As filed with the Securities and Exchange Commission on December 8, 2003
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-16397
Agere Systems Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
22-3746606 (I.R.S. Employer Identification No.) |
|||||
1110
American Parkway N.E. Allentown, Pennsylvania |
18109 |
|||||
(Address of
principal executive offices) |
(Zip
Code) |
Registrants telephone number, including area code: 610-712-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of
Each Class |
Name of Each Exchange on Which Registered |
|||||
Class A Common
Stock, $.01 par value |
New
York Stock Exchange |
|||||
Class B Common
Stock, $.01 par value |
New
York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None.
DOCUMENTS INCORPORATED BY REFERENCE
Agere Systems Inc.
Form 10-K
For the Year Ended September 30,
2003
PART
I |
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1 | ||||||||||
9 | ||||||||||
9 | ||||||||||
9 | ||||||||||
10 | ||||||||||
PART
II |
||||||||||
11 | ||||||||||
12 | ||||||||||
13 | ||||||||||
31 | ||||||||||
32 | ||||||||||
69 | ||||||||||
69 | ||||||||||
PART
III |
||||||||||
69 | ||||||||||
69 | ||||||||||
70 | ||||||||||
70 | ||||||||||
70 | ||||||||||
PART
IV |
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71 |
FORWARD-LOOKING STATEMENTS
PART I
Item 1. Business
General
|
Sold our optoelectronic components business, including the manufacturing facilities associated with that business; |
|
Reduced our headcount; |
|
Consolidated our operations into fewer facilities; and |
|
Closed two integrated circuit wafer manufacturing facilities. |
In fiscal 2002, 27% of our revenue was generated in the United States and 73% outside the United States. See note 19 to our financial statements in Item 8 for additional information about our Client Systems and Infrastructure Systems segments and We conduct a significant amount of our sales activity and manufacturing efforts outside the United States, which subjects us to additional business risks and may adversely affect our results of operations due to increased costs. in Item 7.
Client Systems
|
Digital signal processors for speech compression and encoding and transmission of voice and data; |
|
Conversion signal processors to convert signals between frequencies used in digital signal processors and frequencies used for radio transmission; and |
|
Software that controls the communication process. |
2
voice and data communications networks. We sell our digital telephony solutions to manufacturers of business telephone equipment.
Infrastructure Systems
|
Network communications equipment, which facilitates the transmission, switching and management of data and voice traffic within communications networks; |
|
Network access equipment, such as data communications equipment, which allows devices to connect with communications networks; |
|
Enterprise networking equipment, which switches and routes data traffic in businesses local area networks and storage area networks; and |
|
Wireless infrastructure equipment, such as cellular base stations, which transmits and receives data and voice communications through radio waves. |
|
Enterprise networking; |
|
Wireline communications infrastructure; and |
|
Wireless communications infrastructure. |
3
4
and processing functions. Our products include integrated circuit components for physical layer devices that provide a complete product offering for transmission up to and including 10 gigabits per second.
Customers, Sales And Distribution
Apple Computer,
Inc. |
NEC
Corporation |
|||||
Cisco Systems,
Inc. |
Nokia Corporation |
|||||
Hewlett
Packard |
Samsung Electronics Co., Ltd. |
|||||
Lucent
Technologies Inc. |
Seagate Technology, Inc. |
|||||
Maxtor
Corp. |
Western Digital Corp. |
5
instances, however, our customer uses a contract manufacturer to manufacture and assemble their end product. When our product is being incorporated into an end product being manufactured by a contract manufacturer, we often ship our product directly to the contract manufacturer and receive payment from that contract manufacturer. To determine our sales to particular customers, however, we recognize this type of transaction as a sale to, and revenue from, the end customer. Sometimes a customer for whom we have achieved a design win will have us sell that product to a distributor or trading company from whom the customer then buys our product. We recognize these transactions as indirect sales.
Manufacturing
Competition
|
Rapid technological change; |
|
Evolving standards; |
|
Short product life cycles; and |
|
Price erosion. |
6
Storage |
Mobile Phones |
Computing Connectivity |
Wireless Local Area Networking |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Infineon
Technologies AG |
Koninklijke Philips Electronics N.V. |
Broadcom Corp. |
Broadcom Corp. |
|||||||||||
LSI Logic
Corp. |
Motorola, Inc. |
Conexant Systems, Inc. |
GlobespanVirata, Inc. |
|||||||||||
Marvell
Technology Group Ltd. |
QUALCOMM Inc. |
Infineon Technologies AG |
Texas Instruments Incorporated |
|||||||||||
STMicroelectronics N.V. |
Skyworks Solutions, Inc. |
Koninklijke Philips Electronics N.V. |
||||||||||||
Texas Instruments
Incorporated |
STMicroelectronics N.V. |
PCTel, Inc. |
||||||||||||
Texas Instruments Incorporated |
Enterprise Networking |
Wireline Communications Infrastructure |
Wireless Communications Infrastructure |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Broadcom
Corp. |
Applied Micro
Circuits Corp. |
Applied Micro
Circuits Corp. |
||||||||
IBM Corp. |
Intel
Corp. |
Intel
Corp. |
||||||||
Intel Corp. |
Motorola,
Inc. |
PMC-Sierra,
Inc. |
||||||||
LSI Logic
Corp. |
PMC-Sierra,
Inc. |
Texas Instruments
Incorporated |
||||||||
Marvell Technology Group Ltd. |
Vitesse
Semiconductor Corporation |
Vitesse
Semiconductor Corporation |
|
Performance and reliability; |
|
Price; |
|
Compatibility of products with other products and communications standards used in communications networks; |
|
Product size; |
|
Ability to offer integrated solutions; |
|
Time to market; |
|
Breadth of product line; |
|
Logistics and planning systems; and |
|
Quality of manufacturing processes. |
Research and development
7
Patents, Trademarks And Other Intellectual Property
|
Integrated circuit and optoelectronic manufacturing processes; |
|
Integrated circuits for use in products such as modems, digital signal processors, wireless communications, network processors and communication protocols; and |
|
Optoelectronic products including lasers, optical modulators, optical receivers and optical amplifiers. |
Government Regulation
Employees
8
Backlog
Environmental, Health And Safety Matters
Item 4. Submission of Matters to a Vote of Security Holders
9
Executive Officers of the Registrant
Name |
Age |
Position |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
John T.
Dickson |
57 |
President and Chief Executive Officer |
||||||||
Ronald D.
Black |
39 |
Executive Vice President, Client Systems Group |
||||||||
John W.
Gamble, Jr. |
40 |
Executive Vice President and Chief Financial Officer |
||||||||
Peter
Kelly |
46 |
Executive Vice President, Operations Group |
||||||||
Sohail A.
Khan |
49 |
Executive Vice President, Infrastructure Systems Group |
||||||||
Ahmed
Nawaz |
54 |
Executive Vice President, Worldwide Sales Group |
10
While at AT&T, he was Vice President of the Applications business unit from 1994 to 1995. Prior to joining AT&T, Mr. Nawaz was at Texas Instruments, where he was responsible for the personal computer business unit from 1990 to 1992 and also held various marketing and product management positions.
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
Fiscal 2002 |
High |
Low |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Quarter Ended
December 31, 2001 |
$ | 6.30 | $ | 4.06 | ||||||
Quarter ended
March 31, 2002 |
$ | 6.10 | $ | 3.60 | ||||||
Quarter ended
June 30, 2002 |
$ | 4.49 | $ | 1.40 | ||||||
Quarter ended
September 30, 2002 |
$ | 2.70 | $ | 0.95 |
Fiscal 2003 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Quarter ended
December 31, 2002 |
$ | 1.74 | $ | 0.50 | ||||||
Quarter ended
March 31, 2003 |
$ | 2.04 | $ | 1.35 | ||||||
Quarter ended
June 30, 2003 |
$ | 2.70 | $ | 1.29 | ||||||
Quarter ended
September 30, 2003 |
$ | 3.71 | $ | 2.28 |
Fiscal 2002 |
High |
Low |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Quarter ended
June 30, 2002 (trading began June 3, 2002) |
$ | 3.32 | $ | 1.35 | ||||||
Quarter ended
September 30, 2002 |
$ | 2.72 | $ | 0.94 |
Fiscal 2003 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Quarter ended
December 31, 2002 |
$ | 1.74 | $ | 0.51 | ||||||
Quarter ended
March 31, 2003 |
$ | 2.01 | $ | 1.33 | ||||||
Quarter ended
June 30, 2003 |
$ | 2.60 | $ | 1.19 | ||||||
Quarter ended
September 30, 2003 |
$ | 3.52 | $ | 2.19 |
11
negotiated transaction not involving a public offering in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. Our reliance on this exemption was based in principal part on certain factual representations received from the former Massana stockholders who received the shares.
Item 6. Selected Financial Data
Year Ended September 30, |
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions except per share
amounts) |
2003 |
2002 (1) |
2001 (2) |
2000 (3) |
1999 |
||||||||||||||||||
(unaudited) |
(unaudited) |
||||||||||||||||||||||
Statement
of operations information: |
|||||||||||||||||||||||
Revenue |
$ | 1,839 | $ | 1,923 | $ | 2,886 | $ | 3,515 | $ | 3,064 | |||||||||||||
Gross
profit |
579 | 494 | 915 | 1,574 | 1,492 | ||||||||||||||||||
Income (loss)
from continuing operations |
(371 | ) | (803 | ) | (1,454 | ) | 104 | 159 | |||||||||||||||
Basic and
diluted earnings (loss) per share: (4) |
|||||||||||||||||||||||
Income (loss)
from continuing operations |
$ | (0.22 | ) | $ | (0.49 | ) | $ | (1.09 | ) | $ | 0.10 | $ | 0.15 | ||||||||||
Weighted
average shares outstanding basic and diluted (millions) |
1,667 | 1,637 | 1,334 | 1,035 | 1,035 |
September 30, |
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 (1) |
2001 (2) |
2000 (3) |
1999 |
|||||||||||||||||||
Balance
sheet information: |
|||||||||||||||||||||||
Total
assets |
2,388 | 2,864 | 6,562 | 7,067 | 3,020 | ||||||||||||||||||
Short-term
debt |
195 | 197 | 2,516 | 14 | 14 | ||||||||||||||||||
Long-term
debt |
451 | 486 | 33 | 46 | 64 |
(1) | During fiscal 2002, our short-term debt decreased significantly as we repaid $2.5 billion of borrowings under a credit facility. Also, our total assets decreased significantly as we used $1.6 billion of cash on hand to repay the credit facility and recorded significant impairments of property, plant and equipment, as well as goodwill and other acquired intangibles. |
(2) | During fiscal 2001, we received approximately $3.4 billion of net proceeds from our initial public offering and recorded a $2.8 billion impairment of goodwill and other acquired intangibles. We also assumed $2.5 billion of debt from Lucent, consisting of short-term borrowings under a credit facility provided by financial institutions. We did not receive any of the proceeds of this short-term debt. |
(3) | During fiscal 2000, goodwill and other acquired intangibles increased by $3.4 billion due to the acquisitions of Ortel Corporation, Herrmann Technology Inc., Agere, Inc. and substantially all the assets of VTC Inc. |
(4) | Basic and diluted earnings (loss) per common share are calculated by dividing income (loss) by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding on a historical basis includes the retroactive recognition to October 1, 1998 of the 1,035,100,000 shares owned by Lucent prior to our initial public offering. |
12
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
13
14
of our manufacturing sites in Allentown and Reading. We also expect to spend approximately $20 million for capital expenditures in fiscal 2004 and fiscal 2005 related to our restructuring and consolidation actions. These are expected to be the last major expenditures under our previously announced restructuring initiatives.
15
Results of Operations
Year Ended September 30, |
Change |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
$ |
% |
||||||||||||||||
(dollars in millions) |
|||||||||||||||||||
Operating
Segment: |
|||||||||||||||||||
Client
Systems |
$ | 1,321 | $ | 1,259 | $ | 62 | 5 | % | |||||||||||
Infrastructure Systems |
518 | 664 | (146 | ) | (22 | ) | |||||||||||||
Total
Revenue |
$ | 1,839 | $ | 1,923 | $ | (84 | ) | (4 | )% |
16
a $25 million decrease in intellectual property licensing revenues. The remaining decrease was caused by decreased volume, which resulted from lower demand from telecommunications equipment manufacturers as their customers, communication service providers, reduced capital expenditures.
17
$58 million gain on the sale of our wireless local area network equipment business, while the fiscal 2003 gain consists principally of the recognition of a $16 million gain on the sale of the analog line card business, which had previously been deferred. See Note 9 to our financial statements in Item 8 for additional information.
Year Ended September 30, |
Change |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
$ |
% |
||||||||||||||||
(dollars in millions) |
|||||||||||||||||||
Operating
Segment: (1) |
|||||||||||||||||||
Client
Systems |
$ | (148 | ) | $ | (73 | ) | $ | (75 | ) | (103 | )% | ||||||||
Infrastructure Systems |
(34 | ) | (384 | ) | 350 | 91 | |||||||||||||
Total
Operating Loss by Segment |
$ | (182 | ) | $ | (457 | ) | $ | 275 | 60 | % |
(1) | A reconciliation of operating loss by segment to total operating loss is provided in Note 19 to our financial statements in Item 8. |
Year Ended September 30, |
Change |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
$ |
% |
||||||||||||||||
(dollars in millions) |
|||||||||||||||||||
Operating
Segment: |
|||||||||||||||||||
Client
Systems |
$ | 1,259 | $ | 1,406 | $ | (147 | ) | (10 | )% | ||||||||||
Infrastructure Systems |
664 | 1,480 | (816 | ) | (55 | ) | |||||||||||||
Total
Revenue |
$ | 1,923 | $ | 2,886 | $ | (963 | ) | (33 | )% |
18
by price erosion across the entire segment, particularly in the wireless local area networking market, and volume decreases across the majority of the segment, except for the hard disk drive market which experienced substantial volume growth. The decrease of $816 million within the Infrastructure segment was due to depressed market conditions and reduced expenditures by communication service providers and communication equipment manufacturers, which drove volume decreases across the entire segment.
19
net, the impairment of goodwill and other acquired intangibles, and (gain) loss on sale of operating assets net, which is shown in the following table:
Year Ended September 30, |
Change |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
$ |
% |
||||||||||||||||
(dollars in millions) |
|||||||||||||||||||
Operating
Segment: (1) |
|||||||||||||||||||
Client
Systems |
$ | (73 | ) | $ | (187 | ) | $ | 114 | 61 | % | |||||||||
Infrastructure Systems |
(384 | ) | (236 | ) | (148 | ) | (63 | ) | |||||||||||
Total
Operating Loss by Segment |
$ | (457 | ) | $ | (423 | ) | $ | (34 | ) | (8 | )% |
(1) | A reconciliation of operating loss by segment to total operating loss is provided in Note 19 to our financial statements in Item 8. |
Liquidity and Capital Resources
20
operations was $232 million in fiscal 2002 compared with net cash provided by discontinued operations of $41 million in fiscal 2001.
21
Fiscal Years |
|||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total |
2004 |
2005 and 2006 |
2007 and 2008 |
2009 and Later |
|||||||||||||||||||||||||||
(dollars in millions) |
|||||||||||||||||||||||||||||||
Contractual
obligations: |
|||||||||||||||||||||||||||||||
Convertible
subordinated notes |
$ | 410 | $ | | $ | | $ | | $ | 410 | |||||||||||||||||||||
Accounts
receivable securitization |
154 | | 154 | | | ||||||||||||||||||||||||||
Installment
note |
17 | 7 | 10 | | | ||||||||||||||||||||||||||
Capital
leases |
76 | 42 | 34 | | | ||||||||||||||||||||||||||
Operating
leases |
204 | 79 | 53 | 31 | 41 | ||||||||||||||||||||||||||
Purchase
obligations (1) |
182 | 78 | 91 | 13 | | ||||||||||||||||||||||||||
Other
long-term liabilities (2) |
10 | | 10 | | | ||||||||||||||||||||||||||
Total |
$ | 1,053 | $ | 206 | $ | 352 | $ | 44 | $ | 451 |
(1) | Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of the transactions. These obligations primarily relate to software licenses and services, wafer production and equipment maintenance services. The amounts are based on our contractual commitments; however, it is possible we may be able to negotiate lower payments if we choose to exit these contracts earlier. |
(2) | Other long-term liabilities consist of miscellaneous taxes. |
Recent Pronouncements
22
45 are required only on a prospective basis for guarantees issued or modified after December 31, 2002. Previous accounting for guarantees issued prior to application of Interpretation 45 will not need to be revised or restated. The disclosure requirements in Interpretation 45 are effective for annual and interim periods ending after December 15, 2002. The adoption of the recognition and measurement provisions of Interpretation 45 did not have an impact on our financial condition or results of operations.
Environmental, Health and Safety Matters
23
Legal Proceedings
Factors Affecting Our Future Performance
If we fail to keep pace with technological advances in our industry or if we pursue technologies that do not become commercially accepted, customers may not buy our products and our revenue may decline.
|
Rapid, and sometimes disruptive, technological developments; |
|
Evolving industry standards; |
|
Changes in customer requirements; |
|
Limited ability to accurately forecast future customer orders; |
|
Frequent new product introductions and enhancements; and |
|
Short product life cycles with declining prices over the life cycle of the product. |
24
technologies could render our current and planned products obsolete, resulting in the need to change the focus of our research and development and product strategies and disrupting our business significantly.
The integrated circuit industry is intensely competitive, and our failure to compete effectively could hurt our revenue.
Joint ventures and other third parties manufacture some of our products for us. If these manufacturers are unable to fill our orders on a timely and reliable basis, our revenue may be adversely affected.
|
That they may not be able to develop manufacturing methods appropriate for our products; |
|
That manufacturing costs will be higher than planned; |
|
That reliability of our products will decline; |
|
That they may be unwilling to devote adequate capacity to produce our products; |
|
That they may not be able to maintain continuing relationships with our suppliers; and |
|
That we may have reduced control over delivery schedules and costs of our products. |
25
A widespread outbreak of an illness such as severe acute respiratory syndrome, or SARS, could negatively affect our manufacturing, assembly and test, design or other operations, making it more difficult and expensive to meet our obligations to our customers, and could result in reduced demand from our customers.
We have manufacturing and back-office operations in Singapore, assembly and test and back-office operations in Thailand and design operations in China, countries where outbreaks of SARS have occurred. If our operations are curtailed because of SARS or other health issues, we may need to seek alternate sources of supply for manufacturing or other services and alternate sources can be more expensive. Alternate sources may not be available or may result in delays in shipments to our customers, each of which would adversely affect our results of operations. In addition, a curtailment of our design operations could result in delays in the development of new products. If our customers businesses are affected by SARS, they might delay or reduce purchases from us, which could adversely affect our results of operations.
Our revenue and operating results may fluctuate because we expect to derive most of our revenue from semiconductor devices and the integrated circuits industry is highly cyclical, and because of other characteristics of our business, and these fluctuations may cause our stock price to fall.
Because many of our current and planned products are highly complex, they may contain defects or errors that are detected only after deployment in commercial applications, and if this occurs, it could harm our reputation and result in reduced revenues or increased expenses.
|
Cancellation of orders; |
|
Product returns, repairs or replacements; |
|
Diversion of our resources; |
26
|
Legal actions by our customers or our customers end-users; |
|
Increased insurance costs; and |
|
Other losses to us or to our customers or end-users. |
Because our sales are concentrated on a limited number of key customers, our revenue may materially decline if one or more of our key customers do not continue to purchase our existing and new products in significant quantities.
The demand for components in the communications equipment industry has declined in recent years, and we cannot predict the duration or extent of this decline. Our revenue will depend in part on demand for these types of components.
We are expanding, and may seek in the future to expand, into new areas, and if we are not successful, our results of operations may be adversely affected.
If we fail to attract, hire and retain qualified personnel, we may not be able to develop, market or sell our products or successfully manage our business.
27
Because we are subject to order and shipment uncertainties, any significant cancellations or deferrals could cause our revenue to decline or fluctuate.
If we do not achieve adequate manufacturing utilization, yields, volumes or sufficient product reliability, our gross margins will be reduced.
We have relatively high gross margin on the revenue we derive from the licensing of our intellectual property, and a decline in this revenue would have a greater impact on our net income than a decline in revenue from our integrated circuits products.
If our customers do not qualify our products or manufacturing lines or the manufacturing lines of our third-party suppliers for volume shipments, our results of operations may be adversely affected.
We conduct a significant amount of our sales activity and manufacturing efforts outside the United States, which subjects us to additional business risks and may adversely affect our results of operations due to increased costs.
|
Our brand may not be locally recognized, which may cause us to spend significant amounts of time and money to build a brand identity; |
|
Unexpected changes in regulatory requirements; |
|
Inadequate protection of intellectual property in some countries outside of the United States; |
|
Currency exchange rate fluctuations; |
28
|
International trade disputes; |
|
Political and economic instability; and |
|
Disruptions in international air transport systems. |
We are subject to environmental, health and safety laws, which could increase our costs and restrict our operations in the future.
We may be subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products. If we are unable to protect our intellectual property rights, our business and prospects may be harmed.
We believe that financing has at times been difficult to obtain for companies in our industry and if we need additional cash to fund our operations or to finance future strategic initiatives, we may not be able to obtain it on acceptable terms or at all.
Because of differences in voting power and liquidity between our Class A common stock and Class B common stock, the market price of the Class A common stock may be different from the market price of the Class B common stock.
The development and evolution of markets for our integrated circuits are dependent on factors over which we have no control. For example, if our customers adopt new or competing industry standards with which our products are not compatible or fail to adopt standards with which our products are compatible, our existing products would become less desirable to our customers and our sales would suffer.
29
adopt or continue to follow these standards, which would make our products less desirable to our customers and reduce our sales. Also, competing standards may emerge that are preferred by our customers, which could reduce our sales and require us to make significant expenditures to develop new products. To the extent that we are not able to effectively and expeditiously adapt to new standards, our business will suffer.
Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our managements attention and resources.
We are limited in the amount of stock that we can issue to raise capital because of potential adverse tax consequences.
We could incur significant tax liabilities and payment obligations if Lucent fails to pay the tax liabilities attributable to Lucent under our tax sharing agreement.
Because the Division of Enforcement of the Securities and Exchange Commission is investigating matters brought to its attention by Lucent, our business may be affected in a manner we cannot foresee at this time.
30
the results of the investigation may have an impact on us. Although the investigation could result in no action being taken by the Securities and Exchange Commission, if an action were taken and the investigation were found to concern our business, the action could result in monetary fines or changes in some of our financial and other practices and procedures that we are unable to foresee at this time. In February 2003, Lucent announced that it had reached a tentative settlement with the Securities and Exchange Commission regarding these revenue recognition issues. To date, we believe that a final settlement agreement has not been executed, and there can be no assurances that a final settlement will be reached.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Risk Management
31
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT
SCHEDULE
Consolidated and Combined Financial Statements: |
||||||
Report of
Independent Auditors |
33 | |||||
Consolidated
and Combined Statements of Operations for the years ended September 30, 2003, 2002 and 2001 |
34 | |||||
Consolidated
Balance Sheets as of September 30, 2003 and 2002 |
35 | |||||
Consolidated
and Combined Statements of Changes in Stockholders Equity/Invested Equity and Total Comprehensive Loss for the years ended September 30, 2003, 2002 and 2001 |
36 | |||||
Consolidated
and Combined Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001 |
37 | |||||
Notes to
Consolidated and Combined Financial Statements |
38 | |||||
Financial
Statement Schedule: |
||||||
Schedule
IIValuation and Qualifying Accounts for the years ended September 30, 2003, 2002 and 2001 |
68 |
32
Report of Independent Auditors
To the Board of Directors and
Stockholders of Agere Systems
Inc.:
PricewaterhouseCoopers LLP
Florham Park, New Jersey
October 28,
2003
33
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED
STATEMENTS OF OPERATIONS
(dollars in millions except per share amounts)
Year Ended September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||
REVENUE |
$ | 1,839 | $ | 1,923 | $ | 2,886 | |||||||||
COSTS |
1,260 | 1,429 | 1,971 | ||||||||||||
GROSS
PROFIT |
579 | 494 | 915 | ||||||||||||
OPERATING
EXPENSES: |
|||||||||||||||
Selling,
general and administrative |
294 | 326 | 523 | ||||||||||||
Research and
development |
467 | 625 | 815 | ||||||||||||
Amortization
of goodwill and other acquired intangibles |
8 | 34 | 76 | ||||||||||||
Restructuring
and other charges net |
131 | 503 | 486 | ||||||||||||
(Gain) loss
on sale of operating assets net |
(21 | ) | (299 | ) | 2 | ||||||||||
Impairment of
goodwill and other acquired intangibles |
| | 267 | ||||||||||||
TOTAL
OPERATING EXPENSES |
879 | 1,189 | 2,169 | ||||||||||||
OPERATING
LOSS |
(300 | ) | (695 | ) | (1,254 | ) | |||||||||
Other income
net |
22 | 76 | 62 | ||||||||||||
Interest
expense |
47 | 121 | 151 | ||||||||||||
Loss from
continuing operations before provision for income taxes |
(325 | ) | (740 | ) | (1,343 | ) | |||||||||
Provision for
income taxes |
46 | 63 | 111 | ||||||||||||
Loss from
continuing operations |
(371 | ) | (803 | ) | (1,454 | ) | |||||||||
Discontinued
operations: |
|||||||||||||||
Income (loss)
from operations of discontinued business (net of taxes) |
8 | (1,008 | ) | (3,158 | ) | ||||||||||
Gain on
disposal of discontinued business (net of taxes) |
30 | | | ||||||||||||
Income (loss)
from discontinued operations |
38 | (1,008 | ) | (3,158 | ) | ||||||||||
Loss before
cumulative effect of accounting change |
(333 | ) | (1,811 | ) | (4,612 | ) | |||||||||
Cumulative
effect of accounting change (net of benefit for income taxes of $0 and $2 for the years ended September 30, 2003 and 2001, respectively) |
(5 | ) | | (4 | ) | ||||||||||
NET
LOSS |
$ | (338 | ) | $ | (1,811 | ) | $ | (4,616 | ) | ||||||
Basic and
diluted income (loss) per share information: |
|||||||||||||||
Loss from
continuing operations |
$ | (0.22 | ) | $ | (0.49 | ) | $ | (1.09 | ) | ||||||
Income (loss)
from discontinued operations |
0.02 | (0.62 | ) | (2.37 | ) | ||||||||||
Loss before
cumulative effect of accounting change |
(0.20 | ) | (1.11 | ) | (3.46 | ) | |||||||||
Cumulative
effect of accounting change |
| | | ||||||||||||
Net
loss |
$ | (0.20 | ) | $ | (1.11 | ) | $ | (3.46 | ) | ||||||
Weighted
average shares outstanding basic and diluted (in millions) |
1,667 | 1,637 | 1,334 |
See Notes to Consolidated and Combined Financial Statements.
34
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
(dollars in millions except per share amounts)
September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
||||||||||
ASSETS |
|||||||||||
Cash and cash
equivalents |
$ | 744 | $ | 891 | |||||||
Cash held in
trust |
21 | 16 | |||||||||
Trade
receivables, less allowances of $6 and $9 at September 30, 2003 and 2002, respectively |
265 | 256 | |||||||||
Inventories |
122 | 190 | |||||||||
Other current
assets |
52 | 103 | |||||||||
TOTAL CURRENT
ASSETS |
1,204 | 1,456 | |||||||||
Property,
plant and equipment net |
778 | 1,028 | |||||||||
Goodwill |
109 | 83 | |||||||||
Other
acquired intangibles net of accumulated amortization |
13 | 18 | |||||||||
Other
assets |
284 | 279 | |||||||||
TOTAL
ASSETS |
$ | 2,388 | $ | 2,864 | |||||||
LIABILITIES |
|||||||||||
Accounts
payable |
$ | 245 | $ | 269 | |||||||
Payroll and
related benefits |
109 | 111 | |||||||||
Short-term
debt |
195 | 197 | |||||||||
Income taxes
payable |
328 | 325 | |||||||||
Restructuring
reserve |
47 | 162 | |||||||||
Other current
liabilities |
98 | 173 | |||||||||
TOTAL CURRENT
LIABILITIES |
1,022 | 1,237 | |||||||||
Pension and
postretirement benefits |
288 | 267 | |||||||||
Long-term
debt |
451 | 486 | |||||||||
Other
liabilities |
116 | 142 | |||||||||
TOTAL
LIABILITIES |
1,877 | 2,132 | |||||||||
Commitments
and contingencies |
|||||||||||
STOCKHOLDERS EQUITY |
|||||||||||
Preferred
stock, par value $1.00 per share, 250,000,000 shares authorized and no shares issued and outstanding |
| | |||||||||
Class A
common stock, par value $0.01 per share, 5,000,000,000 shares authorized and 785,090,755 shares issued and outstanding as of September 30, 2003, after deducting 4,281 shares
in treasury and 734,785,226 shares issued and outstanding as of September 30,
2002, after deducting 4,248 shares in treasury |
8 | 7 | |||||||||
Class B
common stock, par value $0.01 per share, 5,000,000,000 shares authorized and 907,994,888 shares issued and outstanding as of September 30, 2003, after deducting 105,112
shares in treasury and 907,995,677 shares issued and outstanding as of
September 30, 2002, after deducting 104,323 shares in treasury |
9 | 9 | |||||||||
Additional
paid-in capital |
7,337 | 7,243 | |||||||||
Accumulated
deficit |
(6,691 | ) | (6,353 | ) | |||||||
Accumulated
other comprehensive loss |
(152 | ) | (174 | ) | |||||||
TOTAL
STOCKHOLDERS EQUITY |
511 | 732 | |||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 2,388 | $ | 2,864 |
See Notes to Consolidated and Combined Financial Statements.
35
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED
STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY/INVESTED EQUITY AND
TOTAL COMPREHENSIVE LOSS
(dollars in millions)
Year Ended September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||
CLASS A
COMMON STOCK |
|||||||||||||||
Beginning
balance |
$ | 7 | $ | 7 | $ | | |||||||||
Issuance of
Class A common stock |
1 | | 6 | ||||||||||||
Conversion of
Class B to Class A common stock |
| | 1 | ||||||||||||
Ending
balance |
8 | 7 | 7 | ||||||||||||
CLASS B
COMMON STOCK |
|||||||||||||||
Beginning
balance |
9 | 9 | 10 | ||||||||||||
Conversion of
Class B to Class A common stock |
| | (1 | ) | |||||||||||
Ending
balance |
9 | 9 | 9 | ||||||||||||
OWNERS NET INVESTMENT |
|||||||||||||||
Beginning
balance |
| | 5,823 | ||||||||||||
Net loss
prior to February 1, 2001 |
| | (74 | ) | |||||||||||
Transfers to
Lucent Technologies Inc. |
| | (1,405 | ) | |||||||||||
Transfers
from Lucent Technologies Inc. |
| | 1,501 | ||||||||||||
Transfer to
additional paid-in capital |
| | (5,845 | ) | |||||||||||
Ending
balance |
| | | ||||||||||||
ADDITIONAL
PAID-IN CAPITAL |
|||||||||||||||
Beginning
balance |
7,243 | 6,996 | | ||||||||||||
Transfer from
owners net investment |
| | 5,845 | ||||||||||||
Transfers to
Lucent Technologies Inc. |
| 127 | (1,604 | ) | |||||||||||
Transfers
from Lucent Technologies Inc. |
| 100 | 1,813 | ||||||||||||
Debt
transferred from Lucent Technologies Inc. |
| | (2,500 | ) | |||||||||||
Issuance of
common stock Massana Limited acquisition |
26 | | | ||||||||||||
Issuance of
common stock pension plan |
30 | | | ||||||||||||
Issuance of
common stock net of expense |
24 | 11 | 3,442 | ||||||||||||
Equity-based
compensation |
14 | 9 | | ||||||||||||
Ending
balance |
7,337 | 7,243 | 6,996 | ||||||||||||
ACCUMULATED DEFICIT |
|||||||||||||||
Beginning
balance |
(6,353 | ) | (4,542 | ) | | ||||||||||
Net
loss |
(338 | ) | (1,811 | ) | |||||||||||
Net loss from
February 1, 2001 |
| | (4,542 | ) | |||||||||||
Ending
balance |
(6,691 | ) | (6,353 | ) | (4,542 | ) | |||||||||
ACCUMULATED OTHER COMPREHENSIVE LOSS |
|||||||||||||||
Beginning
balance |
(174 | ) | (9 | ) | (52 | ) | |||||||||
Minimum
pension liability adjustment |
18 | (170 | ) | | |||||||||||
Foreign
currency translations |
| (3 | ) | 26 | |||||||||||
Reclassification adjustment for realized foreign currency translation losses |
| 35 | | ||||||||||||
Unrealized
gain (loss) on cash flow hedges |
4 | 3 | (13 | ) | |||||||||||
Unrealized
holding gains |
| | 30 | ||||||||||||
Reclassification adjustment for realized holding gains |
| (30 | ) | | |||||||||||
Ending
balance |
(152 | ) | (174 | ) | (9 | ) | |||||||||
TOTAL
STOCKHOLDERS EQUITY/INVESTED EQUITY |
$ | 511 | $ | 732 | $ | 2,461 | |||||||||
TOTAL
COMPREHENSIVE LOSS |
|||||||||||||||
Net
loss |
$ | (338 | ) | $ | (1,811 | ) | $ | (4,616 | ) | ||||||
Other
comprehensive income (loss) |
22 | (165 | ) | 43 | |||||||||||
TOTAL
COMPREHENSIVE LOSS |
$ | (316 | ) | $ | (1,976 | ) | $ | (4,573 | ) |
See Notes to Consolidated and Combined Financial Statements.
36
AGERE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED
STATEMENTS OF CASH FLOWS
(dollars in millions)
Year Ended September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||
OPERATING
ACTIVITIES |
|||||||||||||||
Net
loss |
$ | (338 | ) | $ | (1,811 | ) | $ | (4,616 | ) | ||||||
Less: Income
(loss) from discontinued operations |
38 | (1,008 | ) | (3,158 | ) | ||||||||||
Cumulative
effect of accounting change |
(5 | ) | | (4 | ) | ||||||||||
Loss from
continuing operations |
(371 | ) | (803 | ) | (1,454 | ) | |||||||||
Adjustments
to reconcile loss from continuing operations to net cash (used) provided by operating activities from continuing operations, net of effects for
acquisitions of businesses: |
|||||||||||||||
Restructuring
expense net of cash payments |
12 | 346 | 322 | ||||||||||||
Provision for
inventory write-downs |
| 31 | 83 | ||||||||||||
Depreciation
and amortization |
329 | 412 | 468 | ||||||||||||
(Benefit)
provision for uncollectibles |
| (4 | ) | 9 | |||||||||||
Provision for
deferred income taxes |
17 | 40 | 42 | ||||||||||||
Impairment of
non-consolidated investments |
| 4 | 22 | ||||||||||||
Impairment of
goodwill and other acquired intangibles |
| | 267 | ||||||||||||
Equity
earnings from investments |
(13 | ) | (40 | ) | (42 | ) | |||||||||
Gain on sales
of investments |
| (3 | ) | | |||||||||||
Gain on
disposition of businesses |
(16 | ) | (301 | ) | | ||||||||||
Amortization
of debt issuance costs |
2 | 46 | 29 | ||||||||||||
(Increase)
decrease in receivables |
(18 | ) | 73 | 343 | |||||||||||
Decrease
(increase) in inventories |
43 | (1 | ) | (14 | ) | ||||||||||
(Decrease)
increase in accounts payable |
(4 | ) | (81 | ) | 195 | ||||||||||
Increase
(decrease) in payroll and benefit liabilities |
26 | (18 | ) | (30 | ) | ||||||||||
Changes in
other operating assets and liabilities |
(27 | ) | (105 | ) | (24 | ) | |||||||||
Other
adjustments for non-cash items net |
(3 | ) | (24 | ) | 12 | ||||||||||
Net cash
(used) provided by operating activities from continuing operations |
(23 | ) | (428 | ) | 228 | ||||||||||
Net cash
(used) provided by operating activities from discontinued operations |
(86 | ) | (232 | ) | 41 | ||||||||||
NET CASH
(USED) PROVIDED BY OPERATING ACTIVITIES |
(109 | ) | (660 | ) | 269 | ||||||||||
INVESTING
ACTIVITIES |
|||||||||||||||
Capital
expenditures |
(116 | ) | (195 | ) | (723 | ) | |||||||||
Proceeds from
the sale or disposal of property, plant and equipment |
38 | 142 | 2 | ||||||||||||
Sales of
investments |
9 | 55 | | ||||||||||||
Net proceeds
from disposition of businesses |
64 | 382 | | ||||||||||||
Acquisitions
of businesses net of cash acquired |
(1 | ) | | (1 | ) | ||||||||||
Cash
designated as held in trust |
(5 | ) | (16 | ) | | ||||||||||
Other
investing activities net |
| | (1 | ) | |||||||||||
NET CASH
(USED) PROVIDED BY INVESTING ACTIVITIES |
(11 | ) | 368 | (723 | ) | ||||||||||
FINANCING
ACTIVITIES |
|||||||||||||||
Transfers
from Lucent Technologies Inc. |
| | 171 | ||||||||||||
Payment of
credit facility fees |
| (21 | ) | | |||||||||||
Proceeds from
the issuance of long-term debt net of expenses |
20 | 396 | | ||||||||||||
Net
(repayments) proceeds from short-term debt |
(9 | ) | 163 | | |||||||||||
Principal
repayments of credit facility |
| (2,500 | ) | | |||||||||||
Principal
repayments on long-term debt |
(65 | ) | (19 | ) | (12 | ) | |||||||||
Proceeds from
issuance of stock net of expense |
26 | 11 | 3,448 | ||||||||||||
NET CASH
(USED) PROVIDED BY FINANCING ACTIVITIES |
(28 | ) | (1,970 | ) | 3,607 | ||||||||||
Effect of
exchange rate changes on cash |
1 | 1 | (1 | ) | |||||||||||
Net
(decrease) increase in cash and cash equivalents |
(147 | ) | (2,261 | ) | 3,152 | ||||||||||
Cash and
cash equivalents at beginning of year |
891 | 3,152 | | ||||||||||||
Cash and
cash equivalents at end of year |
$ | 744 | $ | 891 | $ | 3,152 |
See Notes to Consolidated and Combined Financial Statements.
37
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(dollars in
millions except per share amounts)
1. Background and Basis of
Presentation
Background
Basis of Presentation
38
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
2. Summary of Significant Accounting
Policies
Principles of Consolidation and Combination
Use of Estimates
Revenue Recognition
Research and Development Costs
Income Taxes
39
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Loss Per Share
Other Comprehensive Income (Loss)
Foreign Currency Translation
Cash and Cash Equivalents
Inventories
Property, Plant and Equipment
Impairment of Property, Plant and Equipment
40
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
indicates that there is an impairment, assets classified as held and used are written-down to fair value and assets classified as held for sale are written-down to fair value less cost to sell.
Internal Use Software
Goodwill and Other Acquired Intangibles
Investments
Reclassifications
Stock Compensation Plans
41
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Purchase Plan (the ESPP), the net loss and net loss per share as reported would have increased to the pro forma amounts indicated below:
Year Ended September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||
NET
LOSS: |
|||||||||||||||
As
reported |
$ | (338 | ) | $ | (1,811 | ) | $ | (4,616 | ) | ||||||
Add: Total
stock-based employee compensation expense determined under fair value based method for all awards |
(136 | ) | (197 | ) | (214 | ) | |||||||||
Pro forma
(1) |
$ | (474 | ) | $ | (2,008 | ) | $ | (4,830 | ) | ||||||
BASIC AND
DILUTED LOSS PER SHARE: |
|||||||||||||||
As
reported |
$ | (0.20 | ) | $ | (1.11 | ) | $ | (3.46 | ) | ||||||
Pro forma
(1) |
$ | (0.28 | ) | $ | (1.23 | ) | $ | (3.62 | ) |
(1) | The pro forma amounts shown above include the compensation expense determined under the fair value method of all Agere stock options, including Lucent options that were converted to Agere options at the Distribution date. Also included is the compensation expense determined under the fair value method of the options embedded in the Agere shares under the ESPP. |
Year Ended September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||
AGERE: |
|||||||||||||||
Dividend
yield |
0.00 | % | 0.00 | % | 0.00 | % | |||||||||
Volatility |
95.0 | % | 79.4 | % | 66.8 | % | |||||||||
Risk-free
interest rate |
2.29 | % | 3.59 | % | 4.16 | % | |||||||||
Expected
holding period (in years) |
2.8 | 3.1 | 2.4 | ||||||||||||
LUCENT: |
|||||||||||||||
Dividend
yield |
n/a | n/a | 0.58 | % | |||||||||||
Volatility |
n/a | n/a | 59.0 | % | |||||||||||
Risk-free
interest rate |
n/a | n/a | 5.0 | % | |||||||||||
Expected
holding period (in years) |
n/a | n/a | 3.0 |
n/a not applicable
3. Accounting Changes
42
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
deferred tax assets. The pro forma effect of retroactive application of SFAS 143 for fiscal 2002 and 2001 would not change the net loss and loss per share, as reported.
4. Discontinued Operations
5. Restructuring and Other Charges
Net
Restructuring and Related Expenses
43
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
discontinued operations are included in income (loss) from operations of discontinued business (net of taxes). The restructuring actions associated with discontinued operations remain an obligation of the Company and are reflected in the restructuring reserve.
Year Ended September 30, 2003 |
|||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2002 |
Restructuring and Related |
Non-Cash |
September 30, 2003 |
||||||||||||||||||||||||||||
Restructuring Reserve |
Charges |
Credits |
Charges |
Credits |
Cash Payments |
Restructuring Reserve |
|||||||||||||||||||||||||
Workforce
reductions |
$ | 60 | $ | 84 | $ | (24 | ) | $ | (62 | ) | $ | 17 | $ | (64 | ) | $ | 11 | ||||||||||||||
Rationalization of manufacturing capacity and other charges |
102 | 101 | (46 | ) | (57 | ) | 15 | (79 | ) | 36 | |||||||||||||||||||||
Total |
$ | 162 | $ | 185 | $ | (70 | ) | $ | (119 | ) | $ | 32 | $ | (143 | ) | $ | 47 | ||||||||||||||
Continuing
operations |
$ | 174 | $ | (43 | ) | $ | (117 | ) | $ | 21 | $ | (119 | ) | ||||||||||||||||||
Discontinued
operations |
11 | (27 | ) | (2 | ) | 11 | (24 | ) | |||||||||||||||||||||||
Total |
$ | 185 | $ | (70 | ) | $ | (119 | ) | $ | 32 | $ | (143 | ) |
44
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
the resizing of research and development and manufacturing operations at the Companys Orlando facility; $19 for facility lease terminations, including non-cancelable facility leases; $15 for increased depreciation; $7 for contract terminations; and $18 for other related costs. Increased depreciation was recognized due to a change in accounting estimate as a result of shortening the estimated useful lives of certain assets in connection with the planned closing of certain administrative facilities. The other related costs were incurred primarily to implement the restructuring initiatives and include costs for the relocation and training of employees and for the relocation of equipment.
Year Ended September 30, 2002 |
|||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2001 |
Restructuring and Related |
Non-Cash |
September 30, 2002 |
||||||||||||||||||||||||||||
Restructuring Reserve |
Charges |
Credits |
Charges |
Credits |
Cash Payments |
Restructuring Reserve |
|||||||||||||||||||||||||
Workforce
reductions |
$ | 92 | $ | 402 | $ | (39 | ) | $ | (316 | ) | $ | 19 | $ | (98 | ) | $ | 60 | ||||||||||||||
Rationalization of manufacturing capacity and other charges |
79 | 696 | (88 | ) | (569 | ) | 69 | (85 | ) | 102 | |||||||||||||||||||||
Total |
$ | 171 | $ | 1,098 | $ | (127 | ) | $ | (885 | ) | $ | 88 | $ | (183 | ) | $ | 162 | ||||||||||||||
Continuing
operations |
$ | 586 | $ | (90 | ) | $ | (443 | ) | $ | 52 | $ | (150 | ) | ||||||||||||||||||
Discontinued
operations |
512 | (37 | ) | (442 | ) | 36 | (33 | ) | |||||||||||||||||||||||
Total |
$ | 1,098 | $ | (127 | ) | $ | (885 | ) | $ | 88 | $ | (183 | ) |
45
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
46
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
6. Impairment of Goodwill and Other Acquired Intangibles
7. Debt
Accounts Receivable Securitization
47
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Convertible Subordinated Notes
Collateral Installment Loan
Other Debt
8. Acquisition of Massana Limited
48
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
allocation of the purchase price by major balance sheet line item is provided below. The final allocation of the purchase price is contingent on the revision of estimates. The Company does not expect the final allocations to differ materially from the preliminary allocation.
Current
assets |
$ | 1 | ||||
Property,
plant and equipment |
1 | |||||
Goodwill |
26 | |||||
Other
acquired intangibles |
4 | |||||
Current
liabilities |
4 | |||||
Total |
$ | 28 |
9. Divestitures of Businesses
Sale of FPGA Business
Sale of Wireless Local Area Network Equipment Business
Sale of Analog Line Card Business
10. Investment in Silicon Manufacturing Partners
49
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
net income is not shared in the same ratio as equity ownership. The Company recognized equity earnings of $13, $40 and $54 in fiscal 2003, 2002 and 2001, respectively.
September 30, |
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
|
|||||||||||||
Assets |
|||||||||||||||
Current
assets |
$ | 181 | $ | 146 | |||||||||||
Noncurrent
assets |
308 | 443 | |||||||||||||
Liabilities |
|||||||||||||||
Current
liabilities |
$ | 162 | $ | 161 | |||||||||||
Noncurrent
liabilities |
85 | 206 |
Year Ended September 30, |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||||||
Revenue |
$ | 301 | $ | 198 | $ | 234 | |||||||||||||
Gross
profit |
24 | 50 | 83 | ||||||||||||||||
Income from
continuing operations |
10 | 15 | 47 | ||||||||||||||||
Net
income |
$ | 10 | $ | 15 | $ | 47 |
11. Supplementary Financial
Information
Statement of Operations Information
Year Ended September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||
INCLUDED IN
COSTS AND OPERATING EXPENSES: |
|||||||||||||||
Depreciation
and amortization of property, plant and equipment |
$ | 308 | $ | 354 | $ | 379 | |||||||||
OTHER INCOME
NET: |
|||||||||||||||
Interest
income |
$ | 10 | $ | 30 | $ | 69 | |||||||||
Equity
earnings from investments |
13 | 40 | 42 | ||||||||||||
Gain (loss)
on foreign currency transactions |
(3 | ) | 3 | (14 | ) | ||||||||||
Impairment of
non-consolidated investments |
| (4 | ) | (22 | ) | ||||||||||
Other income
(loss) |
2 | 7 | (13 | ) | |||||||||||
Other income
net |
$ | 22 | $ | 76 | $ | 62 |
50
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Balance Sheet Information
September 30, |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
|||||||||||||
INVENTORIES |
||||||||||||||
Finished
goods |
$ | 38 | $ | 49 | ||||||||||
Work in
process |
77 | 119 | ||||||||||||
Raw
materials |
7 | 22 | ||||||||||||
Inventories |
$ | 122 | $ | 190 | ||||||||||
PROPERTY,
PLANT AND EQUIPMENT NET |
||||||||||||||
Land and
improvements |
$ | 35 | $ | 35 | ||||||||||
Buildings and
improvements |
431 | 489 | ||||||||||||
Machinery,
electronic and other equipment |
1,659 | 2,222 | ||||||||||||
Total
property, plant and equipment |
2,125 | 2,746 | ||||||||||||
Less:
accumulated depreciation and amortization |
(1,347 | ) | (1,718 | ) | ||||||||||
Property,
plant and equipment net |
$ | 778 | $ | 1,028 |
Cash Flow Information
51
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
12. Income Taxes
Year Ended September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||
U.S. federal
statutory income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | |||||||||
State and
local income taxes, net of federal income tax effect |
0.6 | 2.8 | 3.0 | ||||||||||||
Effect of
non-U.S. earnings |
(19.7 | ) | (13.3 | ) | (8.8 | ) | |||||||||
Research
credits |
| 0.8 | 1.9 | ||||||||||||
Foreign sales
corporation |
| | 0.5 | ||||||||||||
Valuation
allowance |
(27.9 | ) | (35.0 | ) | (30.7 | ) | |||||||||
Other
differencesnet |
(2.2 | ) | 1.2 | (1.9 | ) | ||||||||||
Effective
income tax rate excluding acquisition related costs (1) |
(14.2 | ) | (8.5 | ) | (1.0 | ) | |||||||||
Acquisition
related costs (1) |
| | (7.3 | ) | |||||||||||
Effective
income tax rate |
(14.2 | )% | (8.5 | )% | (8.3 | )% |
(1) | Non-tax deductible in-process research and development and amortization of goodwill. |
Year Ended September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||
LOSS BEFORE
INCOME TAXES |
|||||||||||||||
United
States |
$ | (222 | ) | $ | (623 | ) | $ | (1,276 | ) | ||||||
Non-U.S |
(103 | ) | (117 | ) | (67 | ) | |||||||||
Loss before
income taxes |
$ | (325 | ) | $ | (740 | ) | $ | (1,343 | ) | ||||||
PROVISION FOR
INCOME TAXES |
|||||||||||||||
Current |
|||||||||||||||
Federal |
$ | 20 | $ | 4 | $ | 15 | |||||||||
State and
local |
1 | (1 | ) | 6 | |||||||||||
Non-U.S |
8 | 20 | 48 | ||||||||||||
Sub-total |
29 | 23 | 69 | ||||||||||||
Deferred |
|||||||||||||||
Federal |
11 | 29 | 5 | ||||||||||||
State and
local |
1 | 4 | 3 | ||||||||||||
Non-U.S |
5 | 7 | 34 | ||||||||||||
Sub-total |
17 | 40 | 42 | ||||||||||||
Provision for
income taxes |
$ | 46 | $ | 63 | $ | 111 |
52
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
||||||||||
Deferred
Tax Assets |
|||||||||||
Benefit
obligations |
$ | 137 | $ | 141 | |||||||
Reserves and
allowances |
87 | 178 | |||||||||
Net operating
loss/credit carryforwards |
833 | 775 | |||||||||
Valuation
allowance |
(1,087 | ) | (997 | ) | |||||||
Property,
plant and equipment |
4 | | |||||||||
Intangibles |
21 | 25 | |||||||||
Other |
9 | 6 | |||||||||
Total
deferred tax assets: |
$ | 4 | $ | 128 | |||||||
Deferred
Tax Liabilities |
|||||||||||
Property,
plant, and equipment |
$ | | $ | 128 | |||||||
Total
deferred tax liabilities: |
$ | | $ | 128 |
13. Comprehensive Income (Loss)
Foreign Currency Translation |
Unrealized Holding Gains |
Unrealized Gains (Losses) on Cash Flow Hedges |
Minimum Pension Liability Adjustment |
Total Accumulated Other Comprehensive Income (Loss) |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Ending
balance September 30, 2000 |
$ | (52 | ) | $ | | $ | | $ | | $ | (52 | ) | ||||||||||
Fiscal 2001
change |
26 | 30 | (13 | ) | | 43 | ||||||||||||||||
Ending
balance September 30, 2001 |
(26 | ) | 30 | (13 | ) | | (9 | ) | ||||||||||||||
Fiscal 2002
change |
32 | (30 | ) | 3 | (170 | ) | (165 | ) | ||||||||||||||
Ending
balance September 30, 2002 |
6 | | (10 | ) | (170 | ) | (174 | ) | ||||||||||||||
Fiscal 2003
change |
| | 4 | 18 | 22 | |||||||||||||||||
Ending
balance September 30, 2003 |
$ | 6 | $ | | $ | (6 | ) | $ | (152 | ) | $ | (152 | ) |
53
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
14. Stock Compensation Plans
54
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Shares (000s) |
Weighted Average Exercise Price |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
LUCENT
OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000 |
42,073 | $ | 32.62 | |||||||
Granted or
Assumed (1) |
9,526 | 17.30 | ||||||||
Exercised |
(2,033 | ) | 2.46 | |||||||
Forfeited or
Expired |
(4,086 | ) | 36.89 | |||||||
LUCENT
OPTIONS OUTSTANDING AT SEPTEMBER 30, 2001 |
45,480 | 32.59 | ||||||||
Granted |
| | ||||||||
Exercised |
(1,890 | ) | 1.97 | |||||||
Forfeited or
Expired |
(5,368 | ) | 6.47 | |||||||
LUCENT
OPTIONS OUTSTANDING AT MAY 31, 2002 |
38,222 | 33.33 | ||||||||
Agere
spin-off adjustments (2) |
18,916 | (11.04 | ) | |||||||
AGERE OPTIONS
SUBSTITUTED FOR LUCENT OPTIONS, OUTSTANDING AT JUNE 1, 2002 |
57,138 | $ | 22.29 | |||||||
AGERE OPTIONS
OUTSTANDING AT SEPTEMBER 30, 2000 |
| | ||||||||
Granted |
151,763 | $ | 5.81 | |||||||
Exercised |
| | ||||||||
Forfeited or
Expired |
(9,013 | ) | 5.87 | |||||||
AGERE OPTIONS
OUTSTANDNG AT SEPTEMBER 30, 2001 |
142,750 | 5.81 | ||||||||
Granted |
5,649 | 5.11 | ||||||||
Agere options
substituted for Lucent options (2) |
57,138 | 22.29 | ||||||||
Exercised |
(41 | ) | 1.18 | |||||||
Forfeited or
Expired |
(32,050 | ) | 13.06 | |||||||
AGERE OPTIONS
OUTSTANDING AT SEPTEMBER 30, 2002 |
173,446 | 9.87 | ||||||||
Granted |
67,185 | 1.43 | ||||||||
Exercised |
(738 | ) | 1.53 | |||||||
Forfeited or
Expired |
(46,787 | ) | 7.82 | |||||||
AGERE OPTIONS
OUTSTANDING AT SEPTEMBER 30, 2003 |
193,106 | $ | 7.47 |
(1) | Includes options converted in acquisitions. |
(2) | Effective with the Distribution on June 1, 2002, the outstanding Lucent options were converted to Agere options. The number of Agere shares covered by substituted options was adjusted and all exercise prices were decreased immediately following the Distribution to preserve the economic values of the options that existed prior to the Distribution. |
55
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Stock Options Outstanding |
Stock Options Exercisable |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices |
Shares (000s) |
Weighted Average Remaining Contractual Life (Years) |
Weighted Average Exercise Price |
Shares (000s) |
Weighted Average Exercise Price |
||||||||||||||||||
$0.08 to
$2.00 |
61,613 | 6.2 | $ | 1.40 | 1,066 | $ | 1.09 | ||||||||||||||||
$2.01 to
$5.15 |
6,292 | 5.2 | 3.84 | 3,154 | 3.80 | ||||||||||||||||||
$5.16 to
$5.85 |
42,813 | 4.8 | 5.59 | 23,316 | 5.59 | ||||||||||||||||||
$5.86 to
$6.00 |
48,082 | 4.4 | 6.00 | 31,339 | 6.00 | ||||||||||||||||||
$6.01 to
$10.30 |
5,326 | 4.1 | 7.84 | 4,643 | 7.87 | ||||||||||||||||||
$10.31 to
$15.50 |
9,001 | 5.2 | 12.11 | 7,385 | 12.15 | ||||||||||||||||||
$15.51 to
$36.00 |
10,641 | 5.5 | 26.02 | 9,581 | 26.00 | ||||||||||||||||||
$36.01 to
$51.56 |
9,338 | 6.3 | 40.30 | 8,275 | 40.37 | ||||||||||||||||||
Total |
193,106 | 5.3 | $ | 7.47 | 88,759 | $ | 11.73 |
Year Ended September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 |
2002 |
2001 |
|||||||||||||
Agere other
stock unit awards granted (000s) |
| | 75 | ||||||||||||
Weighted
average market value of shares granted during the period |
n/a | n/a | $ | 5.43 | |||||||||||
Lucent other
stock unit awards granted (000s) (1) |
| | 500 | ||||||||||||
Weighted
average market value of shares granted during the period (1) |
n/a | n/a | $ | 16.21 |
(1) | Following the Distribution, the remaining 434 Lucent other stock unit awards were converted to 649 Agere other stock unit awards, with a weighted average market value at grant date of $11.73. |
15. Loss Per Common Share
56
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
16. Benefit Obligations
Eight Months Ended June 1, |
Year Ended September 30, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
|||||||||
Net
Periodic Benefit Cost (Credit) from Lucent |
||||||||||
Pension
benefits |
$ | | $ | (2 | ) | |||||
Postretirement benefits |
7 | 10 |
Year Ended September 30, 2003 |
Four Months Ended September 30, 2002 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pension Benefits |
Postretirement Benefits |
Pension Benefits |
Postretirement Benefits |
||||||||||||||||
Agere
Net Periodic Benefit Cost |
|||||||||||||||||||
Service
cost |
$ | 24 | $ | 2 | $ | 12 | $ | 1 | |||||||||||
Interest
cost |
73 | 18 | 23 | 5 | |||||||||||||||
Expected
return on plan assets |
(96 | ) | (4 | ) | (41 | ) | (4 | ) | |||||||||||
Amortization
of prior service cost |
3 | 4 | 2 | | |||||||||||||||
Recognized
net actuarial loss (gain) |
| 1 | (2 | ) | | ||||||||||||||
Transition
asset |
| | (1 | ) | | ||||||||||||||
Net periodic
benefit cost (credit) |
4 | 21 | (7 | ) | 2 | ||||||||||||||
Special
retirement benefits |
7 | | 165 | 5 | |||||||||||||||
Curtailment
charges |
25 | 9 | 16 | 27 | |||||||||||||||
Settlement
charge |
14 | | | | |||||||||||||||
Total benefit
cost |
$ | 50 | $ | 30 | $ | 174 | $ | 34 |
57
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS(Continued)
(dollars in millions except per share amounts)
Year Ended September 30, 2003 |
Four Months Ended September 30, 2002 |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pension Benefits |
Postretirement Benefits |
Pension Benefits |
Postretirement Benefits |
||||||||||||||||
Change in
benefit obligation |
|||||||||||||||||||
Benefit
obligation at beginning of period |
$ | 1,198 | $ | 278 | $ | 996 | $ | 217 | |||||||||||
Service
cost |
24 | 2 | 12 | 1 | |||||||||||||||
Interest
cost |
73 | 18 | 23 | 5 | |||||||||||||||
Amendments |
1 | 59 | | | |||||||||||||||
Actuarial
(gain)/loss |
69 | (12 | ) | 36 | 26 | ||||||||||||||
Benefits
paid |
(223 | ) | (19 | ) | (39 | ) | (3 | ) | |||||||||||
Special
retirement benefits |
7 | | 165 | 5 | |||||||||||||||
Curtailment
charges |
19 | 5 | 5 | 27 | |||||||||||||||
Benefit
obligation at September 30 |
$ | 1,168 | $ | 331 | $ | 1,198 | $ | 278 | |||||||||||
Change in
plan assets |
|||||||||||||||||||
Fair value of
plan assets at beginning of period |
$ | 1,010 | $ | 75 | $ | 1,244 | $ | 97 | |||||||||||
Actual
gain/(loss) on plan assets |
170 | 11 | (195 | ) | (20 | ) | |||||||||||||
Employer
contributions |
31 | 6 | | 1 | |||||||||||||||
Benefits
paid |
(223 | ) | (19 | ) | (39 | ) | (3 | ) | |||||||||||
Fair value of
plan assets at September 30 |
$ | 988 | $ | 73 | $ | 1,010 | $ | 75 | |||||||||||
Funded status
of the plan |
$ | (180 | ) | $ | (258 | ) | $ | (188 | ) | $ | (203 | ) | |||||||
Unrecognized
net actuarial loss |
189 | 52 | 213 | 80 | |||||||||||||||
Unrecognized
prior service cost |
9 | 61 | 11 | 1 | |||||||||||||||
Net amount
recognized |
$ | 18 |