details.
In March 2005, the FASB issued
Interpretation No. 47 Accounting for Conditional Asset Retirement Obligations, or FIN 47. FIN 47 clarifies that the term
conditional asset retirement obligation, as used in SFAS 143 Accounting for Asset Retirement Obligations, refers to a
legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional on a future event that may or may
not be within the control of the entity. FIN 47 also clarifies that we are required to recognize a liability for such an obligation when incurred if
the liabilitys fair value can be reasonably estimated. FIN 47 will become effective no later than the end of the first fiscal year ending after
December 15, 2005. Retrospective application for interim financial information is permitted, but is not required, and early application is encouraged.
We do not expect that FIN 47 will have a significant effect on our financial condition or results of operations and are evaluating the timing of our
adoption of FIN 47.
In June 2005, the FASB issued
Statement No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3 or
SFAS 154. SFAS 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes or APB 20, and SFAS No. 3,
Reporting Accounting
32
Changes in Interim Financial Statements. SFAS 154 requires
retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable to
determine either the period-specific effects or the cumulative effects of the change. APB 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting
principle. This standard will not apply generally with respect to the adoption of new accounting standards, as new accounting standards usually include
specific transition provisions, and will not override transition provisions contained in new or existing accounting literature. SFAS 154 is effective
for fiscal years beginning after December 15, 2005, and early adoption is permitted for accounting changes and error corrections made in fiscal years
beginning after that SFAS 154 was issued. We are evaluating the timing of our adoption of SFAS 154 but do not expect that it will have a material
effect on our financial condition or results of operations.
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market
Risk |
We are exposed to market risk
from changes in foreign currency exchange rates and interest rates that could impact our results of operations and financial position. We manage our
exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative
financial instruments. We use derivative financial instruments as risk management tools and not for speculative purposes. In addition, derivative
financial instruments are entered into with a diversified group of major financial institutions in order to manage our exposure to nonperformance on
such instruments. Our risk management objective is to minimize the effects of volatility on our cash flows by identifying the recognized assets and
liabilities or forecasted transactions exposed to these risks and appropriately hedging the risks.
We may use foreign currency
forward contracts to manage the volatility of non-functional currency cash flows resulting from changes in exchange rates. Foreign currency exchange
contracts are designated for recorded, firmly committed or anticipated purchases and services. The use of these derivative financial instruments allows
us to reduce our overall exposure to exchange rate movements, since the gains and losses on these contracts substantially offset losses and gains on
the assets, liabilities and transactions being hedged. As of September 30, 2005, we did not have any foreign exchange contracts
outstanding.
While we hedge certain foreign
currency transactions, any decline in value of non-U.S. dollar currencies may, if not reversed, adversely affect our ability to contract for product
sales in U.S. dollars because our products may become more expensive to purchase in U.S. dollars for local customers doing business in the countries of
the affected currencies.
As of September 30, 2005, we had
$372 million of fixed rate long-term convertible notes outstanding. Interest rate changes and changes in the value of our common stock would likely
result in changes in the market value of these notes. The fair value of these notes was $373 million at September 30, 2005. We performed a sensitivity
analysis on our fixed rate long-term convertible debt to assess the risk of changes in fair value. The model to determine interest rate sensitivity
assumes a hypothetical 150 basis point shift in interest rates, while keeping the price of our common stock constant. At September 30, 2005, assuming a
150 basis point increase in interest rates, the fair value of the notes would decrease by $19 million. Conversely, a 150 basis point decrease in
interest rates at September 30, 2005, would increase the fair value of the notes by $21 million. The model to determine equity price sensitivity
assumes a hypothetical 10% change in the price of our common stock, while keeping the interest rate constant. At September 30, 2005, assuming a 10%
increase in the price of our common stock, the fair value of the notes would increase by $2 million. Conversely, a 10% decrease in the price of our
common stock would result in the fair value of the notes decreasing by $1 million.
33
Item 8. |
|
Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm |
|
|
|
|
35 |
|
Consolidated
Statements of Operations for the years ended September 30, 2005, 2004 and 2003 |
|
|
|
|
37 |
|
Consolidated
Balance Sheets as of September 30, 2005 and 2004 |
|
|
|
|
38 |
|
Consolidated
Statements of Changes in Stockholders Equity and Total Comprehensive Loss for the years ended September 30, 2005, 2004 and
2003 |
|
|
|
|
39 |
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2005, 2004 and 2003 |
|
|
|
|
40 |
|
Notes to
Consolidated Financial Statements |
|
|
|
|
41 |
|
34
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and
Stockholders of Agere Systems Inc.:
We have completed an integrated
audit of Agere Systems Inc.s 2005 consolidated financial statements and of its internal control over financial reporting as of September 30, 2005
and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented below.
Consolidated financial
statements
In our opinion, the consolidated
financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Agere Systems Inc. and its
subsidiaries (the Company) at September 30, 2005 and 2004, and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2005 in conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 17 to the
consolidated financial statements, the Company changed its method of accounting for asset retirement obligations as of October 1,
2002.
Internal control over financial
reporting
Also, in our opinion,
managements assessment, included in Managements Report on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of September 30, 2005 based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material
respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2005, based on criteria established in Internal Control Integrated Framework issued by COSO. The
Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements assessment and on the
effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over
financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
35
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
New York, New York
November 18, 2005
36
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions except per share
amounts)
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
Revenue |
|
|
|
$ |
1,676 |
|
|
$ |
1,912 |
|
|
$ |
1,839 |
|
Costs |
|
|
|
|
1,012 |
|
|
|
1,046 |
|
|
|
1,260 |
|
Gross
profit |
|
|
|
|
664 |
|
|
|
866 |
|
|
|
579 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative |
|
|
|
|
234 |
|
|
|
272 |
|
|
|
294 |
|
Research and
development |
|
|
|
|
462 |
|
|
|
496 |
|
|
|
467 |
|
Amortization
of acquired intangible assets |
|
|
|
|
6 |
|
|
|
7 |
|
|
|
8 |
|
Purchased
in-process research and development |
|
|
|
|
55 |
|
|
|
13 |
|
|
|
|
|
Restructuring
and other charges net |
|
|
|
|
24 |
|
|
|
197 |
|
|
|
131 |
|
Gain on sale
of operating assets net |
|
|
|
|
(9 |
) |
|
|
(4 |
) |
|
|
(21 |
) |
Total
operating expenses |
|
|
|
|
772 |
|
|
|
981 |
|
|
|
879 |
|
Operating
loss |
|
|
|
|
(108 |
) |
|
|
(115 |
) |
|
|
(300 |
) |
Other income
net |
|
|
|
|
7 |
|
|
|
8 |
|
|
|
22 |
|
Interest
expense |
|
|
|
|
29 |
|
|
|
43 |
|
|
|
47 |
|
Loss from
continuing operations before provision for income taxes |
|
|
|
|
(130 |
) |
|
|
(150 |
) |
|
|
(325 |
) |
(Benefit)
provision for income taxes |
|
|
|
|
(122 |
) |
|
|
(60 |
) |
|
|
46 |
|
Loss from
continuing operations |
|
|
|
|
(8 |
) |
|
|
(90 |
) |
|
|
(371 |
) |
Discontinued
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations of discontinued business (net of taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Gain on
disposal of discontinued business (net of taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
Income from
discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
Loss before
cumulative effect of accounting change |
|
|
|
|
(8 |
) |
|
|
(90 |
) |
|
|
(333 |
) |
Cumulative
effect of accounting change (net of benefit for income taxes of $0 for the year ended September 30, 2003) |
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Net
loss |
|
|
|
$ |
(8 |
) |
|
$ |
(90 |
) |
|
$ |
(338 |
) |
Basic and
diluted income (loss) per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.52 |
) |
|
$ |
(2.23 |
) |
Income from
discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
0.23 |
|
Loss before
cumulative effect of accounting change |
|
|
|
|
(0.04 |
) |
|
|
(0.52 |
) |
|
|
(2.00 |
) |
Loss from
cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
(0.03 |
) |
Net
loss |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.52 |
) |
|
$ |
(2.03 |
) |
Weighted
average shares outstanding basic and diluted (in thousands) |
|
|
|
|
177,775 |
|
|
|
171,248 |
|
|
|
166,699 |
|
See Notes to Consolidated Financial
Statements.
37
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share
amounts)
|
|
|
|
September 30,
|
|
|
|
|
|
2005
|
|
2004
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
698 |
|
|
$ |
778 |
|
Trade
receivables, less allowance of $3 at September 30, 2005 and 2004 |
|
|
|
|
251 |
|
|
|
285 |
|
Inventories |
|
|
|
|
130 |
|
|
|
150 |
|
Other current
assets |
|
|
|
|
38 |
|
|
|
60 |
|
Total
current assets |
|
|
|
|
1,117 |
|
|
|
1,273 |
|
Property,
plant and equipment net |
|
|
|
|
420 |
|
|
|
682 |
|
Goodwill |
|
|
|
|
196 |
|
|
|
119 |
|
Acquired
intangible assets net of accumulated amortization |
|
|
|
|
9 |
|
|
|
6 |
|
Other
assets |
|
|
|
|
139 |
|
|
|
192 |
|
Total
assets |
|
|
|
$ |
1,881 |
|
|
$ |
2,272 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
|
|
$ |
200 |
|
|
$ |
195 |
|
Payroll and
related benefits |
|
|
|
|
87 |
|
|
|
101 |
|
Short-term
debt |
|
|
|
|
|
|
|
|
147 |
|
Income taxes
payable |
|
|
|
|
84 |
|
|
|
218 |
|
Restructuring
reserve |
|
|
|
|
28 |
|
|
|
60 |
|
Deferred
income |
|
|
|
|
35 |
|
|
|
78 |
|
Other current
liabilities |
|
|
|
|
54 |
|
|
|
67 |
|
Total
current liabilities |
|
|
|
|
488 |
|
|
|
866 |
|
Pension and
postretirement benefits |
|
|
|
|
522 |
|
|
|
485 |
|
Long-term
debt |
|
|
|
|
372 |
|
|
|
420 |
|
Other
liabilities |
|
|
|
|
72 |
|
|
|
80 |
|
Total
liabilities |
|
|
|
|
1,454 |
|
|
|
1,851 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $1.00 per share, 250,000,000 shares authorized and no shares issued and outstanding |
|
|
|
|
|
|
|
|
|
|
Common stock,
par value $0.01 per share, 1,000,000,000 shares authorized and 181,627,917 shares issued and outstanding as of September 30, 2005 after
deducting 10,939 shares in treasury and 172,424,021 shares issued and outstanding as of September 30, 2004 after deducting 10,939 shares in
treasury |
|
|
|
|
2 |
|
|
|
2 |
|
Additional
paid-in capital |
|
|
|
|
7,561 |
|
|
|
7,424 |
|
Accumulated
deficit |
|
|
|
|
(6,789 |
) |
|
|
(6,781 |
) |
Accumulated
other comprehensive loss |
|
|
|
|
(347 |
) |
|
|
(224 |
) |
Total
stockholders equity |
|
|
|
|
427 |
|
|
|
421 |
|
Total
liabilities and stockholders equity |
|
|
|
$ |
1,881 |
|
|
$ |
2,272 |
|
See Notes to Consolidated Financial
Statements.
38
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND TOTAL COMPREHENSIVE
LOSS
(dollars in millions)
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
(000 |
s) |
|
|
|
|
|
|
(000 |
s) |
|
|
|
|
|
|
(000 |
s) |
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance |
|
|
|
|
172,424 |
|
|
$ |
2 |
|
|
|
169,309 |
|
|
$ |
2 |
|
|
|
164,278 |
|
|
$ |
2 |
|
Issuance of
common stock Modem-Art Ltd. acquisition |
|
|
|
|
7,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock TeraBlaze, Inc. acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock Massana Limited acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
911 |
|
|
|
|
|
Issuance of
common stock pension plan contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,875 |
|
|
|
|
|
Issuance of
common stock employee benefit plans |
|
|
|
|
2,171 |
|
|
|
|
|
|
|
2,423 |
|
|
|
|
|
|
|
2,245 |
|
|
|
|
|
Ending
balance |
|
|
|
|
181,628 |
|
|
|
2 |
|
|
|
172,424 |
|
|
|
2 |
|
|
|
169,309 |
|
|
|
2 |
|
|
Additional
Paid-in Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance |
|
|
|
|
|
|
|
|
7,424 |
|
|
|
|
|
|
|
7,352 |
|
|
|
|
|
|
|
7,257 |
|
Issuance of
common stock Modem-Art Ltd. acquisition |
|
|
|
|
|
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock TeraBlaze, Inc. acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
Issuance of
common stock Massana Limited acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
Issuance of
common stock pension plan contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
Issuance of
common stock employee benefit plans |
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
39 |
|
Ending
balance |
|
|
|
|
|
|
|
|
7,561 |
|
|
|
|
|
|
|
7,424 |
|
|
|
|
|
|
|
7,352 |
|
|
Accumulated
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance |
|
|
|
|
|
|
|
|
(6,781 |
) |
|
|
|
|
|
|
(6,691 |
) |
|
|
|
|
|
|
(6,353 |
) |
Net
loss |
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
(338 |
) |
Ending
balance |
|
|
|
|
|
|
|
|
(6,789 |
) |
|
|
|
|
|
|
(6,781 |
) |
|
|
|
|
|
|
(6,691 |
) |
|
Accumulated
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance |
|
|
|
|
|
|
|
|
(224 |
) |
|
|
|
|
|
|
(152 |
) |
|
|
|
|
|
|
(174 |
) |
Minimum pension
liability adjustment |
|
|
|
|
|
|
|
|
(125 |
) |
|
|
|
|
|
|
(81 |
) |
|
|
|
|
|
|
18 |
|
Foreign currency
translations |
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for realized foreign currency translation losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Unrealized gain
on cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
4 |
|
Reclassification
adjustment for cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Ending
balance |
|
|
|
|
|
|
|
|
(347 |
) |
|
|
|
|
|
|
(224 |
) |
|
|
|
|
|
|
(152 |
) |
Total
stockholders equity |
|
|
|
|
|
|
|
$ |
427 |
|
|
|
|
|
|
$ |
421 |
|
|
|
|
|
|
$ |
511 |
|
|
Total
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
$ |
(8 |
) |
|
|
|
|
|
$ |
(90 |
) |
|
|
|
|
|
$ |
(338 |
) |
Other
comprehensive income (loss) |
|
|
|
|
|
|
|
|
(123 |
) |
|
|
|
|
|
|
(72 |
) |
|
|
|
|
|
|
22 |
|
Total
comprehensive loss |
|
|
|
|
|
|
|
$ |
(131 |
) |
|
|
|
|
|
$ |
(162 |
) |
|
|
|
|
|
$ |
(316 |
) |
See Notes to Consolidated Financial
Statements.
39
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
$ |
(8 |
) |
|
$ |
(90 |
) |
|
$ |
(338 |
) |
Less: Income
from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
Cumulative
effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Loss from
continuing operations |
|
|
|
|
(8 |
) |
|
|
(90 |
) |
|
|
(371 |
) |
Adjustments
to reconcile loss from continuing operations to net cash provided (used) by operating activities from continuing operations, net of effects for
acquisitions of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
|
|
297 |
|
|
|
215 |
|
|
|
329 |
|
Purchased
in-process research and development |
|
|
|
|
55 |
|
|
|
13 |
|
|
|
|
|
Restructuring
expense net of cash payments |
|
|
|
|
(32 |
) |
|
|
115 |
|
|
|
12 |
|
Pension plan
contributions |
|
|
|
|
(78 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
Provision for
inventory write-downs |
|
|
|
|
13 |
|
|
|
7 |
|
|
|
|
|
(Benefit)
provision for deferred income taxes |
|
|
|
|
(13 |
) |
|
|
(40 |
) |
|
|
17 |
|
Equity loss
(earnings) from investments |
|
|
|
|
10 |
|
|
|
5 |
|
|
|
(13 |
) |
Dividends
received from equity investments |
|
|
|
|
41 |
|
|
|
61 |
|
|
|
|
|
Decrease
(increase) in receivables |
|
|
|
|
34 |
|
|
|
24 |
|
|
|
(18 |
) |
Decrease
(increase) in inventories |
|
|
|
|
7 |
|
|
|
(35 |
) |
|
|
43 |
|
Decrease in
accounts payable |
|
|
|
|
|
|
|
|
(50 |
) |
|
|
(4 |
) |
(Decrease)
increase in payroll and benefit liabilities |
|
|
|
|
(9 |
) |
|
|
1 |
|
|
|
26 |
|
Decrease in
income taxes payable |
|
|
|
|
(114 |
) |
|
|
(88 |
) |
|
|
(43 |
) |
(Decrease)
increase in deferred income |
|
|
|
|
(43 |
) |
|
|
47 |
|
|
|
|
|
Gain on
disposition of businesses |
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(16 |
) |
Changes in
other operating assets and liabilities |
|
|
|
|
(16 |
) |
|
|
(14 |
) |
|
|
17 |
|
Other
adjustments for non-cash items net |
|
|
|
|
(5 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
Net cash
provided (used) by operating activities from continuing operations |
|
|
|
|
137 |
|
|
|
166 |
|
|
|
(23 |
) |
Net cash used
by operating activities from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
(86 |
) |
Net cash
provided (used) by operating activities |
|
|
|
|
137 |
|
|
|
166 |
|
|
|
(109 |
) |
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures |
|
|
|
|
(131 |
) |
|
|
(97 |
) |
|
|
(116 |
) |
Proceeds from
the sale or disposal of property, plant and equipment |
|
|
|
|
96 |
|
|
|
3 |
|
|
|
38 |
|
Sales of
investments |
|
|
|
|
|
|
|
|
4 |
|
|
|
9 |
|
Net proceeds
from disposition of businesses |
|
|
|
|
3 |
|
|
|
|
|
|
|
64 |
|
Acquisitions
of businesses net of cash acquired |
|
|
|
|
(26 |
) |
|
|
|
|
|
|
(1 |
) |
Decrease
(Increase) in cash designated as held in trust |
|
|
|
|
13 |
|
|
|
2 |
|
|
|
(5 |
) |
Net cash
used by investing activities |
|
|
|
|
(45 |
) |
|
|
(88 |
) |
|
|
(11 |
) |
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
repayments on long-term debt |
|
|
|
|
(67 |
) |
|
|
(53 |
) |
|
|
(65 |
) |
Proceeds from
issuance of stock net of expense |
|
|
|
|
16 |
|
|
|
41 |
|
|
|
26 |
|
Proceeds from
the issuance of long-term debt net of expenses |
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
Repayment of
short-term debt net |
|
|
|
|
(122 |
) |
|
|
(32 |
) |
|
|
(9 |
) |
Net cash
used by financing activities |
|
|
|
|
(173 |
) |
|
|
(44 |
) |
|
|
(28 |
) |
|
Effect of
exchange rate changes on cash |
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Net increase
(decrease) in cash and cash equivalents |
|
|
|
|
(80 |
) |
|
|
34 |
|
|
|
(147 |
) |
Cash and
cash equivalents at beginning of year |
|
|
|
|
778 |
|
|
|
744 |
|
|
|
891 |
|
Cash and
cash equivalents at end of year |
|
|
|
$ |
698 |
|
|
$ |
778 |
|
|
$ |
744 |
|
See Notes to Consolidated Financial
Statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in
millions except per share amounts)
1. Background and Basis of
Presentation
Agere Systems Inc. (the
Company or Agere) is a leading provider of integrated circuit solutions for a variety of applications including high-density
storage, mobile wireless communications and enterprise and telecommunications networks. These solutions form the building blocks for a broad range of
computing and communications applications. Ageres customers include manufacturers of hard disk drives, mobile phones, high speed communications
systems and personal computers. The Company also generates revenue from the licensing of intellectual property.
On May 27, 2005, Agere
reclassified its Class A common stock and Class B common stock into a new, single class of common stock, with a par value of $0.01 per share, and
effected a 1-for-10 reverse stock split. Stockholders equity has been restated to give retroactive recognition to the reverse stock split for all
periods presented by combining the par value previously attributable to the Class A common stock and Class B common stock and then reclassifying the
excess common stock par value resulting from the reverse split to additional paid-in capital. In addition, all references in the financial statements
and notes to numbers of shares and per share amounts have been restated to reflect the reclassification and the reverse stock split.
The Company has four operating
segments: Storage, Mobility, Enterprise and Networking and Telecommunications. In accordance with the aggregation criteria set forth in Statement of
Financial Accounting Standards (SFAS) No. 131 Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), the Company operates in two reportable segments, Consumer Enterprise and Telecommunications. See Note 15 Segment
Information.
During fiscal 2003, the Company
sold its optoelectronic components business. See Note 16 Discontinued Operations.
2. |
|
Summary of Significant Accounting Policies |
Principles of Consolidation
The consolidated financial
statements include all majority-owned subsidiaries in which the Company exercises control. Investments in which the Company exercises significant
influence, but which it does not control (generally a 20% to 50% ownership interest), are accounted for under the equity method of accounting. Although
the Companys Silicon Manufacturing Partners Pte Ltd. (SMP) joint venture is majority-owned, it is accounted for under the equity
method of accounting due to the partners significant participatory rights. See Note 7 Investment in Silicon Manufacturing Partners.
Investments in which the Company does not exercise significant influence are recorded at cost (generally less than a 20% interest). All material
intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial
statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (the U.S.)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and revenue and expenses during the period reported. These estimates include assessing the
collectability of accounts receivable, the use and recoverability of inventory, the realization of deferred tax assets, the allocation of purchase
price in acquisitions, tax contingencies and valuation allowances, pension and other employee benefits, restructuring reserves, useful lives for
depreciation and amortization periods of tangible and intangible assets, and long-lived asset impairments, among others. The markets for the
Companys products are characterized by intense competition, rapid technological development, evolving standards, short product life cycles and
price competition, all of which could impact the future realizable value of the Companys assets. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the period that they are determined to be necessary. Actual results could differ from those
estimates.
Revenue Recognition
Revenue is derived from sales of
products and licensing of intellectual property. Revenue is recognized when persuasive evidence of an arrangement exists, the product has been
delivered and title and risk of loss have transferred, the price is fixed and determinable, and collection of the resulting receivable is reasonably
assured.
41
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Utilizing these criteria,
product revenue is generally recognized upon delivery of the product at the end-customers location when the risks and rewards of ownership have
passed to the customer. Revenue is deferred from sales to distributors until the product is ultimately sold to the end-customer. Sales revenue is not
reduced to reflect estimated returns because the Companys sales arrangements do not grant end-customers a right of return. Products are
pre-certified prior to shipment and are not subject to post shipment customer acceptance. There are no post shipment obligations such as installation
or training. Accordingly, unless stated specifically in the contract, deferral of revenue is not required for either customer acceptance or post
shipment obligations.
Revenue from the licensing of
intellectual property is recognized when collection of the resulting receivable is reasonably assured, unless the Company has obligations, such as a
commitment to grant a right to use patents or technologies developed in the future. In any such case, licensing revenue is recognized over a period not
longer than the license term. The revenue associated with these arrangements may include amounts due from the licensee related to past infringements on
the Companys patents or technologies and the licensees continued use of these patents and technologies. These arrangements are not subject
to any form of future acceptance by the licensee.
Research and Development
Costs
Research and development costs
are charged to expense as incurred.
Income Taxes
The asset and liability approach
is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is established, as needed, to reduce net deferred tax assets to the amount for which
recovery is more likely than not.
Loss Per Share
Basic and diluted loss per common
share for all periods is calculated by dividing net loss by the weighted average number of outstanding common shares. Due to the Companys net
losses, the effect of potentially dilutive securities or common stock equivalents that could be issued was excluded from the diluted loss per share
calculation due to its anti-dilutive effect.
Other Comprehensive Income
(Loss)
Total comprehensive loss
includes, in addition to net loss, changes in equity that are excluded from the consolidated statements of operations and are recorded directly into a
separate section of stockholders equity on the consolidated balance sheets. The Companys accumulated other comprehensive loss shown on the
consolidated balance sheets, and the other comprehensive income (loss) shown on the consolidated statements of changes in stockholders equity and
total comprehensive loss, consists of minimum pension liability adjustments, foreign currency translation adjustments and unrealized gains and losses
on cash flow hedges.
Foreign Currency Translation
Balance sheet accounts of the
Companys foreign operations for which the local currency is the functional currency are translated into U.S. dollars at period-end exchange
rates, while income, expenses and cash flows are translated at average exchange rates during the period. Translation gains or losses related to net
assets of such operations are shown as a component of accumulated other comprehensive loss in stockholders equity. Gains and losses resulting
from foreign currency transactions, which are transactions denominated in a currency other than the entitys functional currency, are included in
the consolidated statements of operations.
Cash and Cash Equivalents
The Company considers all liquid
investments with original maturities of ninety days or less to be cash equivalents.
Inventories
Inventories are stated at the
lower of cost, determined on a first-in, first-out basis, or market. The Company records inventory provisions, classified within costs, based on a
review of forecasted demand compared with existing inventory levels.
42
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Property, Plant and
Equipment
Property, plant and equipment are
stated at cost less accumulated depreciation. Depreciation and amortization is determined using the straight-line method over the estimated useful
lives of the various asset classes. Equipment leases qualifying as capital leases are also included in property, plant and equipment.
Estimated useful lives range from
three to five years for machinery, electronic and other equipment, and up to forty years for buildings. Major renewals and improvements are capitalized
and minor replacements, maintenance, and repairs are charged to current operations as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from the consolidated balance sheets and any gain or loss is reflected in the consolidated statements of
operations.
Impairment of Property, Plant and
Equipment
Property, plant and equipment is
reviewed for impairment whenever events such as a significant industry downturn, product discontinuance, plant closures, product dispositions,
technological obsolescence or other changes in circumstances indicate that the carrying amount may not be recoverable. When such events occur, the
Company compares the carrying amount of the assets to the undiscounted expected future cash flows, if separate cash flows are available. If this
comparison indicates that there is impairment, assets classified as held and used are written-down to fair value and assets classified as held for sale
are written-down to fair value less cost to sell.
Internal Use Software
Certain costs of computer
software developed or obtained for internal use are capitalized and amortized on a straight-line basis over three years. Costs for general and
administrative, overhead, maintenance and training, as well as the cost of software that does not add functionality to the existing system, are
expensed as incurred.
Goodwill and Acquired Intangible
Assets
Goodwill is the excess of the
purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. Goodwill is tested for
impairment annually, based on fair value at the reporting unit level, or more frequently if events and circumstances indicate that goodwill may be
impaired. Intangible assets with finite lives are amortized over their estimated useful lives. The Company does not have any indefinite lived
intangible assets other than goodwill.
Investments
Investments in marketable
securities that are available for sale are recorded at fair value. Fair value is based upon market prices quoted on the last business day of the fiscal
period. Unrealized gains and losses related to these securities are excluded from earnings and are included as a separate component of other
comprehensive income (loss) until such gains or losses are realized or such losses are determined to be other than temporary. Minority equity
investments in non-publicly traded companies are generally carried at cost. The Company monitors these investments for impairment and makes appropriate
reductions in carrying values when necessary.
Reclassifications
Certain prior year amounts have
been reclassified to conform to the fiscal 2005 presentation.
Stock Compensation Plans
At September 30, 2005, the
Company had various stock-based compensation plans for employees and outside directors, which are described more fully in Note 10 Stock
Compensation Plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations.
If the Company had elected to
adopt the optional fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123), as amended by SFAS No. 148 Accounting for Stock-Based Compensation Transition and Disclosure (SFAS
148), for its stock option plans and Employee Stock
43
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Purchase Plan
(ESPP), the net loss and net loss per share as reported would have increased to the pro forma amounts indicated below:
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
Net
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
|
|
$ |
(8 |
) |
|
$ |
(90 |
) |
|
$ |
(338 |
) |
Add:
Stock-based employee compensation expense determined under APB 25 intrinsic value method and included in reported net loss |
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Deduct:
Stock-based employee compensation expense determined under SFAS 123 fair value based method (1)(2) |
|
|
|
|
152 |
|
|
|
137 |
|
|
|
138 |
|
Pro
forma |
|
|
|
$ |
(160 |
) |
|
$ |
(227 |
) |
|
$ |
(474 |
) |
Basic and
diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.52 |
) |
|
$ |
(2.03 |
) |
Pro
forma |
|
|
|
$ |
(0.90 |
) |
|
$ |
(1.33 |
) |
|
$ |
(2.85 |
) |
(1) |
|
The pro forma stock-based employee compensation expense has not
been tax-effected due to the recording of a full valuation allowance against U.S. net deferred tax assets. |
(2) |
|
Of the $152 of stock-based employee compensation expense
determined under the fair value based method in fiscal 2005, $47 represents the expense resulting from the acceleration of certain unvested and
out-of-the-money stock options in the fourth quarter of fiscal 2005. The $152 also includes $55 from stock options granted in fiscal 2001
that became fully vested in fiscal 2005. |
The fair value of each stock
option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
Dividend
yield |
|
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Volatility |
|
|
|
|
84.9 |
% |
|
|
94.9 |
% |
|
|
95.0 |
% |
Risk-free
interest rate |
|
|
|
|
3.18 |
% |
|
|
2.48 |
% |
|
|
2.29 |
% |
Expected
holding period (in years) |
|
|
|
|
2.7 |
|
|
|
2.8 |
|
|
|
2.8 |
|
The Company uses third-party
analysis to assist in developing the expected volatility and expected life of its stock options. In the fourth quarter of fiscal 2005, in anticipation
of adopting SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R) in the first quarter of fiscal 2006, the
Company evaluated the variables used in the Black-Scholes model. As a result, the Company changed its computation of expected volatility from being
based solely on historical volatility to a combination of both historical and peer company market-based implied volatility.
On December 8, 2003, President
Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act expanded Medicare to
include, for the first time, coverage for prescription drugs. In May 2004, the Financial Accounting Standards Board (FASB) issued Staff
Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (FSP 106-2). FSP 106-2 provides guidance on the effects of the Act. The Company has concluded that the Act will have no
effect on its financial condition or results of operations.
In October 2004, President Bush
signed into law the American Jobs Creation Act of 2004 (AJCA). In response to the AJCA, in December 2004, the FASB issued Staff Position
No. FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004 (FSP 109-1) and Staff Position No. FAS 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2).
FSP 109-1 clarifies that the manufacturers deduction provided for under the AJCA should be accounted for as a special deduction in accordance
with SFAS No. 109 and not as a tax rate reduction. The
44
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Company currently does not
expect to realize any benefit related to this provision. FSP 109-2 provides guidance under SFAS No. 109, Accounting for Income Taxes
(SFAS 109) with respect to recording the potential impact of the repatriation provisions of the AJCA on companies income tax expense
and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the
effect of the AJCA on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. The Company does not plan to
repatriate any foreign earnings pursuant to the repatriation provisions of the AJCA and, therefore, the Company has not adjusted its tax expense or
deferred tax liability to reflect these provisions of the AJCA.
In November 2004, the FASB issued
SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Among other provisions, the new rule requires that items
such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current period charges regardless of whether
they meet the criterion of so abnormal contained in Accounting Research Bulletin No. 43, Restatement and Revision of Accounting
Research Bulletins. Additionally, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by
Agere in the first quarter of fiscal 2006. The Company has completed its evaluation of the impact that adoption of SFAS 151 could have and has
concluded that such impact will not be significant to its financial position or results of operations.
In December 2004, the FASB issued
SFAS 123R which replaces SFAS 123 and supersedes APB 25. Under the new standard, companies will no longer be allowed to account for stock-based
compensation transactions using the intrinsic value method in accordance with APB 25. Instead, companies will be required to account for such
transactions using a fair value method and to recognize the expense in the statements of operations. The adoption of SFAS 123R will require additional
accounting related to the income tax effects of share-based payment arrangements and additional disclosure of their cash flow impacts. SFAS 123R also
allows, but does not require, companies to restate prior periods. SFAS 123R is effective for periods beginning after June 15, 2005. Accordingly, the
Company will adopt the provisions of SFAS 123R beginning October 1, 2005, using the modified prospective transition method, and will recognize
share-based compensation cost on a straight-line basis over the requisite service periods of awards. Under the modified prospective method, non-cash
compensation expense will be recognized for the portion of outstanding stock option awards granted prior to the adoption of SFAS 123R for which service
has not been rendered, and for any future stock option grants. Although the adoption of SFAS 123R is not expected to have a significant effect on the
Companys financial condition or cash flows, the Company expects to record substantial non-cash compensation expense that will have a significant,
adverse effect on its results of operations. The Companys current estimate is that the effect on its results of operations could be as much as
$40 for fiscal 2006. This is substantially less than the 2005 pro forma effect disclosed above due principally to the full vesting in 2005 of the stock
options granted in fiscal 2001, and to the acceleration of certain unvested and out-of-the-money stock options in the fourth quarter of
fiscal 2005, as disclosed in Note 10 Stock Compensation Plans.
In March 2005, the FASB issued
Interpretation No. 47 Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that the term
conditional asset retirement obligation, as used in SFAS No. 143 Accounting for Asset Retirement Obligations (SFAS
143) refers to a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional on a future
event that may or may not be within the control of the entity. FIN 47 also clarifies that an entity is required to recognize a liability for such an
obligation when incurred if the liabilitys fair value can be reasonably estimated. FIN 47 is required to become effective no later than the end
of the first fiscal year ending after December 15, 2005. Retrospective application for interim financial information is permitted, but is not required,
and early application is encouraged. The Company does not expect that FIN 47 will have a significant effect on its financial condition or results of
operations and is evaluating the timing of its adoption of FIN 47.
In June 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3
(SFAS 154). SFAS 154 replaces APB Opinion No. 20, Accounting Changes (APB 20), and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires retrospective application to prior periods
financial statements of a voluntary change in accounting principle unless it is impracticable to determine either the period-specific effects or the
cumulative effects of the change. APB 20 previously required that most voluntary changes in accounting principle be recognized
45
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
by including in net income in
the period of the change the cumulative effect of changing to the new accounting principle. This standard generally will not apply with respect to the
adoption of new accounting standards, as new accounting standards usually include specific transition provisions, and will not override transition
provisions contained in new or existing accounting literature. SFAS 154 is effective for fiscal years beginning after December 15, 2005, and early
adoption is permitted for accounting changes and error corrections made in years beginning after the date that SFAS 154 was issued. The Company does
not expect that SFAS 154 will have a significant effect on its financial condition or results of operations and is evaluating the timing of its
adoption of SFAS 154.
4. |
|
Restructuring and Other Charges Net |
The Company has implemented
restructuring and consolidation actions to improve gross profit, reduce expenses and streamline operations. These actions include workforce reductions,
rationalization and consolidation of manufacturing capacity and the exit of certain businesses, including the optoelectronic components business. At
September 30, 2005, the Company has restructuring reserves related to three separate restructuring programs. The first restructuring program was a
resizing and consolidation of the business which began in fiscal 2001 and included actions to improve gross profit, reduce expenses and streamline
operations. This program was substantially complete as of December 31, 2004. The second restructuring program was announced on September 23, 2004 and
consists of a further resizing of the business to align the cost structure with revenue expectations and to improve profitability. This program was
substantially complete as of September 30, 2005. The third restructuring program was announced on September 29, 2004 and relates to the closure of the
Companys manufacturing facility in Orlando, Florida. In September 2005, the Company ceased manufacturing operations at its Orlando
facility.
For the years ended September 30,
2005, 2004 and 2003, respectively, restructuring and other charges net, within continuing operations were $24, $197 and $131, respectively.
These amounts include restructuring and related expenses of $18, $160, and $131, respectively; expenses associated with a fiscal 2005 business resizing
of $5 in fiscal 2005, expenses associated with the reclassification of the classes of common stock of $1 in fiscal 2005, and asset retirement
obligation charges and related expenses of $37 in fiscal 2004. There were no asset retirement obligation charges in fiscal 2005 or 2003. Charges and
credits related to continuing operations are included in restructuring and other charges net, while charges and credits related to discontinued
operations are included in income (loss) from operations of discontinued business (net of taxes). In fiscal 2003, the company recorded charges of $11
and credits of $27 related to discontinued operations. There were no charges or credits related to discontinued operations in fiscal 2005 or
2004.
Asset Retirement Obligation
In fiscal 2004, the Company
recorded charges for asset retirement obligations of $37 within restructuring and other charges net. These charges relate to the decommissioning
of the Companys former manufacturing facilities in Allentown and Reading, Pennsylvania. As of June 30, 2005, the decommissioning related to the
Reading, Pennsylvania facility had been completed. The decommissioning related to the Allentown, Pennsylvania facility is substantially complete. The
Company made cash payments towards this obligation of $8 and $29 during fiscal 2005 and 2004, respectively. The reserve balance has been depleted as of
September 30, 2005. The reserve balance was $8 at September 30, 2004 and was recorded in other current liabilities.
Orlando Decommissioning
Activities
During fiscal 2005, the Company
recorded charges of $3 related to decommissioning activities at the Orlando facility. No payments were made towards this obligation in fiscal 2005. At
September 30, 2005, the reserve balance of $3 is recorded in accounts payable on the consolidated balance sheet.
2005 Business Resizing
In the fourth quarter of fiscal
2005, the Company developed plans to resize and discontinue some of its shared business support groups. As part of this program, the Company expects to
reduce its workforce by approximately 70 employees, with approximately half of those employees off-roll as of September 30, 2005. The remaining
employees are expected to be off-roll by the middle of fiscal 2006. As a result of this action, for the year ended
46
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
September 30, 2005, the Company has recorded a charge of $5
within restructuring and other charges net. This charge includes $3 of cash charges principally related to termination benefits related to the
workforce reductions and $2 of non-cash charges principally related to special pension benefits to be paid from the Companys pension fund. At
September 30, 2005, the Company has recorded a liability of $2 within other current liabilities and a long-term liability of $1 within other
liabilities related to cash charges which are expected to be paid by the end of fiscal 2006 and the end of fiscal 2007, respectively.
Restructuring Actions
2001
Manufacturing Rationalization and Resizing
Beginning in fiscal 2001, the
Company implemented a restructuring and consolidation program in response to significant declines in revenue, particularly from telecommunications
network equipment manufacturing customers. These customers were themselves experiencing significant declines in demand from their customers. The
actions taken were designed to permit the Company to achieve breakeven at a significantly lower level of quarterly revenue. This program, which is
substantially complete, included actions to improve gross profit, reduce expenses, eliminate excess manufacturing capacity and streamline operations.
As part of this restructuring program, the Company:
|
|
Sold its optoelectronic components business, including the
manufacturing facilities associated with that business; |
|
|
Reduced total headcount by approximately 9,700
employees; |
|
|
Consolidated operations into fewer facilities, resulting in the
closure of over 25 smaller manufacturing, administrative, support and warehouse facilities; and |
|
|
Closed integrated circuit wafer manufacturing facilities in
Allentown and Reading, Pennsylvania and Madrid, Spain. |
Substantially all of the product
lines eliminated by this restructuring program were part of the optoelectronic components business, which was sold and previously reported as
discontinued operations.
2004 Business
Resizing
On September 23, 2004, the
Company announced a restructuring program to resize the business and improve profitability. As part of this program, the Company reduced its workforce
by approximately 550 employees across the business, including administrative functions, sales, marketing, product development and manufacturing
support, and exited the standalone wireless local area networking chipset business, the radio-frequency power transistor business, and all operations
in the Netherlands.
Closure of the Orlando
Manufacturing Facility
On September 29, 2004, the
Company announced that it would cease operations in its wafer manufacturing facility in Orlando by the end of December 2005, if the Company was unable
to find an acceptable buyer for the facility prior to that date. At the end of June, 2005, the Company announced it would accelerate its timetable and
in September 2005, the Company ceased operations in the Orlando facility. On September 30, 2005, approximately 530 people were employed at the
facility, the majority of which are expected to be off-roll by December 31, 2005.
47
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Year Ended September 30,
2005
The following tables set forth
the Companys restructuring reserve as of September 30, 2005, and the activity affecting the reserve for fiscal 2005:
|
|
|
|
|
|
Year Ended September 30, 2005
|
|
|
|
|
|
|
|
September 30, 2004
|
|
|
|
September 30, 2005
|
|
|
|
|
|
Restructuring Reserve
|
|
Add Charges
|
|
Deduct Non-Cash Charges
|
|
Deduct Cash Payments
|
|
Restructuring Reserve
|
2001
Manufacturing Rationalization and Resizing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
reductions |
|
|
|
$ |
5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4 |
|
|
$ |
1 |
|
Facility lease
terminations |
|
|
|
|
23 |
|
|
|
2 |
|
|
|
|
|
|
|
8 |
|
|
|
17 |
|
Other
charges |
|
|
|
|
3 |
|
|
|
11 |
|
|
|
|
|
|
|
13 |
|
|
|
1 |
|
Asset
impairments |
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
31 |
|
|
$ |
17 |
|
|
$ |
4 |
|
|
$ |
25 |
|
|
$ |
19 |
|
|
2004
Business Resizing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
reductions |
|
|
|
$ |
21 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
20 |
|
|
$ |
1 |
|
Other
charges |
|
|
|
|
2 |
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
2 |
|
|
|
|
|
Asset
impairments |
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
23 |
|
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
$ |
22 |
|
|
$ |
1 |
|
|
Closure of
the Orlando Manufacturing Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
reductions |
|
|
|
$ |
6 |
|
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
|
|
|
$ |
8 |
|
Grand
Total |
|
|
|
$ |
60 |
|
|
$ |
15 |
|
|
$ |
|
|
|
$ |
47 |
|
|
$ |
28 |
|
2001 Manufacturing Rationalization and
Resizing
Facility
Lease Terminations, Other Charges and Asset Impairments
The Company recorded charges for
facility lease terminations, asset impairments and other charges of $17 in fiscal 2005. The charges include $11 primarily for the relocation of
employees and equipment and decommissioning of the Allentown facility and $2 related to estimated facility lease termination costs. The Company also
recorded non-cash charges of $4 for the impairment of assets related to its operations in Singapore.
2004 Business Resizing
Workforce
Reductions
During fiscal 2005, the Company
recorded net charges of $2, which consists of $4 of charges relating to an additional workforce reduction of approximately 50 management employees, net
of reversals of $2 as estimates related to separation payments were revised. The net charge of $2 consists of non-cash charges principally related to
special pension benefits to be paid from the Companys pension fund.
Asset Impairments and Other
Charges
The Company recorded $1 of
non-cash asset impairment charges during fiscal 2005. The Company also reversed a non-cash charge of $4 related to a pension liability that previously
existed in the Netherlands as the obligation has been favorably settled.
Closure of the Orlando Manufacturing
Facility
Workforce
Reductions
During fiscal 2005, the Company
recorded a net reversal of restructuring charges of $1 relating to workforce reductions. The net reversal consists of an additional cash charge of $2
offset by a reversal of a non-cash charge of $3. The additional cash charge of $2 relates to termination benefits for the workforce reduction of
approximately
48
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
156 management and 372
represented employees. The reversal of a non-cash charge of $3 is the result of the Companys revised estimate of costs related to special pension
benefits that will be paid to employees from the Companys pension fund.
Restructuring Reserve Balances as of September 30,
2005
2001 Manufacturing Rationalization and Resizing
The Company anticipates the $1
restructuring reserve relating to workforce reductions as of September 30, 2005 will be paid during the first half of fiscal 2006. The $17 reserve for
facility lease terminations will be paid over the respective lease terms through 2010. The remaining reserve of $1 for other charges is expected to be
paid during the first quarter of fiscal 2006.
2004 Business Resizing
The Company anticipates the $1
restructuring reserve relating to workforce reductions will be paid by the end of fiscal 2006.
Closure of the Orlando Manufacturing
Facility
The Company anticipates that
approximately $7 of the $8 restructuring reserve relating to workforce reductions as a result of the exit of operations at the Orlando facility will be
paid during fiscal 2006. The remaining amount is expected to be paid by the end of fiscal 2007.
The Company expects to fund the
cash payments related to the restructuring reserves with cash on hand.
Year Ended September 30,
2004
The following table sets forth
the Companys restructuring reserve as of September 30, 2004, and the activity affecting the reserve for fiscal 2004:
|
|
|
|
|
|
Year Ended September 30, 2004
|
|
|
|
|
|
|
|
September 30, 2003
|
|
|
|
September 30, 2004
|
|
|
|
|
|
Restructuring Reserve
|
|
Add Charges
|
|
Deduct Non-Cash Charges
|
|
Deduct Cash Payments
|
|
Restructuring Reserve
|
2001
Manufacturing Rationalization and Resizing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
reductions |
|
|
|
$ |
11 |
|
|
$ |
16 |
|
|
$ |
|
|
|
$ |
22 |
|
|
$ |
5 |
|
Facility
Lease Terminations |
|
|
|
|
26 |
|
|
|
7 |
|
|
|
|
|
|
|
10 |
|
|
|
23 |
|
Other
Charges |
|
|
|
|
10 |
|
|
|
14 |
|
|
|
|
|
|
|
21 |
|
|
|
3 |
|
Total |
|
|
|
$ |
47 |
|
|
$ |
37 |
|
|
$ |
|
|
|
$ |
53 |
|
|
$ |
31 |
|
|
2004
Business Resizing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
reductions |
|
|
|
$ |
|
|
|
$ |
39 |
|
|
$ |
18 |
|
|
$ |
|
|
|
$ |
21 |
|
Asset
Impairments |
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Other
Charges |
|
|
|
|
|
|
|
|
5 |
|
|
|
3 |
|
|
|
|
|
|
|
2 |
|
Total |
|
|
|
$ |
|
|
|
$ |
46 |
|
|
$ |
23 |
|
|
$ |
|
|
|
$ |
23 |
|
|
Closure of
the Orlando Manufacturing Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
reductions |
|
|
|
$ |
|
|
|
$ |
77 |
|
|
$ |
71 |
|
|
$ |
|
|
|
$ |
6 |
|
Grand
Total |
|
|
|
$ |
47 |
|
|
$ |
160 |
|
|
$ |
94 |
|
|
$ |
53 |
|
|
$ |
60 |
|
2001 Manufacturing Rationalization and
Resizing
The Company recorded
restructuring charges in fiscal 2004 of $16 relating to workforce reductions associated with its manufacturing rationalization and resizing program.
The charges included $12 related to workforce reductions of approximately 105 employees and $4 in revisions of prior cost estimates. The reductions
occurred across multiple functions including research and development, manufacturing operations and business support.
49
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Other Restructuring and Related
Charges
The Company recorded facility
lease termination charges of $7 related to non-cancelable facility leases in fiscal 2004. The Company also recorded other charges of $14 in fiscal
2004, consisting of $12 for the relocation of employees and equipment and $2 for asset disposal costs.
2004 Business Resizing
The Company recorded
restructuring charges of $39 relating to a workforce reduction of approximately 500 employees announced in September 2004. These charges included $21
of cash charges and $18 of non-cash charges. The $18 non-cash charges consist of: $16 for special pension benefits to be paid from the Companys
pension fund, $1 for curtailment charges relating to an acceleration of the prior service cost under the Companys qualified pension plans as
employees are retiring earlier than anticipated, $1 for special retirement benefits to occupational employees under the terms of a collective
bargaining agreement, and $3 for curtailment charges to the post retirement medical liability, offset in part by a $3 postemployment curtailment
benefit. The cash charges of $21 are principally related to international special pension benefits and termination benefits related to the workforce
reductions.
Other Restructuring and Related
Charges
The Company recorded $2 of
non-cash asset impairment charges relating to both international and domestic locations. The Company also recorded $5 of other charges, of which $3
represents non-cash charges from the recognition of previously unrealized foreign currency translation losses related to the Companys exit of
operations in the Netherlands and $2 of cash charges related to international and domestic contract terminations.
Closure of the Orlando Manufacturing
Facility
The Company recorded
restructuring charges of $77 relating to workforce reductions at the Orlando facility for actions announced on September 29, 2004. These included $6 of
cash charges and $71 of non-cash charges. The $71 of non-cash charges consist of: $39 for curtailment charges to the post retirement medical liability
as employees are expected to be eligible for retiree health benefits sooner than actuarially anticipated, $23 for special pension benefits to be paid
from the Companys pension fund, $4 for special retirement benefits to occupational employees under the terms of a collective bargaining
agreement, $3 for special health retirement benefits to occupational employees under the terms of a collective bargaining agreement, and $2 for
curtailment charges relating to an acceleration of the prior service cost under the Companys qualified pension plans as employees are retiring
earlier than actuarially anticipated. The cash charges of $6 are related to termination benefits for the workforce reduction of approximately 206
management and 409 represented employees.
On March 8, 2005, the Company
acquired Modem-Art Ltd. (Modem-Art) to accelerate the delivery of advanced third generation (3G) mobile communications products
to market, to integrate additional functionality into the Companys existing mobile phone technologies and to leverage the experience of
Modem-Arts development team. Modem-Art was a developer of advanced processor technology for 3G mobile phones. The Company acquired Modem-Art for
$144 by issuing 7,033,170 shares of common stock, valued at $113 based on a $16.08 share price, and paying $31 cash in exchange for all the outstanding
shares of Modem-Art. Of the shares issued, 1,335,995 shares were placed in escrow to satisfy claims, if any, for breaches of representations and
warranties under the merger agreement and 508,308 shares were placed in escrow to satisfy potential tax liabilities of some of the selling shareholders
in connection with their sale of Modem-Art shares. If such shares are not needed to satisfy any claims or to satisfy a tax liability, these shares will
be released to the sellers on the first anniversary
50
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
of the acquisition, or if
earlier, upon the receipt of a tax exemption certificate. As of September 30, 2005, almost all the shares initially deposited in the tax escrow have
been released.
The acquisition of Modem-Art was
accounted for under the purchase method of accounting. The purchase price, including acquisition costs, was allocated to the net assets acquired based
on the fair market values. The consolidated financial statements include the results of operations for Modem-Art from the date of acquisition. The
allocation of the purchase price by major balance sheet item is provided below.
Current
assets (primarily cash) |
|
|
|
$ |
5 |
|
Goodwill |
|
|
|
|
77 |
|
In-process
research and development |
|
|
|
|
55 |
|
Acquired
intangible assets |
|
|
|
|
9 |
|
Current
liabilities |
|
|
|
|
(2 |
) |
Total |
|
|
|
$ |
144 |
|
The acquired intangible asset
consists of a non-competition agreement restricting eight Modem-Art employees from engaging in non-Agere interests or business in the 3G industry,
which is being amortized over the two year term of the agreement.
Of the $144 purchase price, $55
represents the fair value of acquired in-process research and development which had not yet reached technological feasibility and had no alternative
future use at the date of acquisition. Accordingly, this amount was expensed in the statement of operations on the date of acquisition. The in-process
research and development projects are a 3G single-mode chipset (Single-Mode), a variant of the single-mode chipset, which when combined
with Ageres software and advanced second generation (2.5G) chipset incorporating General Packet Radio Service and Enhanced Global
Rates for Global Evolution technologies can fulfill the requirements of dual-mode 2.5G and 3G (Dual-Mode) and the development of High Speed
Downlink Packet Access (HSDPA) technology, which will be integrated in a chipset that supports high speed data transmission from base
stations to mobile phones. The fair values of these projects were determined using the excess earnings method of the income approach. This method
employs a discounted cash flow analysis using the present value of the estimated after-tax cash flows expected to be generated by the purchased
in-process research and development. The Company used the following discount rates, which reflect the development stage of the technology and risks
associated with attaining full technological and commercial feasibility.
Project
|
|
|
|
Discount rate
|
Single-Mode |
|
|
|
|
30 |
% |
Dual-Mode |
|
|
|
|
35 |
% |
HSDPA |
|
|
|
|
40 |
% |
The goodwill of $77 includes
future technology beyond the in-process technologies, such as the second release of HSDPA, a knowledgeable and experienced workforce, and a
time-to-market or defensive strategy. The goodwill has been assigned to the Consumer Enterprise segment and is deductible for tax
purposes.
TeraBlaze, Inc.
On December 31, 2003, the Company
acquired TeraBlaze, Inc. (TeraBlaze), a developer of gigabit Ethernet switching solutions, for $21. The Company issued 692,119 shares of
common stock in exchange for all the outstanding shares of TeraBlaze, of which 69,212 shares were placed into escrow to satisfy potential liabilities,
if any, resulting from claims for breaches of representations and warranties under the merger agreement. As of September 30, 2005, 34,605 shares remain
in escrow and all of these shares will be released on December 31, 2006 if no claims are made.
51
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
The acquisition of TeraBlaze was
accounted for under the purchase method of accounting. The purchase price, including acquisition costs, was allocated to the net assets acquired based
on the relative fair market values. The consolidated financial statements include the results of operations for TeraBlaze from the date of acquisition.
The allocation of the purchase price by major balance sheet line item is provided below.
Goodwill |
|
|
|
$ |
10 |
|
In-process
research and development |
|
|
|
|
13 |
|
Current
liabilities |
|
|
|
|
(2 |
) |
Total |
|
|
|
$ |
21 |
|
The only acquired intangible
asset apart from goodwill was in-process research and development. The goodwill has been assigned to the Consumer Enterprise segment and is not
deductible for tax purposes.
Approximately $13 of the purchase
price represents the fair value of acquired in-process research and development which had not yet reached technological feasibility and had no
alternative future use at the date of acquisition. Accordingly, this amount was expensed in the statement of operations on the date of acquisition. The
in-process research and development consisted of one project, the development of gigabit Ethernet switching technology. The fair value of this project
was determined using the excess earnings method of the income approach. A discount rate of 40% was used, which reflected the development stage of the
technology and risks associated with attaining full technological and commercial feasibility.
Massana Limited
On August 22, 2003, the Company
acquired Massana Limited (Massana), a developer of gigabit Ethernet-over-copper physical layer device technologies, for $28. The Company
issued 910,813 shares of common stock in exchange for all the outstanding shares of Massana, of which 176,803 shares were initially held in escrow to
satisfy potential liabilities, if any, resulting from claims for breaches of representations and warranties under the purchase agreement. As of
September 30, 2005, 58,651 shares remain in escrow and all of these shares will be released on August 23, 2006 if no claims are made.
The acquisition of Massana was
accounted for under the purchase method of accounting. The purchase price, including acquisition costs, was allocated to the net assets acquired based
on relative fair market values. The consolidated financial statements include the results of operations for Massana from the date of acquisition. The
allocation of purchase price by major balance sheet line item is provided below.
Current
assets |
|
|
|
$ |
1 |
|
Property,
plant and equipment |
|
|
|
|
1 |
|
Goodwill |
|
|
|
|
26 |
|
Other
acquired intangibles |
|
|
|
|
4 |
|
Current
liabilities |
|
|
|
|
(4 |
) |
Total |
|
|
|
$ |
28 |
|
The acquired intangible asset
consists of technology, which is being amortized over a 5-year period. The goodwill has been assigned to the Consumer Enterprise segment and is not
deductible for tax purposes.
6. |
|
Supplemental Financial Information |
Statement of Operations Information
The Company recorded inventory
provisions classified within costs of $13 and $7 in fiscal 2005 and 2004, respectively. There were no inventory provisions recorded within costs during
fiscal 2003. These amounts were calculated in accordance with the Companys inventory valuation policy.
The Company has recognized
increased depreciation due to changes in accounting estimates as a result of shortening the estimated useful lives of certain assets in connection with
the Companys restructuring activities. The Company recorded increased depreciation of $120, $5 and $86 for fiscal 2005, 2004 and 2003,
respectively. Of these amounts $120, $5 and $71 were recorded in costs in fiscal 2005, 2004, and 2003, respectively. Amounts recorded
52
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
in restructuring and other
charges net were $15 for fiscal 2003 and there were no amounts recorded in restructuring and other charges net for fiscal 2005 and 2004.
This increased depreciation is reflected in net loss and resulted in a $0.68, $0.03 and $0.52 and per share increase in the net loss for fiscal 2005,
2004 and 2003, respectively.
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
INCLUDED IN
COSTS AND OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property, plant and equipment |
|
|
|
$ |
276 |
|
|
$ |
186 |
|
|
$ |
308 |
|
Amortization
of internal use software |
|
|
|
|
15 |
|
|
|
22 |
|
|
|
27 |
|
|
OTHER INCOME
NET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
|
$ |
16 |
|
|
$ |
8 |
|
|
$ |
10 |
|
Equity
earnings (losses) from investments |
|
|
|
|
(10 |
) |
|
|
(5 |
) |
|
|
13 |
|
Gain on sale
of an investment |
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
Loss on
foreign currency transactions net |
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(3 |
) |
Impairment of
non-consolidated investments |
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
Other
income |
|
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
Other income
net |
|
|
|
$ |
7 |
|
|
$ |
8 |
|
|
$ |
22 |
|
Balance Sheet Information
The Company had $6 and $19 of
cash held in trust as of September 30, 2005 and 2004 respectively, recorded in other current assets. Cash held in trust of $6 at September 30, 2005
primarily consists of an amount in escrow to satisfy a litigation judgment that is currently under appeal. At September 30, 2004, cash held in trust of
$19 primarily supported obligations of the Companys captive insurance company.
|
|
|
|
September 30,
|
|
|
|
|
|
2005
|
|
2004
|
INVENTORIES |
|
|
|
|
|
|
|
|
|
|
Finished
goods |
|
|
|
$ |
36 |
|
|
$ |
51 |
|
Work in
process |
|
|
|
|
89 |
|
|
|
92 |
|
Raw
materials |
|
|
|
|
5 |
|
|
|
7 |
|
Inventories |
|
|
|
$ |
130 |
|
|
$ |
150 |
|
|
PROPERTY,
PLANT AND EQUIPMENT NET
|
|
|
|
|
|
|
|
|
|
|
Land and
improvements |
|
|
|
$ |
36 |
|
|
$ |
36 |
|
Buildings and
improvements |
|
|
|
|
428 |
|
|
|
430 |
|
Machinery,
electronic and other equipment |
|
|
|
|
1,236 |
|
|
|
1,669 |
|
Total
property, plant and equipment |
|
|
|
|
1,700 |
|
|
|
2,135 |
|
Less:
accumulated depreciation and amortization |
|
|
|
|
(1,280 |
) |
|
|
(1,453 |
) |
Property,
plant and equipment net |
|
|
|
$ |
420 |
|
|
$ |
682 |
|
INTERNAL USE
SOFTWARE NET (included in other assets)
|
|
|
|
|
|
|
|
|
|
|
Internal use
software |
|
|
|
$ |
55 |
|
|
$ |
60 |
|
Less:
accumulated amortization |
|
|
|
|
(20 |
) |
|
|
(34 |
) |
Internal use
software net |
|
|
|
$ |
35 |
|
|
$ |
26 |
|
53
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of period |
|
|
|
$ |
3 |
|
|
$ |
6 |
|
|
$ |
9 |
|
Charged
(Credited) to Operating Expenses |
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(1 |
) |
Other
(1) |
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(2 |
) |
Balance at
end of period |
|
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
6 |
|
(1) |
|
Amounts written off as uncollectible, payments or
recoveries. |
Cash Flow Information
Cash paid for interest was $28,
$39 and $40 for fiscal 2005, 2004 and 2003, respectively. Cash paid for income taxes was $5, $67 and $19 for fiscal 2005, 2004 and 2003,
respectively.
In fiscal 2005, the Company
acquired Modem-Art by issuing 7,033,170 shares of common stock valued at $113 and paying $31 cash in exchange for all the outstanding shares of
Modem-Art. See Note 5 Acquisitions.
In fiscal 2004, the Company
acquired TeraBlaze by issuing 692,119 shares of common stock valued at $21 in exchange for all the outstanding shares of TeraBlaze. See Note 5
Acquisitions.
In fiscal 2003, the Company
acquired Massana by issuing 910,813 shares of common stock valued at $26 in exchange for all the outstanding shares of Massana. See Note 5
Acquisitions.
Capital lease obligations of $6
and $19 were recognized in fiscal 2004 and 2003, respectively for the lease of semiconductor manufacturing equipment and other assets.
7. |
|
Investment in Silicon Manufacturing Partners |
The Company has a joint venture,
SMP, with Chartered Semiconductor Manufacturing Ltd. (Chartered Semiconductor), a leading manufacturing foundry for integrated circuits.
SMP operates a 54,000 square foot integrated circuit manufacturing facility in Singapore. The Company owns a 51% equity interest in this joint venture,
and Chartered Semiconductor owns the remaining 49% equity interest. The Companys 51% interest in SMP is accounted for under the equity method as
Agere is effectively precluded from taking any significant action in the management of SMP due to Chartered Semiconductors significant
participatory rights under the joint venture agreement. Because of Chartered Semiconductors approval rights, the Company can not make any
significant decisions regarding SMP without Chartered Semiconductors approval, despite the 51% equity interest. In addition, the General Manager,
who is responsible for the day-to-day management of SMP, is appointed by Chartered Semiconductor and Chartered Semiconductor provides the day-to-day
operational support to SMP. Under the joint venture agreement, each partner is entitled to the margins from sales to themselves or customers that are
directed to SMP by that partner, after deducting their respective share of the overhead costs of SMP. Accordingly, SMPs net income is not shared
in the same ratio as equity ownership. In September 2004, the joint venture agreement was amended to allow SMP to pay dividends out of SMPs
profits determined on a year to year basis. The Company received dividends of $41 and $61 from SMP in fiscal 2005 and 2004, respectively. No dividends
were received in fiscal 2003.
The Company has a take or pay
agreement with SMP under which it has agreed to purchase 51% of the managed wafer capacity from SMPs facility. If the Company fails to purchase
its required commitments, it will be required to pay SMP for the fixed costs associated with any unpurchased wafers. During the first quarter of fiscal
2005, both Agere and Chartered Semiconductor agreed to waive the take or pay agreement for the first quarter, which resulted in a $5 increase to equity
loss for Agere. On September 15, 2005, Agere and Chartered Semiconductor agreed to allow SMP to effect a capital reduction and return excess capital to
Agere and Chartered Semiconductor in the form of cash distributions. Agere and Chartered Semiconductor also agreed to reduce wafer prices for Agere in
the fourth quarter of fiscal 2005. The effect of the wafer price reductions was a $5 increase in the equity loss for Agere. The combined effect of the
take or pay waiver and the reduced wafer costs was a $10 increase to equity losses offset by $10 of reduced costs for fiscal 2005. The Companys
investment in SMP was $84 and $135 at September 30,
54
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
2005 and 2004, respectively,
and is recorded in other assets. The Company recognized equity losses of $10 and $5 and equity earnings of $13 in fiscal 2005, 2004 and 2003,
respectively recorded in other income net.
The Company purchased $110, $142,
and $148 of inventory from SMP in fiscal 2005, 2004 and 2003. At September 30, 2005 and September 30, 2004, the amount of inventory on hand that was
purchased from SMP was $12 and $25, respectively. At September 30, 2005 and September 30, 2004, amounts payable to SMP were $22 and $21, respectively.
At September 30, 2005, the Company has accounts receivable of $1 from SMP recorded in other current assets. There was no accounts receivable from SMP
on September 30, 2004.
The following table shows the
condensed balance sheets and statements of operations of SMP:
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets |
|
|
|
$ |
120 |
|
|
$ |
100 |
|
|
|
|
|
Noncurrent
assets |
|
|
|
|
69 |
|
|
|
162 |
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities |
|
|
|
$ |
21 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
Revenue |
|
|
|
$ |
187 |
|
|
$ |
353 |
|
|
$ |
301 |
|
Gross (loss)
profit |
|
|
|
|
(20 |
) |
|
|
66 |
|
|
|
24 |
|
Net (Loss) /
Income |
|
|
|
$ |
(24 |
) |
|
$ |
48 |
|
|
$ |
10 |
|
SMP had entered into interest
rate swaps, which had been designated as cash flow hedges, to manage interest rate risk from its floating interest rate debt and had recorded the
unrealized gain or loss from these hedges as a separate component of other comprehensive income (loss). The Company had a 51% equity interest in these
transactions and, as a result, recorded an unrealized gain of $5 and $4 in other comprehensive income (loss) in fiscal 2004 and 2003 respectively. SMP
repaid all of its outstanding bank debt in June 2004 and at the same time, settled all outstanding interest rate swap transactions. Upon settlement of
SMPs interest rate swaps, the Company recorded a realized gain of $1 in fiscal 2004 related to the termination of the cash flow hedges, which is
included in equity loss from SMP.
8. |
|
Comprehensive Income (Loss) |
Total comprehensive income (loss)
represents net loss plus the results of certain equity changes not reflected in the consolidated statements of operations. The components of
accumulated other comprehensive income (loss) are shown below.
|
|
|
|
Foreign Currency Translation
|
|
Unrealized Gains (Losses) on Cash Flow
Hedges
|
|
Minimum Pension Liability Adjustment
|
|
Total Accumulated Other Comprehensive
Income (Loss)
|
Ending
balance September 30, 2002 |
|
|
|
$ |
6 |
|
|
$ |
(10 |
) |
|
$ |
(170 |
) |
|
$ |
(174 |
) |
Fiscal 2003
change |
|
|
|
|
|
|
|
|
4 |
|
|
|
18 |
|
|
|
22 |
|
Ending
balance September 30, 2003 |
|
|
|
|
6 |
|
|
|
(6 |
) |
|
|
(152 |
) |
|
|
(152 |
) |
Fiscal 2004
change |
|
|
|
|
3 |
|
|
|
6 |
|
|
|
(81 |
) |
|
|
(72 |
) |
Ending
balance September 30, 2004 |
|
|
|
|
9 |
|
|
|
|
|
|
|
(233 |
) |
|
|
(224 |
) |
Fiscal 2005
change |
|
|
|
|
2 |
|
|
|
|
|
|
|
(125 |
) |
|
|
(123 |
) |
Ending
balance September 30, 2005 |
|
|
|
$ |
11 |
|
|
$ |
|
|
|
$ |
(358 |
) |
|
$ |
(347 |
) |
The foreign currency translation
adjustments are not currently adjusted for income taxes because they relate to indefinite investments in non-U.S. subsidiaries. The unrealized gains
(losses) on cash flow hedges are related to hedging activities by SMP and there are no income taxes provided as they relate to an equity method
investee. Also, there were no income taxes provided for the minimum pension liability adjustment due to the recording of a full valuation allowance
against U.S. net deferred tax assets.
55
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
The following table presents the
principal reasons for the difference between the U.S. federal statutory income tax rate and the effective tax rate based on loss from continuing
operations.
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
U.S. federal
statutory income tax rate |
|
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State and
local income taxes, net of federal income tax effect |
|
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
0.6 |
|
Effect of
non-U.S. earnings |
|
|
|
|
(40.9 |
) |
|
|
(17.0 |
) |
|
|
(19.7 |
) |
Research
credits |
|
|
|
|
8.4 |
|
|
|
2.6 |
|
|
|
|
|
Reversal of
tax and interest contingencies |
|
|
|
|
110.7 |
|
|
|
57.1 |
|
|
|
|
|
Valuation
allowance |
|
|
|
|
(18.4 |
) |
|
|
(30.4 |
) |
|
|
(27.9 |
) |
Purchased
in-process research and development |
|
|
|
|
|
|
|
|
(2.9 |
) |
|
|
|
|
Other
differences net |
|
|
|
|
(1.0 |
) |
|
|
(5.1 |
) |
|
|
(2.2 |
) |
Effective
income tax rate |
|
|
|
|
94.1 |
% |
|
|
40.2 |
% |
|
|
(14.2 |
)% |
The fiscal 2005, 2004 and 2003
rates include the impact of recording charges of approximately $24, $46 and $91, respectively, to increase the valuation allowance for deferred tax
assets. For fiscal 2005, a valuation allowance was recorded on all U.S. net deferred tax assets. Deferred tax expense has been provided for deferred
tax liabilities associated with indefinite-lived goodwill. A full valuation allowance has been recorded for fiscal 2004 and 2003 on U.S. net deferred
tax assets. The fiscal 2005 rate includes the impact of recording a benefit of $120 for the reversal of tax and interest contingencies associated with
audit settlements related to the Companys tax sharing agreement with Lucent Technologies Inc. (Lucent) as well as a benefit of $22
for non-U.S. related audit issues. The fiscal 2004 rate includes the impact of recording a benefit of $86 for the reversal of tax and interest
contingencies associated with audit settlements related to the Companys tax sharing agreement with Lucent.
The following table presents the
U.S. and foreign components of loss from continuing operations before income taxes and the provision for income taxes.
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
LOSS BEFORE
INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States |
|
|
|
$ |
(21 |
) |
|
$ |
(114 |
) |
|
$ |
(222 |
) |
Non-U.S |
|
|
|
|
(109 |
) |
|
|
(36 |
) |
|
|
(103 |
) |
Loss before
income taxes |
|
|
|
$ |
(130 |
) |
|
$ |
(150 |
) |
|
$ |
(325 |
) |
|
(BENEFIT)
PROVISION FOR INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
$ |
(97 |
) |
|
$ |
(34 |
) |
|
$ |
20 |
|
State and
local |
|
|
|
|
(3 |
) |
|
|
|
|
|
|
1 |
|
Non-U.S |
|
|
|
|
(9 |
) |
|
|
14 |
|
|
|
8 |
|
Sub-total |
|
|
|
|
(109 |
) |
|
|
(20 |
) |
|
|
29 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
(14 |
) |
|
|
(43 |
) |
|
|
11 |
|
State and
local |
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Non-U.S |
|
|
|
|
|
|
|
|
3 |
|
|
|
5 |
|
Sub-total |
|
|
|
|
(13 |
) |
|
|
(40 |
) |
|
|
17 |
|
(Benefit)
Provision for income taxes |
|
|
|
$ |
(122 |
) |
|
$ |
(60 |
) |
|
$ |
46 |
|
As of September 30, 2005, the
Company had total tax-effected federal and state net operating loss carryforwards of $942, tax-effected non-U.S. net operating loss carryforwards of
$71, and federal and state research and development credit carryforwards of $41, the majority of which begin to expire at the end of fiscal 2021
through fiscal 2025.
56
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Deferred tax assets are reflected
within other assets and deferred tax liabilities are reflected within other liabilities on the face of the balance sheet. The components of deferred
tax assets and liabilities at September 30, 2005 and 2004 are as follows:
|
|
|
|
September 30,
|
|
|
|
|
|
2005
|
|
2004
|
Deferred
Tax Assets
|
|
|
|
|
|
|
|
|
|
|
Net operating
loss/credit carryforwards |
|
|
|
$ |
1,054 |
|
|
$ |
943 |
|
Valuation
allowance |
|
|
|
|
(1,511 |
) |
|
|
(1,364 |
) |
Other benefit
obligations |
|
|
|
|
96 |
|
|
|
104 |
|
Pension
obligation |
|
|
|
|
102 |
|
|
|
95 |
|
Reserves and
allowances |
|
|
|
|
41 |
|
|
|
82 |
|
Property,
plant and equipment |
|
|
|
|
52 |
|
|
|
23 |
|
Intangible
assets |
|
|
|
|
168 |
|
|
|
118 |
|
Total
deferred tax assets |
|
|
|
$ |
2 |
|
|
$ |
1 |
|
Deferred
Tax Liabilities
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets |
|
|
|
$ |
(4 |
) |
|
$ |
|
|
Total
deferred tax liabilities |
|
|
|
$ |
(4 |
) |
|
$ |
|
|
Net
Deferred Tax Assets (Liabilities) |
|
|
|
$ |
(2 |
) |
|
$ |
1 |
|
The deferred tax liability of $4
as of September 30, 2005 is related to indefinite-lived goodwill intangibles. The deferred tax assets of $2 and $1 as of September 30, 2005 and 2004,
respectively, relate to non-U.S. amounts that the Company believes are more likely than not to be realized and for which a valuation allowance has not
been recognized.
The Company has not provided for
U.S. deferred income taxes or foreign withholding taxes on $310 and $292 of undistributed earnings of its non-U.S. subsidiaries as of September 30,
2005 and 2004, respectively, because these earnings are intended to be reinvested indefinitely.
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
Deferred
Tax Asset Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of period |
|
|
|
$ |
1,364 |
|
|
$ |
1,087 |
|
|
$ |
997 |
|
Charged to
Costs and Expenses |
|
|
|
|
102 |
|
|
|
46 |
|
|
|
90 |
|
Charged
(Credited) to Other Accounts (1) |
|
|
|
|
45 |
|
|
|
29 |
|
|
|
(23 |
) |
Other (2)
(3) |
|
|
|
|
|
|
|
|
202 |
|
|
|
23 |
|
Balance at
end of period |
|
|
|
$ |
1,511 |
|
|
$ |
1,364 |
|
|
|
1,087 |
|
(1) |
|
Fiscal 2005, 2004 and 2003 amounts offset increases (decreases)
in deferred tax assets associated with future tax deductions upon payment of pension liabilities. |
(2) |
|
Fiscal 2004 amount represents additions (deductions) to
prior-year valuation allowance related to U.S. tax return filings, audit settlements with Lucent and Singapore deferred tax assets as a result of an
expired tax holiday. A full valuation allowance was recorded for the Singapore deferred tax assets as realization of these assets is
uncertain. |
(3) |
|
Fiscal 2003 amount represent additions (deductions) to
prior-year valuation allowance based on tax return filings. |
10. |
|
Stock Compensation Plans |
Agere has stock-based
compensation plans under which employees and outside directors receive stock options and other equity-based awards. The plans provide for the granting
of stock options, performance awards, restricted stock awards, cash awards, stock appreciation rights and other stock unit awards. At September 30,
2005, awards relating to 25,473,547 shares were outstanding, including awards relating to 3,005,772 shares that were granted
57
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
prior to Ageres
spin-off by Lucent or companies acquired by Lucent and converted later into Agere awards, and 13,222,258 shares remained available for the grant of
awards under Agere plans. During fiscal 2005, 2004 and 2003, employees of the Company were granted stock options and other equity-based awards under
Ageres 2001 Long Term Incentive Plan. Agere stock options are granted with an exercise price equal to 100% of the market value of a share of
common stock on the date of the grant, generally have seven-year terms, and vest no later than four years from the date of grant.
On September 30, 2005, the
Companys Board of Directors accelerated the vesting of all outstanding, unvested stock options with an exercise price over $35.00 per share held
by current employees, excluding shares covered by options held by members of the Companys executive committee. The unvested portions of the
options that were accelerated covered a total of 2,262,016 shares of common stock and had a weighted average exercise price of $35.55 per share. The
decision to accelerate the vesting of these significantly out-of-the-money stock options was made to avoid recognizing future compensation expense
associated with these stock options as the Company will be required to adopt SFAS 123R beginning in the first quarter of fiscal 2006. This accelerated
vesting will result in lower non-cash charges of approximately $42, net of estimated forfeitures, which otherwise would have been recorded in fiscal
2006 through February 2008.
Through April 30, 2005,
Ageres ESPP had consecutive offering periods, each consisting of four purchase periods of approximately six months in length. Effective May 1,
2005, the ESPP was changed such that offering periods will run generally for 6 months beginning each May 1 and November 1. Under the terms of the ESPP,
participating employees may have up to 10% of eligible compensation (subject to limitations on the number of shares and fair market value of shares
that may be acquired each purchase period) deducted from their pay to purchase the Companys common stock. The per share purchase price is equal
to 85% of the lower of either the market price on the employees entry date for the current offering period, or the last trading day of each
purchase period. Through September 30, 2005, 2,735,448 shares had been purchased under the ESPP and 5,764,552 shares remained available for
purchase.
Presented below is a summary of
the status of Agere stock options and related transactions for fiscal 2005, 2004 and 2003:
|
|
|
|
Shares (000s)
|
|
Weighted Average Exercise Price
|
OPTIONS
OUTSTANDING AT SEPTEMBER 30, 2002 |
|
|
|
|
17,345 |
|
|
$ |
98.79 |
|
Granted |
|
|
|
|
6,719 |
|
|
|
14.31 |
|
Exercised |
|
|
|
|
(74 |
) |
|
|
15.29 |
|
Forfeited or
Expired |
|
|
|
|
(4,679 |
) |
|
|
78.18 |
|
OPTIONS
OUTSTANDING AT SEPTEMBER 30, 2003 |
|
|
|
|
19,311 |
|
|
|
74.77 |
|
Granted |
|
|
|
|
6,482 |
|
|
|
34.91 |
|
Exercised |
|
|
|
|
(423 |
) |
|
|
14.34 |
|
Forfeited or
Expired |
|
|
|
|
(1,965 |
) |
|
|
62.42 |
|
OPTIONS
OUTSTANDING AT SEPTEMBER 30, 2004 |
|
|
|
|
23,405 |
|
|
|
65.82 |
|
Granted |
|
|
|
|
5,494 |
|
|
|
13.66 |
|
Exercised |
|
|
|
|
(119 |
) |
|
|
10.65 |
|
Forfeited or
Expired |
|
|
|
|
(3,319 |
) |
|
|
49.74 |
|
OPTIONS
OUTSTANDING AT SEPTEMBER 30, 2005 |
|
|
|
|
25,461 |
|
|
$ |
56.93 |
|
The weighted average fair value
of the stock options was calculated using the Black-Scholes option-pricing model. The weighted average fair value of stock options granted during
fiscal 2005, 2004 and 2003 was $7.73, $20.35, and $8.34 per share, respectively. See Note 2 Summary of Significant Accounting Policies-Stock
Compensation Plans.
58
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
The following table summarizes
significant ranges of outstanding and exercisable stock options at September 30, 2005:
|
|
|
|
Stock Options Outstanding
|
|
Stock Options Exercisable
|
|
Range of Exercise Prices
|
|
|
|
Shares (000s)
|
|
Weighted Average Remaining Contractual
Life (Years)
|
|
Weighted Average Exercise Price
|
|
Shares (000s)
|
|
Weighted Average Exercise Price
|
$0.80 to
$13.50 |
|
|
|
|
1,745 |
|
|
|
4.6 |
|
|
$ |
10.45 |
|
|
|
945 |
|
|
$ |
10.02 |
|
$13.51 to
$20.00 |
|
|
|
|
7,873 |
|
|
|
5.3 |
|
|
|
14.53 |
|
|
|
2,259 |
|
|
|
15.53 |
|
$20.01 to
$51.50 |
|
|
|
|
5,548 |
|
|
|
4.9 |
|
|
|
35.48 |
|
|
|
4,962 |
|
|
|
35.69 |
|
$51.51to
$58.50 |
|
|
|
|
3,447 |
|
|
|
2.8 |
|
|
|
55.94 |
|
|
|
3,447 |
|
|
|
55.94 |
|
$58.51 to
$60.00 |
|
|
|
|
3,908 |
|
|
|
2.4 |
|
|
|
60.00 |
|
|
|
3,908 |
|
|
|
60.00 |
|
$60.01 to
$155.00 |
|
|
|
|
1,216 |
|
|
|
2.8 |
|
|
|
105.84 |
|
|
|
1,216 |
|
|
|
105.84 |
|
$155.01 to
$515.61 |
|
|
|
|
1,724 |
|
|
|
3.9 |
|
|
|
327.02 |
|
|
|
1,724 |
|
|
|
327.02 |
|
Total |
|
|
|
|
25,461 |
|
|
|
4.2 |
|
|
$ |
56.93 |
|
|
|
18,461 |
|
|
$ |
72.67 |
|
11. |
|
Loss Per Common Share |
Basic and diluted loss per common
share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. As a result of the net loss
reported for each of the years presented, the following potential common shares have been excluded from the calculation of diluted loss per share
because their effect would be anti-dilutive: 11,938,377, 12,396,070 and 12,396,070 related to the convertible notes for fiscal 2005, 2004 and 2003,
respectively, 421,226, 2,501,470 and 1,530,997 of potential common shares related to outstanding stock options for fiscal 2005, 2004 and 2003,
respectively, and 7,989 potential common shares related to restricted stock units for fiscal 2005.
59
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
The Company has pension plans
coveri