| RF MICRO DEVICES INC ITEM 1A RISK FACTORS This 10-K includes “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 |
| These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar words, although some forward-looking statements are expressed differently |
| You should be aware that the forward-looking statements included herein represent management’s current judgment and expectations, but our actual results, events and performance could differ materially from those expressed or implied by forward-looking statements |
| We do not intend to update any of these forward-looking statements or publicly announce the results of any revisions to these forward-looking statements, other than as is required under the federal securities laws |
| Our business is subject to numerous risks and uncertainties, including variability in quarterly operating results, the rate of growth and development of wireless markets, risks associated with the operation of our wafer fabrication facilities, molecular beam epitaxy facility, our assembly facility and our test and tape and reel facilities, our ability to attract and retain skilled personnel and develop leaders, variability in production yields, our ability to reduce costs and improve gross margins by implementing innovative technologies, our ability to bring new products to market, our ability to adjust production capacity in a timely fashion in response to changes in demand for our products, dependence on a limited number of customers and dependence on third parties |
| These and other risks and uncertainties, which are described in more detail below, could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements |
| Our industry’s technology changes rapidly and we depend on the development and growth of the wireless markets |
| We depend on the development and growth of markets for wireless communications products and services |
| We cannot be sure about the rate at which markets for these products will develop or our ability to produce competitive products for these markets as they develop |
| In particular, in fiscal 2006, the market adoption of EDGE, the execution on our product development efforts, and the success of our customers with EDGE-based products was a significant factor in our revenue growth |
| In fiscal 2007, the continued growth of our POLARIS^tm TOTAL RADIO^tm transceiver solutions, our next-generation transmit modules and Bluetooth^® solutions will be significant factors in our revenue growth |
| We supply RF components and system-level solutions primarily for wireless applications |
| The wireless markets are characterized by frequent introduction of new products and services in response to evolving product and process technologies and consumer demand for greater functionality, lower costs, smaller products and better performance |
| We expect our customers’ demands for improvements in product performance to continue, which means that we must continue to improve our product designs and develop new products that may use new technologies |
| It is possible that competing technologies will emerge that permit the manufacture of integrated circuits that are superior to the products we make under existing processes |
| If that happens and we cannot design products using that technology or develop competitive products, our operating results will be adversely affected |
| To remain competitive in our silicon-based products, we expect to continue to transition our silicon semiconductor products to increasingly smaller line width geometries, and as smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property and software, into our products |
| However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, or at all |
| We face risks associated with the operation of our manufacturing facilities |
| We operate one MBE facility and two wafer fabrication facilities |
| We currently use several international and domestic assembly suppliers, as well as our internal assembly facility in Beijing, China, to assemble our products |
| We currently have our own test and tape and reel facilities located in Greensboro, North Carolina, and Beijing, China, and we also utilize contract suppliers and partners in Asia to test our products |
| A number of factors will affect the future success of our facilities, including the following: • demand for our products; • our ability to expand our facilities in a timely manner with acceptable yields; • our ability to generate revenues in amounts that cover the significant fixed costs of operating the facilities; • our ability to qualify our facilities for new products in a timely manner; • the availability of raw materials, including GaAs substrates, and high purity source materials such as gallium, aluminum, arsenic, indium, silicon, phosphorous and beryllium; • our manufacturing cycle times; • our manufacturing yields; 13 _________________________________________________________________ RF Micro Devices, Inc |
| and Subsidiaries Annual Report on Form 10-K 2006 • the political and economic risks associated with the increased reliance on our assembly, test and tape and reel operation in Beijing, China; • our reliance on one qualified MBE facility; • the location of our two wafer fabrication facilities in the same geographic area; • our ability to hire, train and manage qualified production personnel; • our compliance with applicable environmental and other laws and regulations; and • our ability to avoid prolonged periods of down-time in our facilities for any reason |
| We face challenges managing the expansion of our employee base |
| To manage our growth effectively, we must: • develop leaders for key business units and functions; • expand our presence in international locations and adapt to cultural norms in foreign locations; • train and manage our employee base; and • attract and retain qualified people with experience in RF engineering, integrated circuit design, software and technical marketing and support |
| Competition for these technical resources is intense |
| We must also manage multiple relationships with various customers, business partners and other third parties, such as our foundry, assembly, test and tape and reel partners |
| Our systems, networks, software tools, or procedures may not be adequate to support our operations, and we may not be able to expand quickly enough to exploit potential market opportunities |
| Our future operating results and success may also depend on keeping key technical personnel and management and expanding our sales and marketing, research and development and administrative support |
| We do not have employment agreements with the majority of our employees |
| We must also continue to attract qualified personnel |
| The competition for qualified personnel is intense, and the number of people with experience, particularly in RF engineering, integrated circuit design, and technical marketing and support, is limited |
| We cannot be sure that we will be able to attract and retain other skilled personnel in the future |
| We depend heavily on third parties |
| We purchase numerous component parts, such as pHEMT die and passive components, as well as substrates and silicon-based products, from external suppliers |
| The use of external suppliers involves a number of risks, including the possibility of material disruptions in the supply of key components and the lack of control over delivery schedules, capacity constraints, manufacturing yields, quality and fabrication costs |
| We currently use several external manufacturing suppliers, as well as our internal manufacturing facilities in Beijing, China, for assembly, test and tape and reel requirements |
| However, if these vendors’ processes vary in reliability or quality, they could negatively affect our products and, therefore, our results of operations |
| We currently have manufacturing capabilities in Greensboro, North Carolina and Beijing, China, and we also utilize contract suppliers and partners in Asia |
| We expect to increase our reliance on our Beijing facility as well as our utilization of contract suppliers and partners in Asia in order to minimize the movement of inventory, which improves cycle time and results in lower levels of inventory |
| Our revenue, earnings and other operating results have fluctuated significantly in the past and may fluctuate significantly in the future |
| Our future operating results will depend on many factors, including the following: • our ability to accurately predict market requirements and evolving industry standards in a timely manner; • our ability to accurately predict customer demand and thereby avoid the possibility of obsolete inventory, which would reduce our profit margins; • the ability of third party foundries, assembly, test and tape and reel partners to handle our products in a timely and cost-effective manner that meets our customers’ requirements; • our ability to achieve cost savings and improve yields and margins on our new and existing products; • our ability to respond to possible downward pressure on the average selling prices of our products caused by our customers or our competitors; • our ability to efficiently utilize our capacity in response to customer demand; • our ability to successfully complete the ongoing efforts of certain cost-reduction actions; and • our ability to successfully integrate and realize expected synergies from our acquisitions |
| It is likely that our future operating results will be adversely affected by the factors set forth above or other factors |
| If our future operating results are below the expectations of stock market analysts or our investors, our stock price may decline |
| Our operating results could vary as a result of the methods, estimates and judgments we use in applying our accounting policies |
| The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in Part II, Item 7 of this Form 10-K) |
| Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments which could significantly affect our results of operations |
| In particular, beginning in our first quarter of fiscal 2007, the calculation of share-based 14 _________________________________________________________________ RF Micro Devices, Inc |
| and Subsidiaries Annual Report on Form 10-K 2006 compensation expense under SFAS 123(R) will require us to use valuation methodologies and a number of assumptions, estimates and conclusions regarding matters such as expected forfeitures, expected volatility of our share price, the expected dividend rate with respect to our common stock and the exercise behavior of our employees |
| Furthermore, there are no means under applicable accounting principles to compare and adjust or expense if and when we learn of additional information that may affect the estimates that we previously made, with the exception of changes in expected forfeitures of share-based awards |
| Factors may arise over time that lead us to change our estimates and assumptions with respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time |
| Changes in forecasted share-based compensation expense could impact our gross margin percentage, research and development expenses, marketing and selling expenses, general and administrative expenses, and our tax rate |
| If we experience poor manufacturing yields, our operating results may suffer |
| Each product has a unique design and is fabricated using semiconductor process technologies that are highly complex |
| In many cases, the products are assembled in customized packages |
| Our products, which primarily consist of multiple components in a single package, feature enhanced levels of integration and complexity |
| Our customers insist that our products be designed to meet their exact specifications for quality, performance and reliability |
| Our manufacturing (logistics) yield is a combination of yields across the entire supply chain including wafer fabrication, assembly, and test yields |
| Due to the complexity of our products, we periodically experience difficulties in achieving acceptable yields on certain new and existing products |
| Our customers also test our components once they have been assembled into their products |
| The number of usable products that result from our production process can fluctuate as a result of many factors, including the following: • design errors; • defects in photomasks, which are used to print circuits on a wafer; • minute impurities in materials used; • contamination of the manufacturing environment; • equipment failure or variations in the manufacturing processes; • losses from broken wafers or other human error; and • defects in packaging |
| We seek to improve our manufacturing yields |
| Typically, for a given level of sales, when our yields improve, our gross margins improve, and when our yields decrease, our unit costs are higher, our margins are lower, and our operating results are adversely affected |
| During fiscal 2006, we improved our final test yields and during fiscal 2007, we expect to focus additional efforts on improving our total logistics yield |
| We depend on a few large customers for a substantial portion of our revenue |
| Historically, a substantial portion of our revenue has come from large purchases by a small number of customers and we expect that trend to continue |
| Our future operating results depend on both the success of our largest customers and on our success in diversifying our products and customer base |
| We typically manufacture custom products on an exclusive basis for individual customers for a negotiated period of time |
| The concentration of our revenue with a few large customers makes us particularly dependent on factors affecting those customers |
| For example, if demand for their products decreases, they may stop purchasing our products and our operating results would suffer |
| Most of our customers can cease incorporating our products into their products with little notice to us and with little or no penalty |
| The loss of a large customer and failure to add new customers to replace lost revenue would have a material adverse effect on our business, financial condition and results of operations |
| Our operating results are dependent on our GaAs HBT process technology and demand for our GaAs HBT products |
| Although we design products using multiple distinct process technologies, a substantial portion of our revenue comes from the sale of products manufactured using GaAs HBT process technology |
| Our dependence on GaAs HBT products could have an adverse effect on our operating results in the future |
| Competitors offer their own GaAs products, which can adversely affect our selling prices |
| Also, new process technologies are being developed, and one or more of these processes could have characteristics that are superior to GaAs HBT If we are unable to access these technologies through licenses or foundry service arrangements, we will be competitively disadvantaged |
| These and other factors could reduce the demand for GaAs HBT components or otherwise adversely affect our operating results |
| We depend on our exclusive license from Northrop for our GaAs HBT technology |
| If the license is terminated for breach of contract or if it were determined that products made with this technology infringed on a third party’s intellectual property rights, our operating results would be adversely affected |
| Northrop made no representation to us about whether the licensed technology infringed on the intellectual property rights of anyone else |
| 15 _________________________________________________________________ RF Micro Devices, Inc |
| and Subsidiaries Annual Report on Form 10-K 2006 We operate in a very competitive industry and must continue to implement innovative technologies and increase capacity utilization in order to reduce costs and improve margins |
| We compete with several companies primarily engaged in the business of designing, manufacturing and selling RF components and system-level solutions, as well as suppliers of discrete products such as transistors, capacitors and resistors |
| Several of our competitors either have GaAs HBT process technology or are developing GaAs HBT or new fabrication processes |
| Customers could develop products that compete with or replace our products |
| A decision by any of our large customers to design and manufacture integrated circuits internally could have an adverse effect on our operating results |
| Increased competition could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs |
| In order to improve our margins, we need to reduce our costs by making continual operational improvements to reduce cycle time, increase capacity utilization and improve test yields |
| Our inability to meet these objectives could have an adverse effect on our operating results |
| Many of our existing and potential competitors have entrenched market positions, historical affiliations with OEM’s, considerable internal manufacturing capacity, established intellectual property rights and substantial technological capabilities |
| Many of our existing and potential competitors may have greater financial, technical, manufacturing or marketing resources than we do |
| We cannot be sure that we will be able to compete successfully with our competitors |
| Our operating results are substantially dependent on development of new products |
| Our future success will depend on our ability to develop new product solutions for existing and new markets |
| We must introduce new products in a timely and cost-effective manner and secure production orders from our customers |
| The development of new products is a highly complex process, and we have upon occasion experienced delays in completing the development and introduction of new products at times in the past, including during fiscal 2006 |
| Our successful product development depends on a number of factors, including the following: • the accuracy of our prediction of market requirements and evolving standards; • acceptance of our new product designs; • the availability of qualified product designers; • our timely completion and execution on the product designs and ramp of new products according to our customer needs with acceptable manufacturing yields; • acceptance of our customers’ products by the market; and • our ability to successfully design, develop, manufacture and integrate new components, such as pHEMT switches and filters, to increase our product content |
| We may not be able to design and introduce new products in a timely or cost-efficient manner, and our new products may fail to meet the requirements of the market or our customers |
| In that case, we likely will not reach the expected level of production orders, which could adversely affect our operating results |
| Even when a design win is achieved, our success is not assured |
| Design wins may require significant expenditures by us and typically precede volume revenues by six to nine months or more |
| The actual value of a design win to us will ultimately depend on the commercial success of our customers’ products |
| We are subject to risks from international sales and operations |
| We operate globally with sales offices and research and development activities as well as manufacturing, assembly and testing facilities in multiple countries |
| As a result, we are subject to risks and factors associated with doing business outside the United States |
| Global operations involve inherent risks that include currency controls and fluctuations as well as tariff, import and other related restrictions and regulations |
| Sales to customers located outside the United States accounted for approximately 85 percent of our revenue in fiscal 2006 |
| We expect that revenue from international sales will continue to be a significant part of our total revenue |
| Because the majority of our foreign sales are denominated in US dollars, our products become less price-competitive in countries with currencies that are low or are declining in value against the US dollar |
| Also, we cannot be sure that our international customers will continue to accept orders denominated in US dollars |
| If they do not, our reported revenue and earnings will become more directly subject to foreign exchange fluctuations |
| The majority of our assembly, test and tape and reel vendors are located in Asia |
| This subjects us to regulatory, geopolitical and other risks of conducting business outside the United States |
| We do business with our foreign assemblers in US dollars |
| Our manufacturing costs could increase in countries with currencies that are increasing in value against the US dollar |
| Also, we cannot be sure that our international manufacturing suppliers will continue to accept orders denominated in US dollars |
| If they do not, our costs will become more directly subject to foreign exchange fluctuations |
| In addition, if terrorist activity, armed conflict, civil or military unrest or political instability occur in the United States or other locations, such events may disrupt manufacturing, assembly, logistics, security and communications, and could also result in reduced demand for our products |
| Major health concerns could also ad- 16 _________________________________________________________________ RF Micro Devices, Inc |
| and Subsidiaries Annual Report on Form 10-K 2006 versely affect our business and our customer order patterns |
| We could also be affected if labor issues disrupt our transportation arrangements or those of our customers or suppliers |
| On a worldwide basis, we regularly review our key infrastructure, systems, services and suppliers, both internally and externally, to seek to identify significant vulnerabilities as well as areas of potential business impact if a disruptive event were to occur |
| Once identified, we assess the risks, and as we consider it to be appropriate, we initiate actions intended to minimize the risks and their potential impact |
| However, there can be no assurance that we have identified all significant risks or that we can mitigate all identified risks with reasonable effort |
| We may engage in future acquisitions that dilute our shareholders, cause us to incur debt and assume contingent liabilities |
| As part of our business strategy, we expect to continue to review potential acquisitions that could complement our current product offerings, augment our market coverage or enhance our technical capabilities, or that may otherwise offer growth opportunities |
| While we currently have no definitive agreements providing for any such acquisitions, we may acquire businesses, products or technologies in the future |
| In the event of such future acquisitions, we could issue equity securities that would dilute our current shareholders’ percentage ownership, incur substantial debt or other financial obligations or assume contingent liabilities |
| Such actions by us could seriously harm our results of operations or the price of our common stock |
| Acquisitions also entail numerous other risks that could adversely affect our business, results of operations and financial condition, including: • unanticipated costs, capital expenditures or working capital requirements associated with the acquisition; • acquisition-related charges and amortization of acquired technology and other intangibles that could negatively affect our reported results of operation; • diversion of management’s attention from our business; • injury to existing business relationships with suppliers and customers; • failure to successfully integrate acquired businesses, operations, products, technologies and personnel; and • unrealized expected synergies |
| We rely on intellectual property and face claims of infringement |
| Our success depends in part on our ability to obtain patents, trademarks and copyrights, maintain trade secret protection and operate our business without infringing on the proprietary rights of other parties |
| The wireless industry is subject to frequent litigation, often regarding patent and other intellectual property rights |
| Leading companies and organizations in the wireless industry have numerous patents that protect their intellectual property rights in these areas |
| In the event of an adverse result of any intellectual property rights litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology covered by the litigation |
| We cannot be sure that we would be successful in such development or that any such license would be available on commercially reasonable terms, if at all |
| In addition to patent and copyright protection, we also rely on trade secrets, technical know-how and other unpatented proprietary information relating to our product development and manufacturing activities |
| We try to protect this information by entering into confidentiality agreements with our employees and other parties |
| We cannot be sure that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others |
| We cannot be sure that third parties will not assert product liability or other claims against us, our customers or our licensors with respect to existing and future products |
| Any litigation to determine the validity of any third party’s claims could result in significant expense and liability to us and divert the efforts of our technical and management personnel, whether or not the litigation is determined in our favor or covered by insurance |
| We are subject to stringent environmental regulations |
| We are subject to a variety of federal, state and local requirements governing the protection of the environment |
| These environmental regulations include those related to the use, storage, handling, discharge and disposal of toxic or otherwise hazardous materials used in our manufacturing processes |
| A change in environmental laws or our failure to comply with environmental laws could subject us to substantial liability or force us to significantly change our manufacturing operations |
| In addition, under some of these laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated, even if we did not cause the contamination |
| Our stock price is subject to volatility |
| The trading price of our common stock is subject to wide fluctuations in response to quarterly variations in operating results, positive or adverse business developments, changes in financial estimates by securities analysts, announcements of technological innovations, introduction of new products by us or our competitors, transactions by corporate insiders and other events and factors |
| In addition, the stock market has experienced extreme price and volume fluctuations based on factors outside our control that have particularly af- 17 _________________________________________________________________ RF Micro Devices, Inc |
| and Subsidiaries Annual Report on Form 10-K 2006 fected the market prices for many high technology companies |
| These broad market fluctuations may materially and adversely affect the market price of our common stock |
| Future sales of shares could have an adverse effect on the market price of our common stock |
| Sales of substantial amounts of common stock in the public market or the prospect of such sales could adversely affect the market price for our common stock and our ability to raise equity capital in the future |
| As of March 31, 2006, options to purchase approximately 22dtta4 million shares of common stock were outstanding under our formal stock option plans for employees and directors, with a weighted average exercise price of dlra7dtta36 per share and a weighted average remaining contractual life of 6dtta3 years |
| Of these, options to purchase 15dtta4 million shares were exercisable at March 31, 2006, at a weighted average exercise price of dlra7dtta98 per share |
| Provisions in our governing documents could discourage takeovers and prevent shareholders from realizing an investment premium |
| Certain provisions of our articles of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of our company |
| These provisions include the ability of our Board of Directors to designate the rights and preferences of preferred stock and issue such shares without shareholder approval and the requirement of supermajority shareholder approval of certain transactions with parties affiliated with our Company |
| Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock |
| On August 10, 2001, our Board of Directors adopted a shareholder rights plan, pursuant to which uncertificated stock purchase rights were distributed to our shareholders at a rate of one stock purchase right for each share of common stock held of record as of August 30, 2001 |
| The rights plan is designed to enhance the Board’s ability to prevent an acquirer from depriving shareholders of the long-term value of their investment and to protect shareholders against attempts to acquire us by means of unfair or abusive takeover tactics |
| The rights become exercisable based upon certain limited conditions related to acquisitions of stock, tender offers and certain business combination transactions involving us |
| The existence of the rights plan may impede a takeover of us not supported by the Board, including a takeover that may be desired by a majority of our shareholders or involving a premium over the prevailing stock price |