AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 | |
| OR | ||
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | |
Commission file number 001-16397
AGERE SYSTEMS INC.
| A Delaware Corporation |
I.R.S. Employer No. 22-3746606 |
1110 American Parkway NE, Allentown, PA 18109
Telephone: 610-712-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
At July 31, 2004, 813,965,767 shares of Class A common stock and 907,994,888 shares of Class B common stock were outstanding.
AGERE SYSTEMS INC. 1
AGERE SYSTEMS INC. AND SUBSIDIARIES (Unaudited) Revenue Costs Gross profit Operating expenses: Selling, general and administrative Research and development Amortization of acquired intangible assets Purchased in-process research and development Restructuring and other charges—net Gain on sale of operating assets—net Total operating expenses Operating income (loss) Other income (expense)—net Interest expense Income (loss) from continuing operations before income taxes Provision (benefit) for income taxes Income (loss) from continuing operations Discontinued operations: Income from operations of discontinued business (net of taxes) Gain (loss) on disposal of discontinued business (net of taxes) Income (loss) from discontinued operations Income (loss) before cumulative effect of accounting change Cumulative effect of accounting change (net of taxes) Net income (loss) Basic and diluted income (loss) per share information: Income (loss) from continuing operations Income (loss) from discontinued operations Income (loss) before cumulative effect of accounting change Cumulative effect of accounting change Net income (loss) Weighted average shares outstanding—basic (in millions) Weighted average shares outstanding—diluted (in millions) See Notes to Condensed Consolidated Financial Statements. 2
AGERE SYSTEMS INC. AND SUBSIDIARIES ASSETS Current Assets Cash and cash equivalents Cash held in trust Trade receivables, less allowances of $3 and $6 as of June 30, 2004 and September 30, 2003, respectively Inventories Other current assets Total current assets Property, plant and equipment—net of accumulated depreciation and amortization of $1,461 and $1,347 as of June 30, 2004 and September 30, 2003, respectively Goodwill Acquired intangible assets—net of accumulated amortization Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable Payroll and related benefits Short-term debt Income taxes payable Restructuring reserve Other current liabilities Total current liabilities Pension and postretirement benefits Long-term debt Other liabilities Total liabilities Commitments and contingencies Stockholders' Equity Preferred stock, par value $1.00 per share, 250,000,000 shares authorized and no shares issued and outstanding Class A common stock, par value $0.01 per share, 5,000,000,000 shares authorized and 812,707,249 shares issued and outstanding as of June 30, 2004 after deducting 4,281 shares in treasury and 785,090,755 shares issued and outstanding as of September 30, 2003 after deducting 4,281 shares in treasury Class B common stock, par value $0.01 per share, 5,000,000,000 shares authorized and 907,994,888 shares issued and outstanding as of June 30, 2004 and September 30, 2003, after deducting 105,112 shares in treasury Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total stockholders' equity Total liabilities and stockholders' equity See Notes to Condensed Consolidated Financial Statements. 3
AGERE SYSTEMS INC. AND SUBSIDIARIES OPERATING ACTIVITIES Net income (loss) Less: Income from discontinued operations Cumulative effect of accounting change Income (loss) from continuing operations Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities from continuing operations: Purchased in-process research and development Restructuring and other charges—net of cash payments Depreciation and amortization Provision for inventory write-downs (Benefit) provision for deferred income taxes Equity loss (earnings) from investments Gain on disposition of businesses Impairment of investments Amortization of debt issuance costs Dividends received from equity investments Increase in receivables (Increase) decrease in inventories Decrease in accounts payable Increase in payroll and benefit liabilities Decrease in tax payables Changes in other operating assets and liabilities Other adjustments for non-cash items—net Net cash provided (used) by operating activities from continuing operations Net cash used by operating activities from discontinued operations NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES INVESTING ACTIVITIES Capital expenditures Proceeds from the sale or disposal of property, plant and equipment Net proceeds from disposition of businesses Proceeds from sales of investments Decrease (increase) in cash designated as held in trust NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from the issuance of stock—net of expense Proceeds from the issuance of long-term debt Principal repayments on short-term debt Principal repayments on long-term debt NET CASH USED BY FINANCING ACTIVITIES Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period See Notes to Condensed Consolidated Financial Statements. 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Background and Basis of Presentation Background Agere Systems Inc. (the “Company” or “Agere”) is a provider of advanced integrated circuit solutions for applications such as high-density storage, multi-service networking, wireless data and personal computer connectivity. These solutions form the building blocks for a broad range of communications and computing applications. Integrated circuits 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. Business operations are divided into two market-focused groups, Client Systems and Infrastructure Systems. On December 31, 2003, the Company acquired TeraBlaze, Inc., a developer of Gigabit Ethernet switching solutions. See Note 5 “Acquisition of TeraBlaze, Inc.” for more information. In fiscal 2003, the Company exited its optoelectronic components business. The condensed consolidated financial statements reflect this business as discontinued operations. See Note 6 “Discontinued Operations.” Interim Financial Information These condensed financial statements have been prepared in accordance with the rules of the Securities and Exchange Commission for interim financial statements and do not include all annual disclosures required by accounting principles generally accepted in the United States (“U.S.”). These financial statements should be read in conjunction with the audited consolidated and combined financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended September 30, 2003. The condensed financial information as of June 30, 2004 and for the three and nine months ended June 30, 2004 and 2003 is unaudited, but includes all adjustments that management considers necessary for a fair presentation of the Company's consolidated results of operations, financial position
and cash flows. Results for the three and nine months ended June 30, 2004 are not necessarily indicative of results to be expected for the full fiscal year 2004 or any other future periods. 2. Significant Accounting Policies See Item 8—“Financial Statements and Supplementary Data—Notes to Consolidated and Combined Financial Statements—Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2003, for additional significant accounting policies. 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 has transferred, the price is fixed and determinable, and collection of the resulting receivable is reasonably assured. Utilizing these criteria, product revenue is generally recognized upon delivery of the product at the end-customer's 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 Company's 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, deferral of revenue is not required for either customer acceptance or post shipment obligations. Revenue from licensing intellectual property is recognized over a period not longer than the license term when the Company has future obligations 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) under the agreement. If the Company does not have future obligations under the agreement, licensing revenue is recognized when collection of the resulting receivable is reasonably assured. Stock Compensation Plans The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations in accounting for its plans, as permitted under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No.
FORM 10-Q
For the quarterly period ended June 30, 2004
TABLE OF CONTENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions Except Per Share Amounts)
Three Months Ended
June 30,
Nine Months Ended
June 30,
2004
2003
2004
2003
$
495
$
456
$
1,473
$
1,335
267
321
806
970
228
135
667
365
64
76
210
227
131
117
378
360
2
2
5
7
—
—
13
—
11
6
65
99
(3
)
(15
)
(3
)
(13
)
205
186
668
680
23
(51
)
(1
)
(315
)
(1
)
3
4
19
11
11
33
35
11
(59
)
(30
)
(331
)
9
8
(67
)
62
2
(67
)
37
(393
)
—
—
—
19
—
(11
)
—
30
—
(11
)
—
49
2
(78
)
37
(344
)
—
—
—
(5
)
$
2
$
(78
)
$
37
$
(349
)
$
0.00
$
(0.04
)
$
0.02
$
(0.24
)
—
(0.01
)
—
0.03
0.00
(0.05
)
0.02
(0.21
)
—
—
—
—
$
0.00
$
(0.05
)
$
0.02
$
(0.21
)
1,718
1,678
1,709
1,660
1,734
1,678
1,729
1,660
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
June 30,
2004
September 30,
2003
$
771
$
744
14
21
278
265
147
122
57
52
1,267
1,204
685
778
119
109
8
13
205
284
$
2,284
$
2,388
$
215
$
245
104
109
142
195
244
328
41
47
105
98
851
1,022
315
288
423
451
75
116
1,664
1,877
—
—
8
8
9
9
7,404
7,337
(6,654
)
(6,691
)
(147
)
(152
)
620
511
$
2,284
$
2,388
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Nine Months
Ended
June 30,
2004
2003
$
37
$
(349
)
—
49
—
(5
)
37
(393
)
13
—
7
(3
)
166
264
6
—
(43
)
22
6
(14
)
—
(16
)
1
—
1
1
40
—
(12
)
(8
)
(31
)
25
(30
)
(14
)
1
33
(61
)
—
17
—
(6
)
4
112
(99
)
—
(66
)
112
(165
)
(56
)
(77
)
2
31
—
64
4
9
7
(2
)
(43
)
25
39
18
—
20
(32
)
(17
)
(49
)
(42
)
(42
)
(21
)
—
1
27
(160
)
744
891
$
771
$
731
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(Dollars in Millions Except Per Share Amounts)
(Unaudited)