TMCnet News
RF MICRO DEVICES INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) This Annual Report on Form 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, including those related to our proposed merger with TriQuint, 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 those relating to variability in our operating results, the inability of certain of our customers or suppliers to access their traditional sources of credit, our industry's rapidly changing technology, our dependence on a few large customers for a substantial portion of our revenue, our ability to implement innovative technologies, our ability to bring new products to market and achieve design wins, the efficient and successful operation of our wafer fabrication facilities, assembly facilities and test and tape and reel facilities, our ability to adjust production capacity in a timely fashion in response to changes in demand for our products, variability in manufacturing yields, industry overcapacity and current macroeconomic conditions, inaccurate product forecasts and corresponding inventory and manufacturing costs, dependence on third parties and our ability to manage platform providers and customer relationships, our dependence on international sales and operations, our ability to attract and retain skilled personnel and develop leaders, the possibility that future acquisitions may dilute our shareholders' ownership and cause us to incur debt and assume contingent liabilities, fluctuations in the price of our common stock, additional claims of infringement on our intellectual property portfolio, lawsuits and claims relating to our products, security breaches and other similar disruptions compromising our information and exposing us to liability, the impact of stringent environmental regulations, and the receipt of required regulatory approvals related to the proposed merger with TriQuint and the completion of the proposed transaction. These and other risks and uncertainties, which are described in more detail under Item 1A, "Risk Factors" in this Annual Report on Form 10-K and in other reports and statements that we file with the SEC, could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements. The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, including the notes thereto. OVERVIEW Company We are a global leader in the design and manufacture of high-performance radio frequency (RF) solutions. Our products enable worldwide mobility, provide enhanced connectivity, and support advanced functionality in the mobile device, wireless infrastructure, wireless local area network (WLAN or WiFi), cable television (CATV)/broadband, Smart Energy/advanced metering infrastructure (AMI), and aerospace and defense markets. We are recognized for our diverse portfolio of semiconductor technologies and RF systems expertise, and we are a preferred supplier to the world's leading mobile device, customer premises and communications equipment providers. Proposed Merger On February 22, 2014, we entered into the Merger Agreement with TriQuint providing for the combination of RFMD and TriQuint in a merger of equals under a new holding company currently named Rocky Holding, Inc. We believe the combination will create a new leader in radio frequency solutions, with new growth opportunities and a broad portfolio of enabling technologies. Upon completion of the mergers, RFMD shareholders will receive 0.2500 of a share of common stock of the new holding company for each share of RFMD common stock, and TriQuint stockholders will receive 0.4187 of a share of common stock of the new holding company for each share of TriQuint common stock. We anticipate that RFMD shareholders and TriQuint stockholders will each hold approximately 50% of the shares of common stock of the new holding company issued and outstanding immediately after completion of the mergers. Rocky Holding, Inc. intends to apply to list its 31-------------------------------------------------------------------------------- Table of Contents common stock on the NASDAQ Global Select Market, subject to official notice of issuance. Prior to completion of the mergers, we anticipate that Rocky Holding, Inc. will change its name, adopt a NASDAQ symbol for its common stock, and register a new trade name and logo that reflect the key attributes of the combined company. Consummation of the merger with TriQuint is subject to, among other things, the separate approvals of both RFMD shareholders and TriQuint stockholders and regulatory approvals. We currently anticipate the merger will be completed during the second half of calendar year 2014. Business Segments We design, develop, manufacture and market our products to both domestic and international original equipment manufacturers and original design manufacturers in both wireless and wired communications applications, in each of our following operating segments. • Cellular Products Group (CPG) is a leading global supplier of cellular RF solutions which perform various functions in the cellular front end section. The cellular front end section is located between the transceiver and the antenna. These RF solutions include power amplifier (PA) modules, transmit modules, PA duplexer modules, antenna control solutions, antenna switch modules, switch filter modules, switch duplexer modules, and RF power management solutions. CPG supplies its broad portfolio of cellular RF solutions into a variety of mobile devices, including smartphones, handsets, notebook computers and tablets. • Multi-Market Products Group (MPG) is a leading global supplier of a broad array of RF solutions, such as PAs, low noise amplifiers, variable gain amplifiers, high power gallium nitride transistors, attenuators, modulators, switches, VCOs, phase locked loop modules, multi-chip modules, front end modules, and a range of military and space components (amplifiers, mixers, VCOs and power dividers). Major communications applications include mobile wireless infrastructure, point-to-point and microwave radios, small cells, WiFi (routers, access points, mobile devices and customer premises equipment), and CATV infrastructure. Industrial applications include Smart Energy/AMI, private mobile radio, and test and measurement equipment. Aerospace and defense applications include military communications, radar and electronic warfare, as well as space communications. During fiscal 2013, our foundry services were realigned from our Compound Semiconductor Group to our MPG. • Compound Semiconductor Group (CSG) is a business group that was established to leverage our compound semiconductor technologies and related expertise in RF and non-RF end markets and applications. As of March 29, 2014, our reportable segments are CPG and MPG. CSG does not currently meet the quantitative threshold for an individually reportable segment under ASC 280-10-50-12. These business segments are based on the organizational structure and information reviewed by our Chief Executive Officer, who is our chief operating decision maker (or CODM), and are managed separately based on the end markets and applications they support. The CODM allocates resources and evaluates the performance of each operating segment primarily based on operating income and operating income as a percentage of revenue. Fiscal 2014 Management Summary • Our revenue increased 19.1% in fiscal 2014 to $1,148.2 million as compared to $964.1 million in fiscal 2013, primarily due to increased demand for our cellular RF solutions for smartphones and our WiFi products. • Our gross margin for fiscal 2014 increased to 35.3% as compared to 31.7% for fiscal 2013. This increase was primarily due to manufacturing and sourcing-related cost reductions and increased demand, which were partially offset by average selling price erosion. • Our operating income was $27.3 million in fiscal 2014 as compared to an operating loss of $15.7 million in fiscal 2013. This increase was primarily due to higher revenue and improved gross margin, which was partially offset by increased personnel expenses, impairment of IPRD, increased consulting expenses, restructuring expenses associated with achieving both manufacturing efficiencies and operating expense reductions, expenses related to the proposed merger with TriQuint, and expenses related to the phase out of manufacturing and sale of our U.K-based GaAs facility. • Our net income per diluted share was $0.04 for fiscal 2014 compared to net loss per diluted share of $0.19 for fiscal 2013. 32-------------------------------------------------------------------------------- Table of Contents • We generated positive cash flow from operations of $130.8 million for fiscal 2014 as compared to $71.3 million for fiscal 2013. This year-over-year increase was primarily attributable to improved profitability resulting from higher revenue. • Capital expenditures totaled $66.8 million in fiscal 2014 as compared to $54.6 million in fiscal 2013, primarily due to the addition of manufacturing capacity. • During fiscal 2014, we repurchased approximately 2.5 million shares of common stock for approximately $12.8 million, including transaction costs. • On February 22, 2014, we entered into the Merger Agreement with TriQuint and have recorded merger-related expenses and integration costs totaling $5.1 million through March 29, 2014. • During fiscal 2014, we recorded $11.1 million of restructuring expenses, primarily related to (1) efforts initiated to achieve manufacturing efficiencies, (2) efforts initiated to reduce operating expenses, and (3) expenses associated with the sale of our GaAs semiconductor manufacturing facility in the U.K. (see Note 12 of the Notes to the Consolidated Financial Statements). • In the fourth quarter of fiscal 2014, we discontinued engineering efforts on an in-process research and development project and recorded an intangible impairment charge of $11.3 million (see Note 12 of the Notes to the Consolidated Financial Statements). RESULTS OF OPERATIONS Consolidated The following table presents a summary of our results of operations for fiscal years 2014, 2013 and 2012: 2014 2013 2012 (In thousands, % of % of % ofexcept percentages) Dollars Revenue Dollars Revenue Dollars Revenue Revenue $ 1,148,231 100.0 % $ 964,147 100.0 % $ 871,352 100.0 % Cost of goods sold 743,304 64.7 658,332 68.3 582,586 66.9 Gross profit 404,927 35.3 305,815 31.7 288,766 33.1 Research and development 197,269 17.2 178,793 18.5 151,697 17.4 Marketing and selling 74,672 6.5 68,674 7.1 63,217 7.3 General and administrative 76,732 6.7 64,242 6.7 50,107 5.7 Other operating expense (income) 28,913 2.5 9,786 1.0 (898 ) (0.1 ) Operating income (loss) $ 27,341 2.4 % $ (15,680 ) (1.6 )% 24,643 2.8 % Revenue Our overall revenue increased $184.1 million, or 19.1%, in fiscal 2014 as compared to fiscal 2013. Fiscal 2014 reflects increased demand for our cellular RF solutions for smartphones and our WiFi products. Our overall revenue increased $92.8 million, or 10.6%, in fiscal 2013 as compared to fiscal 2012. Fiscal 2013 reflected increased demand for both our 3G/4G cellular RF solutions and our mobile WiFi products. These increases were slightly offset by lower demand for our 2G products that are used in low-end phones and lower demand for our wireless infrastructure products. Our largest customer, Samsung Electronics, Co., Ltd. (Samsung), accounted for approximately 25% and 22% of our total revenue in fiscal 2014 and fiscal 2013, respectively. In addition, we sold our products to another end customer through multiple contract manufacturers, which in the aggregate accounted for approximately 20% of total revenue in fiscal 2014. In fiscal 2012, Samsung and Nokia Corporation (Nokia) accounted for approximately 22% and 14% of our total revenue, 33-------------------------------------------------------------------------------- Table of Contents respectively. The majority of the revenue from these customers was from the sale of our CPG products. No other customer accounted for more than 10% of our total revenue. Our customer diversification strategy has successfully reduced our percentage of sales to any one customer and diversified our customer base across both CPG and MPG. International shipments amounted to $805.4 million in fiscal 2014 (approximately 70% of revenue) compared to $667.7 million in fiscal 2013 (approximately 69% of revenue) and $624.7 million in fiscal 2012 (approximately 72% of revenue). Shipments to Asia totaled $756.1 million in fiscal 2014 (approximately 66% of revenue) compared to $603.6 million in fiscal 2013 (approximately 63% of revenue) and $568.5 million in fiscal 2012 (approximately 65% of revenue). Gross Margin Our overall gross margin for fiscal 2014 increased to 35.3% as compared to 31.7% in fiscal 2013. This increase was primarily due to manufacturing and sourcing-related cost reductions and increased demand, which were partially offset by average selling price erosion. Our overall gross margin for fiscal 2013 decreased to 31.7% as compared to 33.1% in fiscal 2012. This decrease was primarily due to certain costs associated with the transfer of our MBE operations to IQE, costs related to the acquisition of Amalfi (including intangible amortization and inventory step-up), and price erosion on the average selling prices of our products. These decreases were partially offset by higher factory utilization resulting from increased demand and a favorable change in product mix toward higher margin products. Operating Expenses Research and Development In fiscal 2014, research and development expenses increased $18.5 million, or 10.3%, compared to fiscal 2013, primarily due to increased personnel expenses associated with both new product development for 3G/4G mobile devices and our investment in CMOS PAs. In fiscal 2013, research and development expenses increased $27.1 million, or 17.9%, compared to fiscal 2012, primarily due to expenses resulting from new product development for 3G/4G mobile devices as well as increased investments targeting customer diversification, and increases in headcount and related personnel expenses (including Amalfi headcount and related personnel expenses). Marketing and Selling In fiscal 2014, marketing and selling expenses increased $6.0 million, or 8.7%, compared to fiscal 2013, primarily due to increased salaries and commission expenses in support of our customer diversification efforts and in support of our new products for 3G/4G mobile devices. In fiscal 2013, marketing and selling expenses increased $5.5 million, or 8.6%, compared to fiscal 2012, primarily due to an increase in headcount and related personnel expenses in support of our customer diversification efforts and in support of our new products for 3G/4G mobile devices. General and Administrative In fiscal 2014, general and administrative expenses increased $12.5 million, or 19.4%, compared to fiscal 2013 primarily due to increased consulting expenses. In fiscal 2013, general and administrative expenses increased $14.1 million, or 28.2%, compared to fiscal 2012 primarily due to legal expenses resulting from intellectual property rights (IPR) litigation ($6.0 million for fiscal 2013), increased personnel expenses, and increased share-based compensation expenses. Other Operating Expense (Income) In fiscal 2014, other operating expenses increased $19.1 million compared to fiscal 2013, primarily due to an impairment of IPRD, restructuring expenses associated with achieving both manufacturing efficiencies and operating cost reductions, merger-related expenses and integration costs associated with the proposed merger with TriQuint, and expenses related to the phase out of manufacturing and sale of our U.K.-based GaAs facility (see Notes 7 and 12 34-------------------------------------------------------------------------------- Table of Contents of the Notes to the Consolidated Financial Statements in Part II, Item 8 for further explanations of these expenses). These increases were partially offset by the loss realized on the transfer of our MBE wafer growth operations to IQE as well as acquisition-related expenses associated with the acquisition of Amalfi during fiscal 2013. In fiscal 2013, other operating expenses increased $10.7 million compared to fiscal 2012. During fiscal 2013, other operating expenses increased $5.0 million due to the loss realized on the transfer of our MBE wafer growth operations to IQE (see Note 6 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report). In addition, during fiscal 2013, we recorded restructuring expenses of $1.3 million and acquisition-related expenses of $1.5 million associated with the acquisition of Amalfi. Operating Income Our overall operating income was $27.3 million for fiscal 2014 as compared to an operating loss of $15.7 million for fiscal 2013. This increase in operating income was primarily due to higher revenue and improved gross margin, which were partially offset by increased personnel expenses, an impairment of IPRD, increased consulting expenses, restructuring expenses associated with achieving both manufacturing efficiencies and operating expense reductions, merger-related expenses and integration costs associated with the proposed merger with TriQuint, and expenses related to the phase out of manufacturing and sale of our U.K.-based GaAs facility. During fiscal 2013, other operating expenses included a $5.0 million loss realized on the transfer of our MBE wafer growth operations to IQE, Inc. as well as expenses related to the purchase of Amalfi. Our overall operating loss was $15.7 million for fiscal 2013 as compared to an operating income of $24.6 million for fiscal 2012. This decrease was primarily due to increases in headcount and related personnel expenses and other expenses associated with new product development for 3G/4G mobile devices, lower gross margin, increases in legal expenses resulting from IPR litigation, a loss of approximately $5.0 million related to the IQE transaction, increases in share-based compensation expenses and expenses related to the purchase of Amalfi. Segment Product Revenue, Operating Income and Operating Income as a Percentage of Revenue Cellular Products Group Fiscal Year 2014 2013 2012 (In thousands, except percentages) Revenue $ 935,313 $ 761,425 $ 664,242 Operating income $ 109,862 $ 52,574 $ 61,776 Operating income as a % of revenue 11.7 % 6.9 % 9.3 % CPG revenue increased $173.9 million, or 22.8%, in fiscal 2014 as compared to fiscal 2013, primarily due to increased demand for our cellular RF solutions for smartphones. CPG operating income increased $57.3 million, or 109.0%, in fiscal 2014 as compared to fiscal 2013, primarily due to higher revenue and improved gross margin (resulting from manufacturing and sourcing-related cost reductions, partially offset by average selling price erosion) which was partially offset by increased personnel expenses associated with new product development for 3G/4G mobile devices and our investment in CMOS PAs. CPG revenue increased $97.2 million, or 14.6%, in fiscal 2013 as compared to fiscal 2012, primarily due to increased demand for our 3G/4G cellular RF solutions which was slightly offset by lower demand for our 2G products used in low-end phones. CPG operating income decreased $9.2 million, or 14.9%, in fiscal 2013 as compared to fiscal 2012, primarily due to increased operating expenses related to new product development for 3G/4G mobile devices as well as investments targeting customer diversification, and increases in headcount and related personnel expenses (including Amalfi headcount and related personnel expenses). Although erosion in the average selling prices of our established products contributed to the decrease in operating income, it was significantly offset by higher factory utilization resulting from increased demand and a favorable change in product mix toward higher margin products. 35-------------------------------------------------------------------------------- Table of Contents Multi-Market Products Group Fiscal Year 2014 2013 2012 (In thousands, except percentages) Revenue $ 212,897 $ 202,722 $ 207,110 Operating income $ 32,315 $ 11,181 $ 10,930 Operating income as a % of revenue 15.2 % 5.5 % 5.3 % MPG revenue increased $10.2 million, or 5.0%, in fiscal 2014 as compared to fiscal 2013, primarily due to increased demand for our WiFi products. MPG operating income increased $21.1 million, or 189.0%, in fiscal 2014 as compared to fiscal 2013, primarily due to improved gross margin resulting from manufacturing and sourcing-related cost reductions and increased revenue, which was partially offset by average selling price erosion. MPG revenue decreased $4.4 million, or 2.1%, in fiscal 2013 as compared to fiscal 2012, primarily due to the lower demand for our wireless infrastructure products. This decrease was partially offset by increased demand for our mobile WiFi products. MPG operating income increased $0.3 million, or 2.3%, in fiscal 2013 as compared to fiscal 2012, primarily due to decreases in personnel related expenses and other expenses related to the elimination of investments in our lower performing products. The improvement in MPG expenses was partially offset by decreased gross margins resulting from an unfavorable change in product mix toward lower margin products. See Note 17 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for a reconciliation of segment operating income (loss) to the consolidated operating income (loss) for fiscal years 2014, 2013 and 2012. OTHER (EXPENSE) INCOME AND INCOME TAXES Fiscal Year (In thousands) 2014 2013 2012 Interest expense $ (5,983 ) $ (6,532 ) $ (10,997 ) Interest income 179 249 468 Loss on retirement of convertible subordinated notes - (2,756 ) (908 ) Other income (expense) 2,336 (1,180 ) 2,422 Income tax expense (11,231 ) (27,100 ) (14,771 ) Interest expense Interest expense has decreased as a result of lower debt balances. During the first quarter of fiscal 2013, our 0.75% Convertible Subordinated Notes due 2012 (the "2012 Notes") became due and we paid the remaining principal balance of $26.5 million. During fiscal 2013, we purchased and retired $47.4 million original principal amount of our 1.00% Convertible Subordinated Notes due 2014 (the "2014 Notes"). During fiscal 2012, we purchased and retired $35.8 million aggregate principal amount of our 2012 Notes. Loss on the retirement of convertible subordinated notes During fiscal 2014, we did not purchase and retire any of our 2014 Notes. The remaining principal balance of our 2014 Notes was retired in the first quarter of fiscal 2015. During fiscal 2013, we purchased and retired $47.4 million original principal amount of our 2014 Notes for an average price of $98.34, which resulted in a loss of $2.8 million as a result of applying ASC 470-20. During fiscal 2012, we purchased and retired $35.8 million aggregate principal amount of our 2012 Notes for an average price of $103.27, which resulted in a loss of approximately $0.9 million as a result of applying ASC 470-20. 36-------------------------------------------------------------------------------- Table of Contents Other income (expense) In fiscal 2014, we incurred a foreign currency gain of $0.2 million as compared to a loss of $1.2 million in fiscal 2013 and a gain of $0.9 million in fiscal 2012. The foreign currency gain for fiscal 2014 was driven by the changes in the local currency denominated balance sheet accounts, and the depreciation of the U.S dollar against the British Pound and Euro. The foreign currency loss for fiscal 2013 was driven by the changes in the local currency denominated balance sheet accounts, the appreciation of the U.S dollar against the British Pound and Euro, and the depreciation of the U.S. dollar against the Renminbi. Additionally, during fiscal 2014, we recognized a $2.1 million gain on an equity investment (see Note 1 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further information on our equity investment). Investment gains and losses were insignificant in fiscal 2013. During fiscal 2012, we recognized a $1.6 million gain on an equity investment. Income taxes Income tax expense for fiscal 2014 was $11.2 million, which is primarily comprised of tax expense related to international operations. For fiscal 2014, this resulted in an annual effective tax rate of 47.05%. In comparison, income tax expense for fiscal 2013 was $27.1 million, which was primarily comprised of tax expense related to international operations, a $1.3 million reduction in U.K. deferred tax assets due to a decrease in the U.K. tax rate, and a $12.0 million increase in the valuation allowance against U.K. deferred tax assets in connection with the phase out of manufacturing operations at the Newton Aycliffe, U.K. facility. For fiscal 2013, this resulted in an annual effective tax rate of (104.64%). For fiscal 2012, income tax expense was $14.8 million, which was comprised primarily of tax expense related to international operations and a $1.6 million reduction in U.K. deferred tax assets due to a decrease in the U.K. tax rate, offset by a $1.1 million tax benefit from the reversal of uncertain tax position accruals related to success-based fees incurred in connection with prior business combinations. For fiscal 2012, this resulted in an annual effective tax rate of 94.52%. A valuation allowance has been established against net deferred tax assets in the taxing jurisdictions where, based upon the positive and negative evidence available, it is more likely than not that the related net deferred tax assets will not be realized. Realization is dependent upon generating future income in the taxing jurisdictions in which the operating loss carryovers, credit carryovers, depreciable tax basis, and other tax deferred assets exist. The realizability of these deferred tax assets are reevaluated on a quarterly basis. As of the end of fiscal years 2012, 2013 and 2014, the valuation allowance against domestic and foreign deferred tax assets was $112.7 million, $164.2 million, and $143.3 million, respectively. As of the beginning of fiscal 2012, there was a $92.3 million valuation allowance against $90.5 million of U.S. net deferred tax assets and $1.8 million of Shanghai, China net deferred tax assets. The $20.4 million increase in the valuation allowance during fiscal 2012 was comprised of a $22.2 million increase related to changes in domestic net deferred tax assets during fiscal 2012 offset by a $1.8 million decrease from the release of the Shanghai, China valuation allowance upon completing the liquidation of that legal entity. The remaining valuation allowance as of the end of fiscal 2012 was related to the U.S. net deferred tax assets. The valuation allowance against net deferred tax assets increased in fiscal 2013 by $51.5 million. The increase was comprised of $12.0 million established during the fiscal year related to the U.K. net deferred tax assets, $10.8 million related to the Amalfi acquisition, and a $28.7 million increase related to other changes in domestic deferred tax assets during the fiscal year. The U.K. valuation allowance was recorded as a result of the decision, announced in March 2013, to phase out manufacturing at the U.K. facility. Consequently, we determined that this represented significant negative evidence, and that it was no longer "more likely than not" that any U.K. deferred tax assets remaining at the end of fiscal 2014 would ultimately be realized. The valuation allowance against net deferred tax assets decreased in fiscal 2014 by $20.9 million. The decrease was comprised of the reversal of the $12.0 million U.K. valuation allowance established during fiscal 2013 and $15.1 million related to deferred tax assets used against deferred intercompany profits, offset by increases related to a $3.4 million adjustment in the net operating losses acquired in the Amalfi acquisition and $2.8 million for changes in net deferred tax assets for domestic and other foreign subsidiaries during the fiscal year. The U.K. valuation allowance was reversed in connection with the sale of the U.K. manufacturing facility in fiscal 2014 and the write-off of the remaining U.K. deferred tax assets. 37-------------------------------------------------------------------------------- Table of Contents As of March 29, 2014, we had federal loss carryovers of approximately $118.9 million that expire in fiscal years 2020 to 2032 if unused and state losses of approximately $109.6 million that expire in fiscal years 2015 to 2032 if unused. Federal research credits of $64.4 million, federal foreign tax credits of $6.2 million, and state credits of $22.5 million may expire in fiscal years 2015 to 2033, 2018 to 2023, and 2015 to 2028, respectively. Federal alternative minimum tax credits of $1.5 million carry forward indefinitely. Included in the amounts above are certain net operating losses (NOLs) and other tax attribute assets acquired in conjunction with the Filtronic, Sirenza, Silicon Wave, Inc., and Amalfi acquisitions. The utilization of these acquired domestic tax assets is subject to certain annual limitations as required under Internal Revenue Code Section 382 and similar state income tax provisions. Our gross unrecognized tax benefits totaled $31.7 million as of March 31, 2012, $37.9 million as of March 30, 2013, and $39.4 million as of March 29, 2014. Of these amounts, $24.4 million (net of federal benefit of state taxes), $29.7 million (net of federal benefit of state taxes), and $30.9 million (net of federal benefit of state taxes) as of March 31, 2012, March 30, 2013, and March 29, 2014, respectively, represent the amounts of unrecognized tax benefits that, if recognized, would impact the effective tax rate in each of the fiscal years. It is the Company's policy to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. As of March 29, 2014 accrued interest and penalties related to unrecognized tax benefits totaled $2.3 million, of which $0.9 million was recognized in fiscal 2014. Included in the balance of gross unrecognized tax benefits at March 29, 2014, is up to $0.5 million related to tax positions for which it is reasonably possible that the total amounts could significantly change in the next 12 months. This amount represents a potential decrease in gross unrecognized tax benefits related to reductions for tax positions in prior years. SHARE-BASED COMPENSATION Under FASB ASC 718, "Compensation - Stock Compensation" (ASC 718), share-based compensation cost is measured at the grant date, based on the estimated fair value of the award using an option pricing model (Black-Scholes), and is recognized as expense over the employee's requisite service period. As of March 29, 2014, total remaining unearned compensation cost related to nonvested restricted stock units and options was $22.8 million, which will be amortized over the weighted-average remaining service period of approximately 1.2 years. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations to date through sales of equity and debt securities, bank borrowings, capital equipment leases and revenue from product sales. Beginning in fiscal 1998, we have raised approximately $1,053.3 million, net of offering expenses, from public and Rule 144A securities offerings. As of March 29, 2014, we had working capital of approximately $317.4 million, including $171.9 million in cash and cash equivalents, compared to working capital at March 30, 2013, of $330.5 million, including $101.7 million in cash and cash equivalents. Our total cash, cash equivalents and short-term investments were $244.0 million as of March 29, 2014. This balance includes approximately $49.6 million held by our foreign subsidiaries. If these funds held by our foreign subsidiaries are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, under our current plans, we expect to permanently reinvest these funds outside of the U.S. and do not expect to repatriate them to fund our U.S. operations. Share Repurchase On January 25, 2011, we announced that our board of directors authorized the repurchase of up to $200 million of our outstanding common stock, exclusive of related fees, commissions or other expenses, from time to time during a period commencing on January 28, 2011 and expiring on January 27, 2013. This share repurchase program authorizes the Company to repurchase shares through solicited or unsolicited transactions in the open market or in privately negotiated transactions. On January 31, 2013, our board of directors authorized an extension of our 2011 share repurchase program to repurchase up to $200 million of our outstanding common stock through January 31, 2015. During fiscal 2014, we repurchased 2.5 million shares at an average price of $5.03 on the open market. During fiscal 2013, we repurchased approximately 1.9 million shares at an average price of $3.75 on the open market and during fiscal 2012, we repurchased approximately 4.9 million shares at an average price of $6.18 on the open market. Between January 25, 2011 and March 29, 2014, we repurchased approximately $62.6 million of our common stock under this program, leaving us with an additional authorization of up to approximately $137.4 million under the program. 38-------------------------------------------------------------------------------- Table of Contents Cash Flows from Operating Activities Operating activities in fiscal 2014 provided cash of $130.8 million, compared to $71.3 million in fiscal 2013. This year-over-year increase was primarily attributable to improved profitability resulting from higher revenue. Net cash provided by operations for fiscal 2014 also includes outflows related to merger-related expenses and integration costs incurred in connection with the proposed merger with TriQuint. Cash Flows from Investing Activities Net cash used in investing activities in fiscal 2014 was $57.0 million compared to $14.5 million in fiscal 2013. This change was primarily due to a decrease in net proceeds from maturities of available-for-sale securities as well as increased purchases of property and equipment for fiscal 2014 as compared to fiscal 2013. These increases in cash used in investing activities were partially offset by the purchase of Amalfi for approximately $47.7 million during fiscal 2013. In the first quarter of fiscal 2015, we commenced construction on a new manufacturing facility in China to significantly expand our internal assembly and test capabilities. Costs related to this new facility are expected to account for approximately 25% of our total fiscal 2015 capital expenditures, which are currently expected to be in line with fiscal 2014 and which we expect to fund with cash flows from operations. The actual amount of capital expenditures will be dependent on our sourcing strategy for manufacturing capacity and the rate and pace of new technology development. Cash Flows from Financing Activities Net cash used in financing activities in fiscal 2014 was $4.2 million compared to $89.7 million in fiscal 2013. Net cash used in financing activities was higher during fiscal 2013 as we paid the $26.5 million remaining principal balance of the 2012 Notes, repurchased and retired $47.4 million original principal amount of our 2014 Notes, and paid the $6.3 million remaining balance of our bank loan. During fiscal 2014, we did not purchase and retire any of our 2014 Notes. The $87.5 million remaining principal balance of our 2014 Notes was retired in the first quarter of fiscal 2015 with cash on hand. Our future capital requirements may differ materially from those currently anticipated and will depend on many factors, including, but not limited to, market acceptance of our products, volume pricing concessions, capital improvements, demand for our products, technological advances and our relationships with suppliers and customers. Based on current and projected levels of cash flow from operations, coupled with our existing cash and cash equivalents, and our revolving credit facility, we believe that we have sufficient liquidity to meet both our short-term and long-term cash requirements. However, if there is a significant decrease in demand for our products, or in the event that growth is faster than we had anticipated, operating cash flows may be insufficient to meet our needs. If existing resources and cash from operations are not sufficient to meet our future requirements or if we perceive conditions to be favorable, we may seek additional debt or equity financing. We cannot be sure that any additional equity or debt financing will not be dilutive to holders of our common stock. Further, we cannot be sure that additional equity or debt financing, if required, will be available on favorable terms, if at all. Proposed Merger It is currently the expectation that our proposed merger with TriQuint will result in approximately $150 million in cost synergies by the end of the second year following the closing. In the second half of fiscal 2014, we have recorded approximately $5.1 million of merger-related expenses and integration costs in "Other operating expense (income)" on the Consolidated Statements of Operations. We currently expect to incur an additional $15.0 million to $30.0 million for merger-related expenses and integration costs in connection with the consummation of this transaction. The merger is subject to approval by the shareholders of each of the two companies and the receipt of certain regulatory approvals and other customary closing conditions. If the Merger Agreement is terminated in certain circumstances, RFMD or TriQuint would be required to pay the other a termination fee of $66.7 million. If the Merger Agreement is terminated due to the failure of the shareholders of RFMD or the stockholders of TriQuint to approve the merger, RFMD or TriQuint, as the case may be, will be required to pay the other a fee of $17.1 million. 39-------------------------------------------------------------------------------- Table of Contents IMPACT OF INFLATION We do not believe that the effects of inflation had a significant impact on our revenue or income from continuing operations during fiscal years 2014, 2013 and 2012. Our financial results in fiscal 2015 could be adversely affected by wage and commodity price inflation (including precious metals). OFF-BALANCE SHEET ARRANGEMENTSAs of March 29, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. CONTRACTUAL OBLIGATIONSThe following table summarizes our significant contractual obligations and commitments (in thousands) as of March 29, 2014, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. Payments Due By Period Total Less than More than Payments 1 year 1-3 years 3-5 years 5 years Capital commitments $ 9,760 $ 9,221 $ 539 $ - $ - Capital leases 91 73 18 - - Operating leases 48,843 8,899 14,687 9,410 15,847 Convertible debt (including interest) * 87,941 87,941 - - - Purchase obligations 103,710 100,632 3,078 - - Wafer supply agreement 7,166 7,166 - - - Total $ 257,511 $ 213,932 $ 18,322 $ 9,410 $ 15,847 * The 2014 Notes had a remaining principal balance of $87.5 million as of March 29, 2014. The 2014 Notes were subsequently retired on April 15, 2014. Capital Commitments On March 29, 2014, we had capital commitments of approximately $9.8 million, primarily for increasing manufacturing capacity, as well as for equipment replacements, equipment for process improvements and general corporate requirements. Capital Leases We lease certain equipment and computer hardware and software under non-cancelable lease agreements that are accounted for as capital leases. Interest rates on capital leases ranged from 6.0% to 6.4% as of March 29, 2014. Equipment under capital lease arrangements is included in property and equipment and has a net cost of approximately $0.3 million as of both March 29, 2014 and March 30, 2013. Operating Leases We lease the majority of our corporate, wafer fabrication and other facilities from several third-party real estate developers. The remaining terms of these operating leases range from approximately one year to 14 years. Several have renewal options of up to two ten-year periods and several also include standard inflation escalation terms. Several also include rent escalation, rent holidays and leasehold improvement incentives, which are recognized to expense on a straight-line basis. The amortization period of leasehold improvements made either at the inception of the lease or during the lease term is amortized over the lesser of the remaining life of the lease term (including renewals that are reasonably assured) or the useful life of the asset. We also lease various machinery and equipment and office equipment under non-cancelable operating leases. The remaining terms of these operating leases range from less than one year to approximately three years. As of March 29, 2014, the total future minimum lease payments were approximately $48.7 million related to facility operating leases and approximately $0.2 million related to equipment operating leases. 40-------------------------------------------------------------------------------- Table of Contents Convertible Debt In April 2007, we issued $200 million aggregate principal amount of the 2012 Notes and $175 million aggregate principal amount of the 2014 Notes (together with the 2012 Notes, the "Notes"). The Notes were issued in a private placement to Merrill Lynch, Pierce, Fenner & Smith Incorporated for resale to qualified institutional buyers. Offering expenses in connection with the issuance of the Notes, including discounts and commissions, were approximately $8.8 million, which are being amortized as interest expense over the terms of the Notes based on the effective interest method. The 2012 Notes became due on April 15, 2012 (the remaining balance of $26.5 million was paid with cash on hand) and the 2014 Notes matured on April 15, 2014. Interest on the 2014 Notes was payable in cash semiannually in arrears on April 15 and October 15 of each year. The 2014 Notes were subordinated unsecured obligations of the Company and ranked junior in right of payment to all of the Company's existing and future senior debt. The 2014 Notes effectively were subordinated to the indebtedness and other liabilities of the Company's subsidiaries. The 2014 Notes became due on April 15, 2014, and the remaining principal balance of $87.5 million plus interest of $0.4 million was paid with cash on hand. During fiscal 2013, we purchased and retired $47.4 million original principal amount of our 2014 Notes for an average price of $98.34, which resulted in a loss of $2.8 million as a result of applying ASC 470-20. During fiscal 2012, we purchased and retired $35.8 million aggregate principal amount of our 2012 Notes for an average price of $103.27, which resulted in a loss of approximately $0.9 million as a result of applying ASC 470-20. ASC 470-20 requires us to record gains and losses on the early retirement of our 2012 Notes and 2014 Notes in the period of derecognition, depending on whether the fair market value at the time of derecognition was greater than, or less than, the carrying value of the debt. As of March 29, 2014, the 2014 Notes had a fair value on the Private Offerings, Resale and Trading through Automated Linkages ("PORTAL") Market of $88.7 million, compared to a carrying value of $87.3 million. As of March 30, 2013, the 2014 Notes had a fair value on the PORTAL Market of $86.7 million, compared to a carrying value of $82.0 million. The indentures governing our 2014 Notes contain certain non-financial covenants, and as of March 29, 2014, we were in compliance with these covenants. Credit Agreement On March 19, 2013, we entered into a four-year senior credit facility with Bank of America, N.A., as Administrative Agent and a lender, and a syndicate of other lenders (the "Credit Agreement"). The Credit Agreement includes a $125.0 million revolving credit facility, which includes a $5.0 million sublimit for the issuance of standby letters of credit and a $5.0 million sublimit for swingline loans. We may request, at any time and from time to time, that the revolving credit facility be increased by an amount not to exceed $50.0 million. The revolving credit facility is available to finance working capital, capital expenditures and other lawful corporate purposes. Our obligations under the Credit Agreement are jointly and severally guaranteed by certain subsidiaries. On August 15, 2013, the Credit Agreement was amended to revise the definition of "Eurodollar Base Rate" and a provision regarding restricted payments. We currently have no outstanding amounts under the Credit Agreement. The Credit Agreement contains various conditions, covenants and representations with which we must be in compliance in order to borrow funds and to avoid an event of default, including financial covenants that we must maintain a consolidated leverage ratio not to exceed 2.50 to 1.0 as of the end of any fiscal quarter and a consolidated liquidity ratio not to be less than 1.05 to 1.0 as of the end of any fiscal quarter. We must also maintain Consolidated EBITDA (as defined in the Credit Agreement) of not less than $75.0 million as of the end of any four-fiscal-quarter period of the Company. We are in compliance with these covenants as of March 29, 2014. See Note 9 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further details. Other Debt During fiscal 2008, we entered into a loan denominated in Renminbi with a bank in Beijing, China. In April 2012, this loan balance equaled U.S. $6.3 million and was repaid at maturity with cash on hand. During fiscal 2007, we entered into a $25.0 million asset-based financing equipment term loan. During fiscal 2012, the equipment term loan became due and the remaining balance of $3.9 million was paid with cash on hand. 41-------------------------------------------------------------------------------- Table of Contents Purchase Obligations Our purchase obligations, totaling approximately $103.7 million, are primarily for the purchase of raw materials and manufacturing services that are not recorded as liabilities on our balance sheet because we have not yet received the related goods or services as of March 29, 2014. Wafer Supply Agreement During the first quarter of fiscal 2013, we entered into an asset transfer agreement with IQE under which we transferred our MBE wafer growth operations (located in Greensboro, North Carolina) to IQE. The transaction with IQE was intended to lower our manufacturing costs, strengthen our supply chain and provide us with access to newly developed wafer starting process technologies. The assets transferred to IQE included our leasehold interest in the real property, building and improvements used for the facility and machinery and equipment located in the facility. Approximately 70 employees at our MBE facility became employees of IQE as part of the transaction. In conjunction with the asset transfer agreement, we entered into a wafer supply agreement with IQE under which IQE will supply us with competitively priced wafer starting materials through March 31, 2016. As of March 29, 2014, our minimum purchase commitment related to the wafer supply agreement is approximately $7.2 million (see Note 6 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further details). Other Contractual Obligations As of March 29, 2014, in addition to the amounts shown in the Contractual Obligations table above, we have $41.7 million of unrecognized income tax benefits and accrued interest, of which $11.1 million have been recorded as liabilities. We are uncertain as to if, or when, such amounts may be settled. As discussed in Note 10 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report, we have an unfunded pension plan in Germany with a benefit obligation of approximately $5.5 million as of March 29, 2014. Pension benefit payments are not included in the schedule above as they are not available for all periods presented. Pension benefit payments were less than $0.1 million in fiscal 2014 and are expected to be less than $0.1 million in fiscal 2015. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated financial statements requires management to use judgment and estimates. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could differ from those estimates. The accounting policies that are most critical in the preparation of our consolidated financial statements are those that are both important to the presentation of our financial condition and results of operations and require significant judgment and estimates on the part of management. Our critical accounting policies are reviewed periodically with the Audit Committee of the Board of Directors. We also have other policies that we consider key accounting policies, such as policies for revenue recognition (see Note 1 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report); however, these policies typically do not require us to make estimates or judgments that are difficult or subjective. Inventory Reserves. The valuation of inventory requires us to estimate obsolete or excess inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally 12 to 24 months. The estimates of future demand that we use in the valuation of inventory reserves are the same as those used in our revenue forecasts and are also consistent with the estimates used in our manufacturing plans to enable consistency between inventory valuations and build decisions. Product-specific facts and circumstances reviewed in the inventory valuation process include a review of the customer base, market conditions, and customer acceptance of our products and technologies, as well as an assessment of the selling price in relation to the product cost. Historically, inventory reserves have fluctuated as new technologies have been introduced and customers' demand has shifted. Inventory reserves had a 1% or lower impact on margins in fiscal years 2014, 2013 and 2012. Goodwill and Intangible Assets. Goodwill is recorded when the purchase price paid for a business exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Intangibles are recorded when such assets are acquired by purchase or license. The value of our intangibles, including goodwill, could be 42-------------------------------------------------------------------------------- Table of Contents impacted by future adverse changes such as: (i) any future declines in our operating results; (ii) a decline in the value of technology company stocks, including the value of our common stock; (iii) a prolonged or more significant slowdown in the worldwide economy or the semiconductor industry; or (iv) any failure to meet the performance projections included in our forecasts of future operating results. Goodwill We have determined that our reporting units as of fiscal 2014 are CPG, MPG and CSG for purposes of allocating and testing goodwill. In evaluating our reporting units we first consider our operating segments and related components in accordance with FASB guidance. Goodwill is allocated to our reporting units that are expected to benefit from the synergies of the business combinations generating the underlying goodwill. As of March 29, 2014, our goodwill balance of $103.9 million is allocated to our CPG and MPG reporting units. We account for goodwill in accordance with FASB's authoritative guidance, which requires that goodwill and certain intangibles are not amortized, but are subject to an annual impairment test. We complete our goodwill impairment test on an annual basis on the first day of the fourth quarter in each fiscal year, or more frequently, if changes in facts and circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. In fiscal 2013, we adopted FASB Accounting Standards Update (ASU) 2011-08 "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment" (ASU 2011-08), which provides entities with an option to perform a qualitative assessment (commonly referred to as "step zero") to determine whether further quantitative analysis for impairment of goodwill is necessary. In performing step zero for our goodwill impairment test, we are required to make assumptions and judgments including but not limited to the following: the evaluation of macroeconomic conditions as related to our business, industry and market trends, and the overall future financial performance of our reporting units and future opportunities in the markets in which they operate. We also consider recent fair value calculations of our reporting units as well as cost factors such as changes in raw materials, labor or other costs. If impairment indicators are present after performing step zero, we would perform a quantitative impairment analysis to estimate the fair value of goodwill. In doing so, we would estimate future revenue, consider market factors and estimate our future profitability and cash flows. Based on these key assumptions, judgments and estimates, we determine whether we need to record an impairment charge to reduce the value of the goodwill carried on our balance sheet to its estimated fair value. Assumptions, judgments and estimates about future values are complex and often subjective and can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments and estimates we have made have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our results of operations. We performed a step zero analysis for our goodwill impairment test in the fourth quarter of fiscal 2014. As a result of our analysis, no further quantitative impairment test was deemed necessary for fiscal 2014. There was no impairment of goodwill as a result of our annual impairment tests completed during the fourth quarters of fiscal years 2013 and 2012. Intangible Assets Intangible assets are recorded when such assets are acquired by purchase or license. Finite-lived intangible assets consist primarily of technology licenses, customer relationships, a wafer supply agreement and developed technology resulting from business combinations and are subject to amortization. Indefinite-lived intangible assets consist of IPRD. Technology licenses are recorded at cost and are amortized on a straight-line basis over the lesser of the estimated useful life of the technology or the term of the license agreement, ranging from approximately six to 15 years. The fair value of customer relationships acquired prior to fiscal 2013 was based on the benefit derived from the incremental revenue and related cash flows as a direct result of the customer relationship. These forecasted cash flows are discounted to present value using an appropriate discount rate. The fair value of customer relationships acquired during fiscal 2013 was determined based on an income approach using the "with and without method," in which the value of the asset is determined by the difference in discounted cash flows of the profitability of the Company "with" the asset and the profitability of the Company "without" the asset. Customer relationships are amortized on a straight-line basis over the estimated useful life, ranging from three to ten years. 43-------------------------------------------------------------------------------- Table of Contents The fair value of developed technology acquired prior to fiscal 2013 was determined by discounting forecasted cash flows directly related to the existing product technology, net of returns on contributory assets. The fair value of developed technology acquired during fiscal 2013 was determined based on an income approach using the "excess earnings method," which estimated the value of the intangible assets by discounting the future projected earnings of the asset to present value as of the valuation date. Developed technology is amortized on a straight-line basis over the estimated useful life of six years. The fair value of the wafer supply agreement was determined using the incremental income method, which is a discounted cash flow method within the income approach. Under this method, the fair value was estimated by discounting to present value the additional savings from expense reductions in operations at a discount rate to reflect the risk inherent in the wafer supply agreement as well as any tax benefits. The wafer supply agreement is amortized on a units of use activity method and has a useful life of approximately four years. IPRD is recorded at fair value as of the date of acquisition as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts or impairment. The fair value of the acquired IPRD was determined based on an income approach using the "excess earnings method," which estimated the value of the intangible assets by discounting the future projected earnings of the asset to present value as of the valuation date. Upon completion of development, acquired IPRD assets are transferred to finite-lived intangible assets and amortized over their useful lives. See Note 8 of the Notes to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding an impairment of assets recorded in the fourth quarter of fiscal 2014. We regularly review identified intangible assets to determine if facts and circumstances indicate that the useful life is shorter than we originally estimated or that the carrying amount of the assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets and occur in the period in which the impairment determination was made. Impairment of Long-lived Assets. We review the carrying values of all long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business, significant negative industry or economic trends, and significant changes or planned changes in our use of assets. In making impairment determinations for long-lived assets, we utilize certain assumptions, including but not limited to: (i) estimations and quoted market prices of the fair market value of the assets; and (ii) estimations of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service that the asset will be used in our operations and estimated salvage values. Income Taxes. In determining income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax expense, the resultant tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. As part of our financial process, we assess on a tax jurisdictional basis the likelihood that our deferred tax assets can be recovered. If recovery is not likely (a likelihood of less than 50 percent), the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to ultimately be recoverable. In this process, certain relevant criteria are evaluated including: the amount of income or loss in prior years, the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior carryback years that can be used to absorb net operating losses and credit carrybacks, future expected taxable income, and prudent and feasible tax planning strategies. Changes in taxable income, market conditions, U.S. or international tax laws, and other factors may change our judgment regarding realizability. These changes, if any, may require material adjustments to the net deferred tax assets and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made. See Note 13 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for additional information regarding changes in the valuation allowance and net deferred tax assets. 44-------------------------------------------------------------------------------- Table of Contents As part of our financial process, we also assess the likelihood that our tax reporting positions will ultimately be sustained. To the extent it is determined it is more likely than not that a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability. Our judgment regarding the sustainability of our tax reporting positions may change in the future due to changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which will result in a corresponding increase or decrease in net income in the period when such determinations are made. See Note 13 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for additional information regarding our uncertain tax positions and the amount of unrecognized tax benefits. RECENT ACCOUNTING PRONOUNCMENTS In July 2013, the FASB issued ASU 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction of a deferred tax asset or a tax credit carryforward, excluding certain exceptions. This ASU will be effective for us beginning with the first quarter of fiscal 2015 and we do not believe that the adoption of this standard will significantly impact our consolidated financial statements. In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income." ASU 2013-02 requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in the financial statements. We adopted this guidance in the first quarter of fiscal 2014. The adoption of this guidance affected the presentation of comprehensive income, but did not impact our financial position, results of operations or cash flows. |