AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 2005
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 March 31, 2005
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 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 April 30, 2005, 899,131,569 shares of Class A common stock and 907,994,888 shares of Class B common stock were outstanding.
AGERE SYSTEMS INC. Part I—Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of March 31, 2005 and September 30, 2004 Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2005 and 2004 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Part II—Other Information 1
FORM 10-Q
For the quarterly period ended March 31, 2005
TABLE OF CONTENTS
Page
2
3
4
5
21
33
33
34
35
Item 1. Financial Statements AGERE SYSTEMS INC. AND SUBSIDIARIES 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) loss on sale of operating assets—net Total operating expenses Operating income (loss) Other income—net Interest expense Loss before income taxes (Benefit) provision for income taxes Net income (loss) Basic and diluted income (loss) per share information: 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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Three Months
Ended
March 31,
Six Months
Ended
March 31,
2005
2004
2005
2004
$
417
$
462
$
827
$
978
263
254
537
539
154
208
290
439
60
70
115
146
113
128
232
247
3
1
4
3
55
—
55
13
4
7
18
54
(2
)
1
(4
)
—
233
207
420
463
(79
)
1
(130
)
(24
)
3
4
1
5
8
10
16
22
(84
)
(5
)
(145
)
(41
)
(16
)
(79
)
(10
)
(76
)
$
(68
)
$
74
$
(135
)
$
35
$
(0.04
)
$
0.04
$
(0.08
)
$
0.02
1,754
1,711
1,742
1,704
1,754
1,734
1,742
1,727
AGERE SYSTEMS INC. AND SUBSIDIARIES ASSETS Current Assets Cash and cash equivalents Cash held in trust Trade receivables, less allowances of $3 as of March 31, 2005 and September 30, 2004 Inventories Other current assets Total current assets Property, plant and equipment—net of accumulated depreciation and amortization of $1,465 as of March 31, 2005 and $1,453 as of September 30, 2004 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 Deferred income 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 898,411,771 shares issued and outstanding as of March 31, 2005 after deducting 4,281 shares in treasury and 816,245,321 shares issued and outstanding as of September 30, 2004 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 March 31, 2005 and September 30, 2004, 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
March 31,
2005
September 30,
2004
$
675
$
778
6
19
209
285
123
150
40
41
1,053
1,273
577
682
196
119
11
6
141
192
$
1,978
$
2,272
$
178
$
195
85
101
16
147
202
218
33
60
63
78
55
67
632
866
444
485
415
420
72
80
1,563
1,851
—
—
9
8
9
9
7,535
7,409
(6,916
)
(6,781
)
(222
)
(224
)
415
421
$
1,978
$
2,272
AGERE SYSTEMS INC. AND SUBSIDIARIES OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Purchased in-process research and development Restructuring and other charges—net of cash payments Pension plan contributions Provision for inventory write-downs (Benefit) provision for deferred income taxes Equity loss from investments Dividends received from equity investments Decrease in receivables Decrease (increase) in inventories Decrease in accounts payable (Decrease) increase in payroll and benefit liabilities Decrease in income taxes payable Changes in other operating assets and liabilities Other adjustments for non-cash items—net NET CASH PROVIDED BY OPERATING ACTIVITIES INVESTING ACTIVITIES Capital expenditures Proceeds from the sale or disposal of property, plant and equipment Acquisition of business, net of cash acquired Proceeds from sales of investments Decrease in cash designated as held in trust NET CASH USED BY INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from the issuance of stock—net of expense 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 (decrease) increase 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
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months
Ended
March 31,
2005
2004
$
(135
)
$
35
157
112
55
13
(28
)
11
(40
)
—
11
3
(1
)
(43
)
5
3
41
40
78
43
16
(27
)
(17
)
(54
)
(13
)
4
(15
)
(40
)
(30
)
(15
)
(3
)
(2
)
81
83
(56
)
(35
)
5
1
(26
)
—
—
4
13
5
(64
)
(25
)
10
27
(122
)
(27
)
(9
)
(39
)
(121
)
(39
)
1
—
(103
)
19
778
744
$
675
$
763
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation Agere Systems Inc. (the “Company” or “Agere”) designs, develops, manufactures and sells integrated circuit solutions for applications such as 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. Agere’s 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. Interim Financial Information These condensed financial statements have been prepared in accordance with the rules of the Securities and Exchange Commission (“SEC”) for interim financial statements and do not include all annual disclosures required by accounting principles generally accepted in the United States. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended September 30, 2004. The condensed financial information as of March 31, 2005 and for the three and six months ended March 31, 2005 and 2004 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 six months ended March 31, 2005 are not necessarily indicative of results to be expected for the full fiscal year 2005 or any other future periods. 2. 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. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure.” Stock compensation expense net of related taxes recorded under APB No. 25, which uses the intrinsic value method, was $0 for all periods
presented. The following table illustrates the effect on net income (loss) and net income (loss) per share if Agere had applied the fair value recognition provisions of SFAS 123 to its stock option plans and employee stock purchase plan (“ESPP”): Net income (loss): As reported Less: Total stock-based employee compensation expense determined under SFAS 123 fair value method(1) Pro forma Basic and diluted income (loss) per share: As reported Pro forma 5
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Three Months
Ended
March 31,
Six Months
Ended
March 31,
2005
2004
2005
2004
$
(68
)
$
74
$
(135
)
$
35
32
39
61
70
$
(100
)
$
35
$
(196
)
$
(35
)
$
(0.04
)
$
0.04
$
(0.08
)
$
0.02
$
(0.06
)
$
0.02
$
(0.11
)
$
(0.02
)
(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.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS—(Continued) At March 31, 2005, awards relating to 261,693,778 Class A shares were outstanding. During the six months ended March 31, 2005 the Company granted stock options relating to 51,350,948 Class A shares under its stock option plans, primarily as part of its broad based annual grant program. As of March 31, 2005, 62,584,937 shares remained available for purchase under the ESPP. For the six months ended March 31, 2005, 5,463,466 shares were purchased under the ESPP. 3. Recent Pronouncements 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 FASB issued Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FAS 106-2”). FAS 106-2 provides guidance on the effects of the Act. Based on this guidance, the Company has concluded that it will likely be eligible to receive a federal subsidy. Therefore, the Company expects the Act to have a financial effect and is in the process of calculating this effect. The evaluation
is expected to be completed by the end of fiscal 2005. 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 (“SFAS 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 manufacturer's
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. The Company currently does not expect to realize any benefit related to this provision. FSP 109-2 provides guidance under 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. Agere has not yet completed its evaluation of the impact of the repatriation provisions nor has it determined the related range of income tax effects of such repatriation. That evaluation is expected to be completed by the
end of fiscal 2005. Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the AJCA. In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement 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 ARB No. 43. 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 is in the process of evaluating the impact that adoption of SFAS 151 could have but does not anticipate that such impact will be significant to its financial position or results of operations. In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS 123 and supersedes APB No. 25. Under the new standard, companies will no longer be able to account for stock-based compensation transactions using the intrinsic value method in accordance with APB No. 25. Instead, companies will be required to account 6
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS—(Continued) 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. As originally issued, SFAS 123R would have been effective for periods beginning after June 15, 2005 but this requirement was amended on April 14, 2005 by a new rule from the SEC that requires adoption of SFAS 123R by the first fiscal year beginning after June 15, 2005. This new rule delayed the Company's effective date for implementing SFAS 123R from July 1, 2005 to October 1, 2005. The Company is evaluating the impact of adopting SFAS 123R. The adoption
of SFAS 123R is not expected to have a significant effect on the Company's financial condition or cash flows; however, following adoption, the Company expects to record substantial non-cash stock compensation expense that will have a significant, adverse effect on its results of operations. 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 FASB Statement No. 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 an entity is required to recognize a liability for such an obligation when incurred if the liability's 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. The Company is evaluating the timing of its adoption of FIN 47 and the potential effects of implementing this Interpretation on its financial condition and results of operations. 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 March 31, 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. The third restructuring program was announced on September 29, 2004 and relates to the planned sale or closure of the Company's manufacturing facility in Orlando, Florida, by December 31, 2005. For the three and six months ended March 31, 2005, restructuring and other charges—net were $4 and $18, respectively. These amounts include restructuring and related expenses of $4 and $17, respectively, and expenses associated with the planned combination of classes of common stock of $0 and $1, respectively. For the three and six months ended March 31, 2004, restructuring and other charges—net were $7 and $54, respectively, and included asset retirement obligation charges of $1 and $32, respectively, and restructuring and related expenses of $6 and $22, respectively. Asset Retirement Obligation In fiscal 2004, the Company recorded charges for an asset retirement obligation of $1 and $32 for the three and six months ended March 31, 2004, respectively, within restructuring and other charges—net. These charges relate to the decommissioning of the Company's former manufacturing facilities in 7
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS—(Continued) Allentown and Reading, Pennsylvania that is expected to be completed by end of fiscal 2005. The Company made cash payments towards this obligation of $3 and $7 during the three and six months ended March 31, 2005, respectively, and payments of $7 and $12 during the three and six months ended March 31, 2004, respectively. The remaining balance in the reserve is $1 and $20 as of March 31, 2005 and 2004, respectively, and is recorded in other current liabilities. 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:
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
•
Sold its optoelectronic components business, including the manufacturing facilities associated with that business;