UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT | | |
| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OF 1934
For the fiscal year ended September 30, 2005October 3, 2008
OR
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period fromto
Commission file number 1-5560001-5560
SKYWORKS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 04-2302115 |
(State or other jurisdictionOther Jurisdiction of
incorporation Incorporation or organization)Organization) | | (I.R.S. Employer
Identification No.) |
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20 Sylvan Road, Woburn, Massachusetts
| | 01801 |
(Address of principal executive offices)Principal Executive Offices) | | 01801
(Zip Code) |
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| Registrant’s telephone number, including area code: | | (781) 376-3000 |
Securities registered pursuant to Section 12(b) of the Act:
None
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| Title of Each Class | | Name of Each Exchange on Which Registered |
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| Common Stock, par value $0.25 per share | | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.25 par value
(Title None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Class)the Securities Act.
þ Yeso No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
o Yesþ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yeso No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as defineda non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act Rule 12b-2).þ Yeso NoAct. (Check one):
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| Large accelerated filerþ | | Accelerated filero | | Non-accelerated filer o
(Do not check if a smaller reporting company) | | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yesþ No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (based on the closing price of the registrant’s common stock as reported on the NASDAQ NationalGlobal Select Market on the last business day of the registrant’s most recently completed second fiscal quarter (April 1, 2005)(March 28, 2008) was approximately $982,184,761.$1,144,736,590. The number of outstanding shares of the registrant’s common stock, par value, $0.25 per share as of December 8, 2005November 21, 2008 was 158,786,540.165,764,093.
The Exhibit Index is located on page 84.DOCUMENTS INCORPORATED BY REFERENCE
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| Part of Form 10-K | | Documents from which portions are incorporated by reference |
| Part III | | Portions of the Registrant’s Proxy Statement relating to the Registrant’s 2009 Annual Meeting of Stockholders to be filed on or before February 2, 2009 are incorporated by reference into Items 10, 11, 12, 13 and 14 |
SKYWORKS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 30, 2005OCTOBER 3, 2008
TABLE OF CONTENTS
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In this document, the words “we”, “our”, “ours” and “us” refer only to Skyworks Solutions, Inc. and its consolidated subsidiaries and not any other person or entity. In addition, the following industry standards are referenced throughout the document:
| • | | CDMA (Code Division Multiple Access): a method for transmitting simultaneous signals over a shared portion of the spectrum. |
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| • | | DigRF: the digital interface standard that defines an efficient physical interconnection between baseband and RF integrated circuits for digital cellular terminals. |
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| • | | EDGE (Enhanced Data rates for Global Evolution): an enhancement to the GSM and TDMA wireless communications systems that increases data throughput to 384Kpbs. |
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| • | | GPRS (General Packet Radio Service): an enhancement to the GSM mobile communications system that supports data packets. |
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| • | | GSM (Global System for Mobile Communications): a digital cellular phone technology based on TDMA that is the predominant system in Europe, but is also used around the world. |
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| • | | PHS (Personal Handyphone System): a TDMA-based cellular phone system introduced in Japan in mid 1995. |
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| • | | TD-SCDMA (Time Division Synchronous Code Division Multiple Access): a 3G mobile communications standard, being pursued in the People’s Republic of China by the CATT. |
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| • | | WCDMA (Wideband CDMA): a 3G technology that increases data transmission rates in GSM systems by using the CDMA air interface instead of TDMA. |
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| • | | WLAN (Wireless Local Area Network): a type of local-area network that uses high-frequency radio waves rather than wires to communicate between nodes. |
Skyworks, Breakthrough Simplicity, the star design logo, DCR, iPAC, LIPA, Lynx, Pegasus, Polar Loop, Single Package Radio, SPR, System Smart, and Trans-Tech are trademarks or registered trademarks of Skyworks Solutions, Inc. or its subsidiaries in the United States and in other countries. All other brands and names listed are trademarks of their respective companies.
CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and areis subject to the “safe harbor” created by those sections. Words such as “believes”, “expects”, “may”, “will”, “would”, “should”, “could”, “seek”, “intends”, “plans”, “potential”, “continue”, “estimates”, “anticipates”, “predicts” and similar expressions or variations or negatives of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report on Form 10-K.Report. Additionally, forward-looking statements include, but are not limited to:
| | • | | our plans to develop and market new products, enhancements or technologies and the timing of these development programs; |
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| | • | | our estimates regarding our capital requirements and our needs for additional financing; |
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| | • | | our estimates of expenses and future revenues and profitability; |
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| | • | | our estimates of the size of the markets for our products and services; |
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| | • | | the rate and degree of market acceptance of our products; and |
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| | • | | the success of other competing technologies that may become available. |
Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements involve inherent risks and uncertainties and actual results and outcomes may differ materially and adversely from the results and outcomes discussed in or anticipated by the forward-looking statements. A number of important factors could cause actual results to differ materially and adversely from those in the forward-looking statements. We urge you to consider the risks and
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uncertainties discussed elsewhere in this report and in the other documents filed by us with the Securities and Exchange Commissions (“SEC”) in evaluating our forward-looking statements. We have no plans, and undertake no obligation, to revise or update our forward-looking statements to reflect any event or circumstance that may arise after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.
This Annual Report on Form 10-K also contains estimates made by independent parties and by us relating to market size and growth and other industry data. These estimates involve a number of assumptions and limitations and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation”. These and other factors could cause results to differ materially and adversely from those expressed in the estimates made by the independent parties and by us.
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In this document, the words “we”, “our”, “ours” and “us” refer only to Skyworks Solutions, Inc., and its consolidated subsidiaries and not any other person or entity. In addition, the following industry standards are referenced throughout the document:
| • | | CDMA (Code Division Multiple Access): a method for transmitting simultaneous signals over a shared portion of the RF spectrum |
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| • | | EDGE (Enhanced Data rates for GSM Evolution): an enhancement to the GSM and TDMA wireless communications systems that increases data throughput to 474Kbps |
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| • | | GPRS (General Packet Radio Service): an enhancement to the GSM mobile communications system that supports transmission of data packets |
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| • | | GSM (Global System for Mobile Communications): a digital cellular phone technology based on TDMA that is the predominant system in Europe, and is also used around the world |
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| • | | TD-SCDMA (Time Division Synchronous Code Division Multiple Access): a 3G (third generation wireless services) mobile communications standard, being pursued in the People’s Republic of China by the CATT |
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| • | | WCDMA (Wideband CDMA): a 3G technology that increases data transmission rates in GSM systems by using the CDMA air interface instead of TDMA |
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| • | | WEDGE: an acronym for technology that supports both EDGE and WCDMA |
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| • | | WiMAX (Worldwide Interoperability for Microwave Access): a standards-based technology enabling the delivery of last mile wireless broadband access as an alternative to cable and DSL |
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| • | | WLAN (Wireless Local Area Network): a type of local-area network that uses high-frequency radio waves rather than wires to communicate between nodes |
Skyworks, Breakthrough Simplicity, the star design logo, Helios, Intera and Trans-Tech are trademarks or registered trademarks of Skyworks Solutions, Inc. or its subsidiaries in the United States and in other countries. All other brands and names listed are trademarks of their respective companies.
PART l
ITEM 1. BUSINESS.
INTRODUCTION
Skyworks Solutions, Inc. (“Skyworks” or the “Company”) is an industry leader in radio solutionsdesigns, manufactures and precisionmarkets a broad range of high performance analog and mixed signal semiconductors servicing a diversified set of mobile communications customers.that enable wireless connectivity. Our power amplifiers (PAs), front-end modules (FEMs) and integrated radio frequency (RF) solutions can be found in many of the cellular handsets sold by the world’s leading manufacturers. Leveraging our core analog technologies, we also offer a diverse portfolio of linear integrated circuits (ICs) that support automotive, broadband, cellular infrastructure, industrial and multimodemedical applications.
We have aligned our product portfolio around two markets: mobile platforms and linear products. Our mobile platform solutions include highly customized PAs, FEMs, and integrated RF transceivers that are at the heart of many of today’s leading-edge multimedia handsets. Our primary customers for these products include top-tier handset manufacturers such as Sony Ericsson, Motorola, Samsung, LG Electronics and Research in Motion. In parallel, we offer over 900 different catalogue linear products to a highly diversified non-handset customer base. Our linear products are typically precision analog integrated circuits that target markets in cellular infrastructure,
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broadband networking, medical, automotive and industrial applications, among others. Representative linear products include synthesizers, mixers, switches, diodes and RF receivers. Our primary customers for linear products include Ericsson, Huawei, Cisco, Nokia-Siemens,
Alcatel ·Lucent, and ZTE, as well as leading distributors such as Avnet.
We are a leader in the PA and FEM market for cellular handsets, and wireless networking platforms. Skyworks also offers a portfolioplan to build upon our position by continuing to develop more highly integrated and higher performance products necessary for the next generation of highly innovativemultimedia handsets. Our competitors in the mobile platforms market include RF Micro Devices, Anadigics and TriQuint Semiconductor. In the linear products supportingmarket, we plan to continue to grow by both expanding distribution of our standard components and by leveraging our core analog technologies to develop integrated products for specific customer applications. Our competitors in the linear products market include Analog Devices, Hittite Microwave, Linear Technology and Maxim Integrated Products.
Skyworks Solutions, Inc., a wide range of applications including automotive, broadband, consumer, industrial, infrastructure, medical, military, Radio Frequency Identification (“RFID”), satellite and wireless data.
SkyworksDelaware corporation, was formed through the merger (“Merger”) of the wireless business of Conexant Systems, Inc. (“Conexant”), and Alpha Industries, Inc. (“Alpha”), on June 25, 2002, pursuant to an Agreement and Plan of Reorganization, dated as of December 16, 2001, and amended as of April 12, 2002, by and among Alpha, Conexant and Washington Sub, Inc. (“Washington”), a wholly-owned subsidiary of Conexant to which Conexant spun off its wireless communications business. Pursuant to the Merger, Washington merged with and into Alpha, with Alpha as the surviving corporation. Immediately following the Merger, Alpha purchased Conexant’s semiconductor assembly and test facility located in Mexicali, Mexico and certain related operations (the “Mexicali Operations”). For purposes of this Annual Report on Form 10-K, the Washington business and the Mexicali Operations are collectively referred to as “Washington/Mexicali”. Shortly thereafter, Alpha, which was incorporated in Delaware in 1962, changed its corporate name to Skyworks Solutions, Inc.2002.
We are headquarteredHeadquartered in Woburn, Massachusetts, andwe have executive offices in Irvine, California. We have design,worldwide operations with engineering, manufacturing, marketing, sales and service facilities throughout Asia, Europe and North America. Our Internet address is www.skyworksinc.com. We make available on our website free of charge our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 filings on Forms 3, 4 and 5, and amendments to those reports as soon as practicable after we electronically submit such material withto the Securities and Exchange Commission (“SEC”).SEC. The information contained in our website is not incorporated by reference in this Annual ReportReport. You may read and copy materials that we have filed with the SEC at the SEC public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on Form 10-K.the public reference room. Our SEC filings are also available to the public on the SEC’s Internet website at www.sec.gov.
INDUSTRY BACKGROUND
We believe thatthere are two major trends in the wireless industry that are shaping the market landscape and the way in which original equipment manufacturers (“OEMs”) engage semiconductor suppliers. First, there is ona market share consolidation underway. By virtually all analyst estimates, approximately 80 percent of the vergehandset market is now controlled by the five largest OEMs, who are increasingly leveraging their brand, manufacturing and distribution advantages across network carriers worldwide.
Second, and perhaps even more dramatic, is the convergence of another growth cycle. Accordingmultimedia-rich mobile platforms and the increasingly important role of multimode FEMs in the rapidly evolving wireless handset market — particularly as the industry shifts to Deutsche Bank, handset sales3G technology enabling applications such as Web browsing, video streaming, gaming, MP3 players and cameras. In fact, next generation EDGE, WEDGE and WCDMA wireless platforms will have increased approximately 100% between 2001 and 2005 with volumessoon become the majority of the more than one billion cellular phones the industry is expected to reach 772 million unitsproduce annually. With this accelerating trend, the complexity in 2005,the FEM increases as each new operating frequency band requires additional amplifier, filtering and are expectedswitching content to grow to nearly 1 billion units by 2008. Today, the worldwide penetration rate of wireless devices is less than 30%, given the low subscriber adoption rates in some of the world’s largest countries such as China and India. It is anticipated that approximately 993 million new subscribers will begin using wireless services over the next five years, bringing the worldwide subscriber base to nearly 2.9 billion people by 2008 – or roughly 37% of the world’s population.support:
At that same time, handset growth is also being driven by replacement units purchased by existing subscribers, as carriers introduce updated models, smaller form factors, added features and new multimedia applications. More specifically, traditional voice services offered by wireless carriers are being rapidly supplemented or augmented by the emergence of next-generation features such as cameras, TVs, video gaming, Web browsing, and WiFi-based (802.11) wireless data applications. As more and more features emerge within the handset, higher levels of semiconductor integration and power efficient architectures are required. Furthermore, many services will be offered simultaneously and over different frequencies, requiring agile, multimode operability. | • | | backward compatibility to existing networks, |
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| • | | simultaneous transmission of voice and data, |
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| • | | international roaming, and |
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| • | | broadband functionality to accommodate music, video, data, and other multimedia features. |
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Further, given constraints on handset size and power consumption, these complex modules must remain physically small, energy efficient and cost effective, while also managing an unprecedented level of potential signal interference within the handset. As a result, addressable semiconductor content within the transmit and receive chain portion of the cellular handset is expected to more than double over the next several years, creating an incremental market opportunity measured in billions of dollars during that time.
Meanwhile, outside of the handset market, wireless technologies are rapidly proliferating as they aretend to be the critical link between the analog and digital worlds. CorePrecision analog technology allows for the detection, measurement, amplification and conversion of temperature, pressure and audio information into the digital realm. According to the Semiconductor Industry Association,independent market research, the total available market for the analog semiconductor segment was $32 billion in 2005 and is expected to approach $50$45 billion in 2008.2011. Today, this adjacent analog semiconductor market, which is characterized by longer product lifecycles and higherrelatively high gross margins, is highly fragmented and diversified among various end-markets, customer bases and applications.
We believe that these market trends create a potentially significant opportunity for a broad-based semiconductor supplier with a comprehensive product portfolio based on radio frequency and analog technologies.
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Select Analog End Markets
SKYWORKS’ STRATEGY
Skyworks’ vision is to become the premierleading supplier of radio solutionshigh performance analog and precision analogmixed signal semiconductors forenabling mobile communications applications.connectivity. Key elements in our strategy include:
Leveraging Core TechnologiesDiversifying into Adjacent Linear Markets of Skyworks
By leveraging core analog, mixed signal and RF technology, Skyworks deploys technology building blocks such as radio frequency integrated circuits, analog/mixed-signal processing coresis also able to deliver solutions to broader and digital baseband interfaces across multiplediverse markets that are characterized by longer product platforms. We believe that this approach creates economies of scale in researchlifecycles, sustained revenue profiles and development, and facilitates a reduction inhigher contribution margins than our handset business. While the time toaddressable market for key products.linear products is highly fragmented, it is significantly larger than the cellular handset RF industry.
Increasing Integration LevelsExpanding Power Amplifier and Front-End Solutions Market Share
HighOur products offer customers solutions that significantly speed time-to-market while significantly reducing bill of material costs, power consumption and footprints. We plan to increase our current worldwide market share position through higher levels of integration enhanceand continued innovation, leveraging our leading–edge process and packaging technologies.
Capturing Increasing Dollar Content in Third and Fourth Generation Applications
As the benefitsindustry migrates to multi-mode EDGE, WEDGE, WCDMA and WiMAX architectures, RF complexity in the transmit and receive chain substantially increases given simultaneous voice and high speed data communications requirements, coupled with the need for backward compatibility to existing networks. As a result, we believe the addressable market for our solutions will more than double over the next several years.
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Partnering with the World’s Leading Baseband Suppliers
As a result of our products by reducing production costs throughexiting the usebaseband business at the end of fewer external components, reduced board space and improved system assembly yields. By combining all of the integral functionality, Skyworks can deliver additional semiconductor content, thereby offering existing and potential customers more compelling and cost-effective solutions.
Capturing an Increasing Amount of Semiconductor Content
We enable our customers to startfiscal 2006, we are now effectively partnering with, individual components as necessary, and then migrate up the product integration ladder.rather than competing against, system-level developers. We believe thatthese strategic relationships will enhance our highly integratedcompetitive position as the market migrates to 3G multimode and system-on-a-chip architectures where best-in-class baseband, radio and front-end solutions will enable these customers to improve their time-to-market while focusing their resources on product differentiation through a broader range of more sophisticated, next-generation features.are increasingly required.
Focusing on a Leadership Customer Base
Skyworks supports every top-tier wireless handset Original Equipment Manufacturer (“OEM”) including Nokia Corporation, Motorola, Inc., Samsung Electronics Co., Sony Ericsson Mobile Communications AB and LG Electronics, Inc. At the same time, we are diversifying our customer base as we introduce highly innovative linear products in support of medical, automotive, consumer and broadband applications. We believe that the efficiency learned from working with highly agile handset market leaders will prove to be a competitive advantage in these newly addressed market areas.
Delivering Operational Excellence
The Skyworks operations team leverages world-class manufacturing technologies and enables highly integrated modules, as well as system-level solutions. SkyworksSkyworks’ strategy is to vertically integrate where itwe can differentiate or will otherwise enter alliances and partnerships for leading-edge capabilities. These partnerships and alliances are designed to ensure product leadership and competitive advantage in the marketplace. We are focused on achieving the industry’s shortest cycle times, highest yields and ultimately the lowest product cost structure.
BUSINESS FRAMEWORK
To address the wireless industry opportunities discussed above and to execute our strategy, weWe have aligned our product portfolio around two markets: mobile platforms and linear products. We believe we possess a broad technology capability and one of the most complete wireless communications product portfolios that, when coupled with key customer relationships with all major handset manufacturers, positions us well to meet industry needs.
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SKYWORKS PRODUCT PORTFOLIOOVERVIEW
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| Mobile Platforms | | Linear Products |
CDMA RF SubsystemsPower Amplifiers | | Amplifiers |
| | DCR™ Transceivers | | Attenuators |
| | GPRS RF Subsystems | | Chip Capacitors |
| | GSM/GPRS/EDGE Power Amplifiers | | Attenuators |
| Helios™ Radio Solutions | | Diodes |
| | Helios™ DigRF SubsystemIntera™ EDGE/WEDGE Front-End Modules | | Directional Couplers/Detectors |
| | Helios™ EDGE RF Subsystems | | Hybrids |
| | Intera™ Front-End ModulesTD-SCDMA Power Amplifiers | | Infrastructure RF Subsystems |
| WCDMA Power Amplifiers | | Lynx™ EDGE System Platforms | | Phase ShiftersMixers/Demodulators |
| | Pegasus™ GPRS System Platforms | | WiMax Power Dividers/Combiners |
| | PHS System Solutions | | Receivers |
| | SPR™ SolutionsAmplifiers and Front-End Modules | | Switches |
| | | TD-SCDMA Power Amplifiers | | Synthesizers/Synthesizers / PLLs |
| | | WCDMA/CDMA Power Amplifiers | | Technical Ceramics |
| | WCDMA FEMs | | Transmitters |
| | WCDMA Transceivers | | WLAN Front-End Modules |
Mobile Platforms:
| • | | DCR Transceiver (Tx/Rx):encompasses the complete RF transmit and receive functions. |
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| | • | | Front-End Modules (FEM): power amplifiers that are integrated with switches, diplexers, filters and other components to create a single package front-end solution.solution |
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| | • | | Power Amplifiers (PA): the module that strengthens the signal so that it has sufficient energy to reach a base station.station |
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| | • | | RF Subsystems/Single PackageHelios™ Radio (SPR™) Solution:Solutions:combines the transceiver, the PA and associated controller, surface acoustic wave (SAW) filters, and a switchplexer into a single, multi chip module (MCM) package. |
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| • | | System Platforms:incorporates all RF devices referenced above, as well as baseband processors that handle mixed-signal functions (converting analog signals to digital) and ARM/DSP digital devices that act as the central processor.package |
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Linear Products:
| | • | | Attenuators:A circuit that allows a known source of power to be reduced by a predetermined factor (usually expressed as decibels). |
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| • | | Capacitors:a passive electronic component that stores energy in the form of an electrostatic field. |
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| | • | | Ceramic:material used in semiconductors which contain transition metal oxides that are II-VI semiconductors, such as zinc-oxide.zinc-oxide |
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| | • | | Diodes:semiconductor devices that pass current in one direction only.only |
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| | • | | Directional Coupler:a transmission coupling device for separately sampling the forward or backward wave in a transmission line.line |
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| | • | | Directional Detector:intended for use in power management applications. |
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| • | | Hybrid:monolithic circuitry that is 100% passive and offers low loss, high isolation and phase/amplitude balance. |
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| • | | Phase Shifter:achieves its distinct sound by creating one or more notches in the frequency domain that eliminate sounds at the notch frequencies.applications |
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| | • | | PLL (Phase-Locked Loop):is a closed-loop feedback control system that maintains a generated signal in a fixed phase relationship to a reference signal.signal |
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| | • | | Power Combiner:Switch:used for connecting more than one antenna to a single radio. |
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| • | | Power Divider:passive devices designed to combine multiple antennas in a stacked antenna system, while providing a constant 50 ohm impedance over the bandwidth chosen. |
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| • | | Switch: the component that performs the change between the transmit and receive function, as well as the band function for cellular handsets.handsets |
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| | • | | Synthesizer:designed for tuning systems and is optimized for low phaselow-phase noise with comparison frequencies.frequencies |
We believe we possess a broad technology capability and one of the most complete wireless communications product portfolios in the industry.
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THE SKYWORKS ADVANTAGE
By turning complexity into simplicity, we provide our customers with the following competitive advantages:
• | | Broad multimode radio and precision analog product portfolio |
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• | | Market leadership in key product segments |
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• | | Solutions for all air interface standards, including GSM/GPRS/EDGE, WCDMA, CDMA2000 and WLAN |
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• | | Analog, Radio Frequency (“RF”), mixed signal and digital design capabilities |
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• | | Access to all key process technologies: GaAs HBT, PHEMT, BiCMOS, SiGE, CMOS and RF CMOS |
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• | | World-class manufacturing capabilities and scale |
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• | | Superior level of customer service and technical support |
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• | | Commitment to technology innovation |
Broad front-end module, multimode radio and precision analog product portfolio
Market leadership in key product segments
Solutions for key air interface standards, including CDMA2000, GSM/GPRS/EDGE, WCDMA, WLAN and WiMAX
Engagements with a diverse set of top-tier customers
Analog, RF and mixed signal design capabilities
Access to key process technologies: GaAs HBT, PHEMT, BiCMOS, SiGE, CMOS and RF CMOS
World-class manufacturing capabilities and scale
Higher level of customer service and technical support
Commitment to technology innovation, including leveraging of Skyworks’ broad intellectual property portfolio
MARKETING AND DISTRIBUTION
Our products are primarily sold through a direct Skyworks sales force. This team is globally deployed across all major market regions. In some markets we supplement our direct sales effort with independent manufacturers’ representatives, assuring broader coverage of territories and customers. We also utilize distribution partners, some of which are franchised globally with others focused in specific regional markets (e.g., Europe, North America, China and Taiwan).
We maintain an internal marketing organization that is responsible for developing sales and advertising literature, print media, such as product announcements and catalogs, as well as a variety of Web-based content. Skyworks’ sales engagement begins at the earliest stages in a customer design. We strive to provide close technical collaboration with our customers at the inception of
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a new program. This partnershiprelationship allows our team to facilitate customer-driven solutions, which leverage the unique strength of our product portfolio while providing high value and greatly reducing time-to-market.
We believe that the technical and complex nature of our products and markets demand an extraordinary commitment to closemaintain intimate ongoing relationships with our customers. As such, we strive to expand the scope of our customer relationship to include design, engineering, manufacturing, purchasing and project management. We also employ a collaborative approach in developing these partnershipsrelationships by combining the support of our design teams, applications engineers, manufacturing personnel, sales and marketing staff and senior management.
We believe that maintaining frequent and interactive contact with our customers is paramount to our continuous efforts to provide world-class sales and service support. By listening and responding to feedback, we are able to mobilize actionsresources to raise the level of customer satisfaction, improve our ability to anticipate future product needs, and enhance our understanding of key market dynamics. We are confident that diligence in following this path will position Skyworks to participate in numerous opportunities for growth in the future.
REVENUES FROM AND DEPENDENCE ON CUSTOMERS; CUSTOMER CONCENTRATION
For information regarding customer concentration and revenues from external customers for our reportable segment for each of the last three fiscal years, see Note 1517 of Item 8 of this Annual Report on Form 10-K.
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INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We own or are licensed under numerous United States and foreign patents and patent applications related to our products, our manufacturing operations and processes, and other activities. In addition, we own a number of trademarks and service marks applicable to certain of our products and services. We believe that intellectual property, including patents, patent applications, trade secrets and trademarks are of material importance to our business. We rely on patent, copyright, trademark, trade secret and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our confidential and proprietary technologies, devices, algorithms and processes. We cannot guarantee that these efforts will meaningfully protect our intellectual property, and others may independently develop substantially equivalent proprietary technologies, devices, algorithms or processes. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and effective copyright, patent, trademark and trade secret protection may not be available in those jurisdictions. In addition to protecting our proprietary technologies and processes, we strive to strengthen our intellectual property portfolio to enhance our ability to obtain cross-licenses of intellectual property from others, to obtain access to intellectual property we do not possess and to more favorably resolve potential intellectual property claims against us. Furthermore, in our linear products business, we seek to generate high gross margin revenue through the sale and license of non-core intellectual property, and we on occasion purchase intellectual property to support our core business. Due to rapid technological changes in the industry, we believe that establishing and maintaining a technological leadership position depends primarily on our ability to develop new innovative products through the technical competence of our engineering personnel.
COMPETITIVE CONDITIONS
We compete on the basis of time-to-market, new product innovation, overall product quality and performance, price, compliance with industry standards, strategic relationships with customers, and protection of our intellectual property. Certain competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements, or may be able to devote greater resources to the development, promotion and sale of their products than we can.
Current and potential competitors also have established or may establish financial or strategic relationships among themselves or with our customers, resellers, suppliers or other third parties. These relationships may affect our customers’ purchasing decisions. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. We cannot provide assurances that we willmight not be able to compete successfully against current and potential competitors.
RESEARCH AND DEVELOPMENT
Our products and markets are subject to continued technological advances. Recognizing the importance of such technological advances, we maintain a high level of research and development activities. We maintain close collaborative relationships with many of our customers to help identify market demands and target our development efforts to meet those demands. Our design centers are strategically located around the world to be in close proximity to our customers and to take advantage of key technical and engineering talent worldwide. We are focusing our development efforts on new products, design tools and manufacturing processes using our core technologies. Our research and development expenditures for fiscal 2005, 2004,years ended October 3, 2008, September 28, 2007, and 2003September 29, 2006 were $152.2, $152.6$146.0 million, $126.1 million, and $156.1$164.1 million, respectively.
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RAW MATERIALS
Raw materials for our products and manufacturing processes are generally available from several sources. We do not carry significant inventories and it is our policy not to depend on a sole source of supply unless market or other conditions dictate otherwise. Consequently, there are limited situations where we procure certain components and services for our products from single or limited sources. We purchase materials and services primarily pursuant to individual purchase orders. However, we have a limited number of long-term supply contracts with our suppliers. Certain of our suppliers consign raw materials to us at our manufacturing facilities. We request these raw materials and take title to them as they are needed in our manufacturing process. We believe we have adequate sources for the supply of raw materials and components for our manufacturing needs with suppliers located around the world.
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BACKLOG
Our sales are made primarily pursuant to standard purchase orders for delivery of products, with such purchase orders officially acknowledged by us according to our own terms and conditions. Due to industry practice, which allows customers to cancel orders with limited advance notice to us prior to shipment, and with little or no penalty, we believe that backlog as of any particular date is not a reliable indicator of our future revenue levels. We also deliver product tomaintain Skyworks-owned finished goods inventory at certain external customer “hubs” (consignment) where our significant“hub” locations. We do not recognize revenue until these customers will pullconsume the Skyworks-owned inventory from their existing consignment inventories when required. These consignment pulls trigger revenue recognition and we periodically replenish these inventory levels.hub locations.
ENVIRONMENTAL REGULATIONS
Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes, and other activities affecting the environment have had, and will continue to have, an impact on our manufacturing operations. Thus far, compliance with environmental requirements and resolution of environmental claims hashave been accomplished without material effect on our liquidity and capital resources, competitive position or financial condition.
Most of our European customers have mandated that our products comply with local and regional lead free and other “green” initiatives. We believe that our current expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection, and other expenditures for the resolution of environmental claims, will not have a material adverse effect on our liquidity and capital resources, competitive position or financial condition. We cannot assess the possible effect of compliance with future requirements.
CYCLICALITY/ SEASONALITY
The semiconductor industry is highly cyclical and is characterized by rapid technological change. Product obsolescence, price erosion, evolving technical standards and shortened product life cycles may contribute to wide fluctuations in product supply and demand. These and other factors, together with changes in general economic conditions, may cause significant upturns and downturns in the industry, and in our business. We have experienced periods of industry downturns characterized by diminished product demand, production overcapacity, excess inventory levels and accelerated erosion of average selling prices. These factors may cause substantial fluctuations in our revenues and our operational performance. We have experienced these cyclical fluctuations in our business in the past and may experience cyclical fluctuations in the future.
Sales of our products are also subject to seasonal fluctuation and periods of increased demand in end-user consumer applications, such as mobile handsets. ThisThe highest demand for our mobile handset products generally occurs in the last calendar quarter ending in December. Sales of semiconductor products and system solutions used in theseThe lowest demand for our mobile handset products generally increase just prior to thisoccurs in the first calendar quarter and continue at a higher level through the end of the calendar year.ending in March.
GEOGRAPHIC INFORMATION
For information regarding net revenues by geographic region for each of the last three fiscal years, see Note 1517 of Item 8 of this Annual Report on Form 10-K. Risks attendant to our foreign operations are discussed in Item 1A-Risk Factors.
EMPLOYEES
As of September 30, 2005,October 3, 2008, we employed approximately 4,0003,300 persons. Approximately 800500 of our employees in Mexico are covered by collective bargaining agreements.
ITEM 1A. RISK FACTORS.
You should carefully consider the risks described below in addition to the other information contained in this report before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations, financial condition or results from operations.
We believeoperate in the highly cyclical wireless communications semiconductor industry, which is subject to significant downturns.
We operate primarily in the wireless semiconductor industry, which is cyclical and subject to rapid declines in demand for end-user products in both the consumer and enterprise markets. Recently, deteriorating economic conditions worldwide, together with other factors such as the unprecedented volatility of the financial markets and liquidity concerns, make it difficult for our customers and for us to accurately forecast and plan future success will dependbusiness activities. If such uncertainty and economic weakness continues, the market for wireless semiconductor products is likely to contract and, as a result, our business, financial condition and results of operations for our current fiscal year would likely be materially and adversely affected. Such periods of industry downturn are characterized by diminished product demand, manufacturing overcapacity, excess inventory levels and accelerated erosion of average selling prices. Furthermore, downturns in large part uponthe wireless semiconductor industry may be prolonged and any extended delay or failure of the wireless semiconductor market to recover from an economic downturn would materially and adversely affect our continued ability to attract, motivate, developbusiness, financial condition and retain highly skilled and dedicated employees.results of operations beyond our current fiscal year.
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We have incurred substantial operating losses in the past and may experience future losses.
In the past, weak global economic conditions have led to a slowdown in customer orders, an increase in the number of cancellations and reschedulings of backlog, and higher overhead costs as a percentage of our reduced net revenue. These factors contributed to operating losses for our business in the past. Additionally, we have incurred operating losses in connection with the restructuring of our business; for example, we had operating losses of $66.3 million during fiscal year 2006 in connection with the exit of our baseband product area. While we had positive operating results during fiscal years 2007 and 2008, we may experience future losses as a result of a significant downturn in the economy, as a result of corporate restructuring activities, as a result of market factors beyond our control or as a result of a combination of the foregoing.
Our operating results may be adversely affected by substantial quarterly and annual fluctuations and market downturns.
Our revenues, earnings and other operating results have fluctuated in the past and our revenues, earnings and other operating results may fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control.
These factors include, among others:
| • | | changes in end-user demand for the products (principally cellular handsets) manufactured and sold by our customers, |
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| • | | the effects of competitive pricing pressures, including decreases in average selling prices of our products, |
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| • | | production capacity levels and fluctuations in manufacturing yields, |
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| • | | availability and cost of materials and services from our suppliers, |
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| • | | the gain or loss of significant customers, |
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| • | | our ability to develop, introduce and market new products and technologies on a timely basis, |
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| • | | new product and technology introductions by competitors, |
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| • | | changes in the mix of products produced and sold, |
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| • | | market acceptance of our products and our customers, |
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| • | | our ability to continue to generate revenues by licensing and/or selling non-core intellectual property, and |
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| • | | intellectual property disputes, including those concerning payments associated with the licensing and/or sale of intellectual property. |
The foregoing factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly or annual operating results. If our operating results fail to meet the expectations of analysts or investors, it could materially and adversely affect the price of our common stock.
Our stock price has been volatile and may fluctuate in the future.
The trading price of our common stock has and may continue to fluctuate significantly. Such fluctuations may be influenced by many factors, including:
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| • | | the recent unprecedented volatility of the financial markets, |
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| • | | uncertainty regarding the prospects of the domestic and foreign economies, |
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| • | | our performance and prospects, |
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| • | | the performance and prospects of our major customers, |
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| • | | the depth and liquidity of the market for our common stock, |
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| • | | investor perception of us and the industry in which we operate, |
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| • | | changes in earnings estimates or buy/sell recommendations by analysts, and |
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| • | | domestic and international political conditions. |
Public stock markets have recently experienced extreme price and trading volume volatility. This volatility has significantly and negatively affected the market prices of securities of many technology companies, including the market price of our common stock. These broad market fluctuations may further materially and adversely affect the market price of our common stock in future periods.
In addition, fluctuations in our stock price, volume of shares traded, and changes in our trading multiples may make our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction. Our Company has been, and in the future may be, the subject of commentary by financial news media. Such commentary may contribute to volatility in our stock price. If our operating results do not meet the expectations of securities analysts, the financial news media or investors, our stock price may decline, possibly substantially over a short period of time.
The wireless semiconductor markets are characterized by significant competition which may cause pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.
The wireless communications semiconductor industry in general and the markets in which we compete in particular are very competitive. We compete with U.S. and international semiconductor manufacturers of all sizes in terms of resources and market share, including RF Micro Devices, Anadigics and TriQuint Semiconductor. As we continue to expand in the linear products markets, we will compete with companies in other industries, including Analog Devices, Hittite Microwave, Linear Technology and Maxim Integrated Products.
We currently face significant competition in our markets and expect that intense price and product competition will continue. This competition has resulted in, and is expected to continue to result in, declining average selling prices for our products and increased challenges in maintaining or increasing market share. Furthermore, additional competitors may enter our markets as a result of growth opportunities in communications electronics, the trend toward global expansion by foreign and domestic competitors and technological and public policy changes. We believe that the principal competitive factors for semiconductor suppliers in our markets include, among others:
| • | | rapid time-to-market and product ramp, |
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| • | | timely new product innovation, |
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| • | | product quality, reliability and performance, |
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| • | | product price, |
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| • | | features available in products, |
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| • | | compliance with industry standards, |
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| • | | strategic relationships with customers, |
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| • | | access to and protection of intellectual property, and |
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| • | | maintaining access to raw materials, supplies and services at a competitive cost. |
We might not be able to successfully address these factors. Many of our competitors enjoy the benefit of:
long presence in key markets,
| • | | brand recognition, |
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| • | | high levels of customer satisfaction, |
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| • | | ownership or control of key technology or intellectual property, and |
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| • | | strong financial, sales and marketing, manufacturing, distribution, technical or other resources. |
As a result, certain competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products than we can.
Current and potential competitors have established, or may in the future establish, financial or strategic relationships among themselves or with customers, resellers or other third parties. These relationships may affect customers’ purchasing decisions. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. We cannot assure you that we will be able to compete successfully against current and potential competitors. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.
Our success depends upon our ability to develop new products and reduce costs in a timely manner.
The wireless communications semiconductor industry generally and, in particular, the markets into which we sell our products are highly cyclical and characterized by constant and rapid technological change, continuous product evolution, price erosion, evolving technical standards, short product life cycles, increasing demand for higher levels of integration, increased miniaturization, reduced power consumption and wide fluctuations in product supply and demand. Our operating results depend largely on our ability to continue to cost-effectively introduce new and enhanced products on a timely basis. The successful development and commercialization of semiconductor devices and modules is highly complex and depends on numerous factors, including:
| • | | the ability to anticipate customer and market requirements and changes in technology and industry standards, |
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| • | | the ability to obtain capacity sufficient to meet customer demand, |
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| • | | the ability to define new products that meet customer and market requirements, |
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| • | | the ability to complete development of new products and bring products to market on a timely basis, |
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| • | | the ability to differentiate our products from offerings of our competitors, |
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| • | | overall market acceptance of our products, |
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| • | | the length of time that a particular product is in demand, and |
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| • | | the ability to obtain adequate intellectual property protection for our new products. |
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Our ability to manufacture current products, and to develop new products, depends, among other factors, on the viability and flexibility of our own internal information technology systems, or IT Systems.
We will be required to continually evaluate expenditures for planned product development and to choose among alternative technologies based on our expectations of future market growth. We cannot assure you that we will be able to develop and introduce new or enhanced wireless communications semiconductor products in a timely and cost-effective manner, that our products will satisfy customer requirements or achieve market acceptance or that we will be able to anticipate new industry standards and technological changes. We also cannot assure you that we will be able to respond successfully to new product announcements and introductions by competitors or to changes in the design or specifications of complementary products of third parties with which our products interface. If we fail to rapidly and cost-effectively introduce new and enhanced products in sufficient quantities that meet our customers requirements, our business and results of operations would be materially and adversely harmed.
In addition, prices of many of our products decline, sometimes significantly, over time. We cannot assure you that our products will not become obsolete earlier than planned or have life cycles long enough to allow us to recoup the cost of our investment in designing such products. Accordingly, we believe that to remain competitive, we must continue to reduce the cost of producing and delivering existing products at the same time that we develop and introduce new or enhanced products. We cannot assure you that we will be able to continue to reduce the cost of our products to remain competitive.
If OEMs and Original Design Manufacturers, or ODMs, of communications electronics products do not design our products into their equipment, we will have difficulty selling those products. Moreover, a “design win” from a customer does not guarantee future sales to that customer.
Our products are not sold directly to the end-user, but are components or subsystems of other products. As a result, we rely on OEMs and ODMs of wireless communications electronics products to select our products from among alternative offerings to be designed into their equipment. Without these “design wins,” we would have difficulty selling our products. If a manufacturer designs another supplier’s product into one of its product platforms, it is more difficult for us to achieve future design wins with that platform because changing suppliers involves significant cost, time, effort and risk on the part of that manufacturer. Also, achieving a design win with a customer does not ensure that we will receive significant revenues from that customer. Even after a design win, the customer is not obligated to purchase our products and can choose at any time to reduce or cease use of our products, for example, if its own products are not commercially successful, or for any other reason. We cannot assure you that we will continue to achieve design wins or to convert design wins into actual sales, and any failure to do so could materially and adversely affect our operating results.
Our manufacturing processes are extremely complex and specialized and disruptions could have a material adverse effect on our business, financial condition and results of operations.
Our manufacturing operations are complex and subject to disruption, including for causes beyond our control. The fabrication of integrated circuits is an extremely complex and precise process consisting of hundreds of separate steps. It requires production in a highly controlled, clean environment. Minor impurities, contamination of the clean room environment, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer, defects in equipment or materials, human error, or a number of other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to malfunction. Because our operating results are highly dependent upon our ability to produce integrated circuits at acceptable manufacturing yields, these factors could have a material adverse affect on our business. In addition, although we invest significant resources in the testing of our products, we may discover from time to time defects in our products after they have been shipped, and we may be required to incur additional development and remediation costs, pursuant to warranty and indemnification provisions in our customer contracts and purchase orders. The potential liabilities associated with these, and similar, provisions in certain of our customer contracts are capped at significant amounts, or are uncapped. These problems may divert our technical and other resources from other product development efforts and could result in claims against us by our customers or others, including liability for costs associated with product recalls, or other
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obligations under customer contracts, which may adversely impact our operating results. If any of our products contain defects, or have reliability, quality or compatibility problems, our reputation may be damaged, which could make it more difficult for us to sell our products to existing and prospective customers and could adversely affect our operating results.
Additionally, our operations may be affected by lengthy or recurring disruptions of operations at any of our production facilities or those of our subcontractors. These disruptions may result from electrical power outages, fire, earthquake, flooding, war, acts of terrorism, health advisories or risks, or other natural or manmade disasters, as well as equipment maintenance, repairs and/or upgrades such as the conversion to a 6” wafer manufacturing line currently in process at our Newbury Park, California facility. Disruptions of our manufacturing operations could cause significant delays in shipments until we are able to shift the products from an affected facility or subcontractor to another facility or subcontractor. In the event of such delays, we cannot assure you that the required alternative capacity, particularly wafer production capacity, would be available on a timely basis or at all. Even if alternative wafer production or assembly and test capacity is available, we may not be able to obtain it on favorable terms, which could result in higher costs and/or a loss of customers. We may be unable to obtain sufficient manufacturing capacity to meet demand, either at our own facilities or through external manufacturing or similar arrangements with others.
Due to the highly specialized nature of the gallium arsenide integrated circuit manufacturing process, in the event of a disruption at the Newbury Park, California or Woburn, Massachusetts semiconductor wafer fabrication facilities for any reason, alternative gallium arsenide production capacity would not be immediately available from third-party sources. These disruptions could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to maintain and improve manufacturing yields that contribute positively to our gross margin and profitability.
Minor deviations or perturbations in the manufacturing process can cause substantial manufacturing yield loss, and in some cases, cause production to be suspended. Manufacturing yields for new products initially tend to be lower as we complete product development and commence volume manufacturing, and typically increase as we bring the product to full production. Our forward product pricing includes this assumption of improving manufacturing yields and, as a result, material variances between projected and actual manufacturing yields will have a direct effect on our gross margin and profitability. The difficulty of accurately forecasting manufacturing yields and maintaining cost competitiveness through improving manufacturing yields will continue to be magnified by the increasing process complexity of manufacturing semiconductor products. Our manufacturing operations will also face pressures arising from the compression of product life cycles, which will require us to manufacture new products faster and for shorter periods while maintaining acceptable manufacturing yields and quality without, in many cases, reaching the longer-term, high-volume manufacturing conducive to higher manufacturing yields and declining costs.
We are dependent upon third parties for the manufacture, assembly and test of our products.
We rely upon independent wafer fabrication facilities, called foundries, to provide silicon-based products and to supplement our gallium arsenide wafer manufacturing capacity. There are significant risks associated with reliance on third-party foundries, including:
| • | | the lack of wafer supply, potential wafer shortages and higher wafer prices, |
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| • | | limited control over delivery schedules, manufacturing yields, production costs and quality assurance, and |
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| • | | the inaccessibility of, or delays in obtaining access to, key process technologies. |
Although we have long-term supply arrangements to obtain additional external manufacturing capacity, the third-party foundries we use may allocate their limited capacity to the production requirements of other customers. If we choose to use a new foundry, it will typically take an extended period of time to complete the qualification process before we can begin shipping products from the new foundry. The foundries may experience financial difficulties, be unable to deliver products to us in a timely manner or suffer damage or destruction to their facilities, particularly
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since some of them are located in earthquake zones. If any disruption of manufacturing capacity occurs, we may not have alternative manufacturing sources immediately available. We may therefore experience difficulties or delays in securing an adequate supply of our products, which could impair our ability to meet our customers’ needs and have a material adverse effect on our operating results.
Although we own and operate a test and assembly facility, we still depend on subcontractors to package, assemble and test certain of our products at cost-competitive rates. We do not have long-term agreements with any of our assembly or test subcontractors and typically procure services from these suppliers on a per order basis. If any of these subcontractors experiences capacity constraints or financial difficulties, suffers any damage to its facilities, experiences power outages or any other disruption of assembly or testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner and/or at cost-competitive rates. Due to the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our components. Any problems that we may encounter with the delivery, quality or cost of our products could damage our customer relationships and materially and adversely affect our results of operations. We are continuing to develop relationships with additional third-party subcontractors to assemble and test our products. However, even if we use these new subcontractors, we will continue to be subject to all of the risks described above.
We are dependent upon third parties for the supply of raw materials and components.
Our manufacturing operations depend on obtaining adequate supplies of raw materials and the components used in our manufacturing processes at a competitive cost. Although we maintain relationships with suppliers located around the world with the objective of ensuring that we have adequate sources for the supply of raw materials and components for our manufacturing needs, increases in demand from the semiconductor industry for such raw materials and components can result in tighter supplies. We cannot assure you that our suppliers will be able to meet our delivery schedules, that we will not lose a significant or sole supplier, that a supplier will be able to meet performance and quality specifications or that we will be able to purchase such supplies or material at a competitive cost. If a supplier were unable to meet our delivery schedules, or if we lost a supplier or a supplier were unable to meet performance or quality specifications, our ability to satisfy customer obligations would be materially and adversely affected. In addition, we review our relationships with suppliers of raw materials and components for our manufacturing needs on an ongoing basis. In connection with our ongoing review, we may modify or terminate our relationship with one or more suppliers. We may also enter into other sole supplier arrangements to meet certain of our raw material or component needs. While we do not typically rely on a single source of supply for our raw materials, we are currently dependent on a sole-source supplier for epitaxial wafers used in the gallium arsenide semiconductor manufacturing processes at our manufacturing facilities. If we were to lose this sole source of supply, for any reason, a material adverse effect on our business could result until an alternate source is obtained. To the extent we enter into additional sole supplier arrangements for any of our raw materials or components, the risks associated with our supply arrangements would be exacerbated.
Our reliance on a small number of customers for a large portion of our sales could have a material adverse effect on the results of our operations.
Significant portions of our sales are concentrated among a limited number of customers. If we lost one or more of these major customers, or if one or more major customers significantly decreased its orders for our products, our business could be materially and adversely affected. Sales to our three largest OEM customers in fiscal 2008, Sony Ericsson Mobile Communication AB (SEMC), Samsung, and Asian Information Technology, Inc. (AIT), including sales to their manufacturing subcontractors (in the case of SEMC and Samsung), represented approximately 40% of our net revenues for fiscal 2008.
If we are unable to attract and retain qualified personnel to contribute to the design, development, manufacture and sale of our products, we may not be able to effectively operate our business.
As the source of our technological and product innovations, our key technical personnel represent a significant asset. Our success depends on our ability to continue to attract, retain and motivate qualified personnel, including executive officers and other key management and technical personnel. The competition for management and technical personnel is intense in the semiconductor industry, and therefore we cannot assure
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you that we will be able to attract and retain qualified management and other personnel necessary for the design, development, manufacture and sale of our products. We may have particular difficulty attracting and retaining key personnel during periods of poor operating performance and/or declines in the price of our common stock given, among other things, the use of equity-based compensation by us and our competitors. The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel, could have a material adverse effect on our ability to operate our business.
Lengthy product development and sales cycles associated with many of our products may result in significant expenditures before generating any revenues related to those products.
After our product has been developed, tested and manufactured, our customers may need three to six months or longer to integrate, test and evaluate our product and an additional three to six months or more to begin volume production of equipment that incorporates the product. This lengthy cycle time increases the possibility that a customer may decide to cancel or change product plans, which could reduce or eliminate our sales to that customer. As a result of this lengthy sales cycle, we may incur significant research and development expenses, and selling, general and administrative expenses, before we generate the related revenues for these products. Furthermore, we may never generate the anticipated revenues from a product after incurring such expenses if our customer cancels or changes its product plans.
Uncertainties involving the ordering and shipment of, and payment for, our products could adversely affect our business.
Our sales are typically made pursuant to individual purchase orders and not under long-term supply arrangements with our customers. Our customers may cancel orders before shipment. Additionally, we sell a portion of our products through distributors, some of whom have rights to return unsold products if the product is defective. We may purchase and manufacture inventory based on estimates of customer demand for our products, which is difficult to predict. This difficulty may be compounded when we sell to OEMs indirectly through distributors or contract manufacturers, or both, as our forecasts of demand will then be based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously sold products, or overproduction due to a change in anticipated order volumes could result in us holding excess or obsolete inventory, which could result in inventory write-downs and, in turn, could have a material adverse effect on our financial condition.
In addition, if a customer encounters financial difficulties of its own as a result of a change in demand or for any other reason, the customer’s ability to make timely payments to us for non-returnable products could be impaired.
We may be subject to claims of infringement of third-party intellectual property rights, or demands that we license third-party technology, which could result in significant expense and prevent us from using our technology.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their technology or refrain from using it.
Any litigation to determine the validity of claims that our products infringe or may infringe intellectual property rights of another, including claims arising from our contractual indemnification of our customers, regardless of their merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. Regardless of the merits of any specific claim, we cannot assure you that we would prevail in litigation because of the complex technical issues and inherent uncertainties in intellectual property litigation. If litigation were to result in an adverse ruling, we could be required to:
| • | | pay substantial damages, |
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| • | | cease the manufacture, import, use, sale or offer for sale of infringing products or processes, |
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| • | | discontinue the use of infringing technology, |
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| • | | expend significant resources to develop non-infringing technology, and |
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| • | | license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms. |
We cannot assure you that our operating results or financial condition will not be materially adversely affected if we, or one of our customers, were required to do any one or more of the foregoing items.
In addition, if another supplier to one of our customers, or a customer of ours itself, were found to be infringing upon the intellectual property rights of a third party, the supplier or customer could be ordered to cease the manufacture, import, use, sale or offer for sale of its infringing product(s) or process (es), either of which could result, indirectly, in a decrease in demand from our customers for our products. If such a decrease in demand for our products were to occur, it could have an adverse impact on our operating results.
Many of our products incorporate technology licensed or acquired from third parties. If licenses to such technology are not available on commercially reasonable terms and conditions, our business could be adversely affected.
We sell products in markets that are characterized by rapid technological changes, evolving industry standards, frequent new product introductions, short product life cycles and increasing levels of integration. Our ability to keep pace with this market depends on our ability to obtain technology from third parties on commercially reasonable terms to allow our products to remain competitive. If licenses to such technology are not available on commercially reasonable terms and conditions, and we cannot otherwise integrate such technology, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. In such instances, we could also incur substantial unanticipated costs or scheduling delays to develop substitute technology to deliver competitive products.
If we are not successful in protecting our intellectual property rights, it may harm our ability to compete.
We rely on patent, copyright, trademark, trade secret and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary technologies, information, data, devices, algorithms and processes. In addition, we often incorporate the intellectual property of our customers, suppliers or other third parties into our designs, and we have obligations with respect to the non-use and non-disclosure of such third-party intellectual property. In the future, it may be necessary to engage in litigation or like activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. This could require us to expend significant resources and to divert the efforts and attention of our management and technical personnel from our business operations. We cannot assure you that:
| • | | the steps we take to prevent misappropriation, infringement, dilution or other violation of our intellectual property or the intellectual property of our customers, suppliers or other third parties will be successful, |
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| • | | any existing or future patents, copyrights, trademarks, trade secrets or other intellectual property rights or ours will not be challenged, invalidated or circumvented, or |
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| • | | any of the measures described above would provide meaningful protection. |
Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, develop similar technology independently or design around our patents. If any of our intellectual property protection mechanisms fails to protect our technology, it would make it easier for our competitors to offer similar products, potentially resulting in loss of market share and price erosion. Even if we receive a patent, the patent claims may not be broad enough to adequately protect our technology. Furthermore, even if we receive patent protection in the United States, we may not seek, or may not be granted, patent protection in foreign countries. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for certain technologies and in certain foreign countries.
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We attempt to control access to and distribution of our proprietary information through operational, technological and legal safeguards. Despite our efforts, parties, including former or current employees, may attempt to copy, disclose or obtain access to our information without our authorization. Furthermore, attempts by computer hackers to gain unauthorized access to our systems or information could result in our proprietary information being compromised or interrupt our operations. While we attempt to prevent such unauthorized access we may be unable to anticipate the methods used, or be unable to prevent the release of our proprietary information.
We are subject to the risks of doing business internationally.
A substantial majority of our net revenues are derived from customers located outside the United States, primarily in countries located in the Asia-Pacific region and Europe. In addition, we have suppliers located outside the United States, and third-party packaging, assembly and test facilities and foundries located in the Asia-Pacific region. Finally, we have our own packaging, assembly and test facility in Mexicali, Mexico. Our international sales and operations are subject to a number of risks inherent in selling and operating abroad. These include, but are not limited to, risks regarding:
| • | | currency exchange rate fluctuations, |
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| • | | local economic and political conditions, including social, economic and political instability, |
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| • | | disruptions of capital and trading markets, |
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| • | | inability to collect accounts receivable, |
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| • | | restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including export duties, quotas, customs duties, increased import or export controls and tariffs), |
| • | | changes in, or non-compliance with, legal or regulatory import/export requirements, |
|
| • | | natural disasters, acts of terrorism, widespread illness and war, |
|
| • | | limitations on the repatriation of funds, |
|
| • | | difficulty in obtaining distribution and support, |
|
| • | | cultural differences in the conduct of business, |
| • | | the laws and policies of the United States and other countries affecting trade, foreign investment and loans, and import or export licensing requirements, |
|
| • | | tax laws, |
|
| • | | the possibility of being exposed to legal proceedings in a foreign jurisdiction, and |
|
| • | | limitations on our ability under local laws to protect or enforce our intellectual property rights in a particular foreign jurisdiction. |
Additionally, we are subject to risks in certain global markets in which wireless operators provide subsidies on handset sales to their customers. Increases in handset prices that negatively impact handset sales can result from changes in regulatory policies or other factors, which could impact the demand for our products. Limitations or changes in policy on phone subsidies in South Korea, Japan, China and other countries may have additional negative impacts on our revenues.
21
We face a risk that capital needed for our business will not be available when we need it.
To the extent that our existing cash and cash equivalents and cash generated from operations are insufficient to fund our future activities or repay debt when it becomes due, we may need to raise additional funds through public or private equity or debt financing. If unfavorable capital market conditions exist if and when we were to seek additional financing, we may not be able to raise sufficient capital on favorable terms and on a timely basis (if at all). Failure to obtain capital when required by our business circumstances would have a material adverse effect on us.
In addition, any strategic investments and acquisitions that we may make to help us grow our business may require additional capital resources. We cannot assure you that the capital required to fund these investments and acquisitions will be available in the future.
Our leverage and our debt service obligations may adversely affect our cash flow.
On October 3, 2008, we had total indebtedness of approximately $187.6 million, which represented approximately 17.3% of our total capitalization. After the close of fiscal year 2008, we retired $40.5 million in aggregate principal amount of our 1.25% and 1.50% convertible notes. Although our cash and cash equivalents balance currently exceeds our total indebtedness, we have long term debt obligations that mature in 2010 and 2012, and we may require additional financing prior to such dates in order to allow us to sufficiently fund our research and development, capital expenditures, acquisitions, working capital and other cash requirements, particularly if our short-term revolving credit facility were not renewed.
Our indebtedness could have significant negative consequences, including:
| • | | increasing our vulnerability to general adverse economic and industry conditions, |
|
| • | | limiting our ability to obtain additional financing, |
|
| • | | requiring the dedication of a portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, |
|
| • | | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete, and |
|
| • | | placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources. |
Despite our current debt levels, we believe we are able to incur substantially more debt, which would increase the risks described above.
Accounting Rule Changes for Certain Convertible Debt Instruments Will Alter Trends Established in Previous Periods
In May, 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement). This FSP alters the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. Specifically, it will significantly increase the non-cash interest expense associated with our existing 1.25% and 1.50% convertible notes, and previously held 4.75% convertible notes including interest expense in prior periods. The exact impact of this proposal to the Company’s financial statements is currently being evaluated. The Company is not required to adopt FSP APB 14-1 until the first quarter of fiscal 2010.
22
Remaining competitive in the semiconductor industry requires transitioning to smaller geometry process technologies and achieving higher levels of design integration.
In order to remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller geometries. This transition requires us to modify the manufacturing processes for our products, design new products to more stringent standards, and to redesign some existing products. In the past, we have experienced some difficulties migrating to smaller geometry process technologies or new manufacturing processes, which resulted in sub-optimal manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes in the future. In some instances, we depend on our relationships with our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to maintain our foundry relationships. If our foundries or we experience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operations could be materially and adversely affected. As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, or at all.
Increasingly stringent environmental laws, rules and regulations may require us to redesign our existing products and processes, and could adversely affect our ability to cost-effectively produce our products.
The electronics industry has been subject to increasing environmental regulations. A number of domestic and foreign jurisdictions seek to restrict the use of various substances, a number of which have been used in our products or processes. For example, the European Union Restriction of Hazardous Substances in Electrical and Electronic Equipment (RoHS) Directive now requires that certain substances be removed from all electronics components. Removing such substances requires the expenditure of additional research and development funds to seek alternative substances, as well as increased testing by third parties to ensure the quality of our products and compliance with the RoHS Directive. While we have implemented a compliance program to ensure our product offering meets these regulations, there may be instances where alternative substances will not be available or commercially feasible, or may only be available from a single source, or may be significantly more expensive than their restricted counterparts. Additionally, if we were found to be non-compliant with any such rule or regulation, we could be subject to fines, penalties and/or restrictions imposed by government agencies that could adversely affect our operating results.
We may be liable for penalties under environmental laws, rules and regulations, which could adversely impact our business.
We have used, and will continue to use, a variety of chemicals and compounds in manufacturing operations and have been and will continue to be subject to a wide range of environmental protection regulations in the United States and in foreign countries. We cannot assure you that current or future regulation of the materials necessary for our products would not have a material adverse effect on our business, financial condition and results of operations. Environmental regulations often require parties to fund remedial action for violations of such regulations regardless of fault. Consequently, it is often difficult to estimate the future impact of environmental matters, including potential liabilities. Furthermore, our customers increasingly require warranties or indemnity relating to compliance with environmental regulations. We cannot assure you that the amount of expense and capital expenditures that might be required to satisfy environmental liabilities, to complete remedial actions and to continue to comply with applicable environmental laws will not have a material adverse effect on our business, financial condition and results of operations.
Our gallium arsenide semiconductors may cease to be competitive with silicon alternatives.
Among our product portfolio, we manufacture and sell gallium arsenide semiconductor devices and components, principally power amplifiers and switches. The production of gallium arsenide integrated circuits is more costly than the production of silicon circuits. The cost differential is due to higher costs of raw materials for gallium arsenide and higher unit costs associated with smaller sized wafers and lower production volumes. Therefore, to remain
23
competitive, we must offer gallium arsenide products that provide superior performance over their silicon-based counterparts. If we do not continue to offer products that provide sufficiently superior performance to justify the cost differential, our operating results may be materially and adversely affected. We expect the costs of producing gallium arsenide devices will continue to exceed the costs of producing their silicon counterparts. Silicon semiconductor technologies are widely used process technologies for certain integrated circuits and these technologies continue to improve in performance. We cannot assure you that we will continue to identify products and markets that require performance attributes of gallium arsenide solutions.
To be successful we may need to effect investments, alliances and acquisitions, and to integrate companies we acquire.
Although we have invested in the past, and intend to continue to invest, significant resources in internal research and development activities, the complexity and rapidity of technological changes and the significant expense of internal research and development make it impractical for us to pursue development of all technological solutions on our own. On an ongoing basis, we review investment, alliance and acquisition prospects that would complement our product offerings, augment our market coverage or enhance our technological capabilities. However, we cannot assure you that we will be able to identify and consummate suitable investment, alliance or acquisition transactions in the future. Moreover, if we consummate such transactions, they could result in:
| • | | issuances of equity securities dilutive to our stockholders, |
|
| • | | large, one-time write-offs, |
|
| • | | the incurrence of substantial debt and assumption of unknown liabilities, |
|
| • | | the potential loss of key employees from the acquired company, |
|
| • | | amortization expenses related to intangible assets, and |
|
| • | | the diversion of management’s attention from other business concerns. |
Moreover, integrating acquired organizations and their products and services may be difficult, expensive, time-consuming and a strain on our resources and our relationship with employees and customers and ultimately may not be successful. Additionally, in periods following an acquisition, we will be required to evaluate goodwill and acquisition-related intangible assets for impairment. When such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings.
Certain provisions in our organizational documents and Delaware law may make it difficult for someone to acquire control of us.
We have certain anti-takeover measures that may affect our common stock. Our certificate of incorporation, our by-laws and the Delaware General Corporation Law contain several provisions that would make more difficult an acquisition of control of us in a transaction not approved by our Board of Directors. Our certificate of incorporation and by-laws include provisions such as:
| • | | the division of our Board of Directors into three classes to be elected on a staggered basis, one class each year, |
|
| • | | the ability of our Board of Directors to issue shares of preferred stock in one or more series without further authorization of stockholders, |
|
| • | | a prohibition on stockholder action by written consent, |
|
| • | | elimination of the right of stockholders to call a special meeting of stockholders, |
24
| • | | a requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders, |
|
| • | | a requirement that the affirmative vote of at least 66 2/3 percent of our shares be obtained to amend or repeal any provision of our by-laws or the provision of our certificate of incorporation relating to amendments to our by-laws, |
|
| • | | a requirement that the affirmative vote of at least 80% of our shares be obtained to amend or repeal the provisions of our certificate of incorporation relating to the election and removal of directors, the classified board or the right to act by written consent, |
|
| • | | a requirement that the affirmative vote of at least 80% of our shares be obtained for business combinations unless approved by a majority of the members of the Board of Directors and, in the event that the other party to the business combination is the beneficial owner of 5% or more of our shares, a majority of the members of Board of Directors in office prior to the time such other party became the beneficial owner of 5% or more of our shares, |
|
| • | | a fair price provision, and |
|
| • | | a requirement that the affirmative vote of at least 90% of our shares be obtained to amend or repeal the fair price provision. |
In addition to the provisions in our certificate of incorporation and by-laws, Section 203 of the Delaware General Corporation Law generally provides that a corporation shall not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder, unless a majority of the directors then in office approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder or specified stockholder approval requirements are met.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We ownare headquartered in Woburn, Massachusetts and lease manufacturing facilities and other real estate propertieshave executive offices in the United States and a number of foreign countries.Irvine, California. For information regarding property, plant and equipment by geographic region for each of the last two fiscal years, see Note 1517 of Item 8 of this Annual Report on Form 10-K. We own and lease approximately 885,000 square feet and 59,000 square feet, respectively, of office and manufacturing space. In addition, we lease approximately 405,000 square feet of sales office and design center space with approximately 23% of this space located in foreign countries. We are headquartered in Woburn, Massachusetts and have executive offices in Irvine, California. The following table sets forth our principal facilities measuring 50,000 square feet or more:facilities:
| | | | | | | | |
| Location | | Owned/Leased | | Square Footage | | Primary Function |
| Woburn, Massachusetts | | Owned | | 158,000 | | | Corporate headquarters and manufacturing |
| Irvine, California | | Leased | | 144,200 | | | Office space and design center |
| Newbury Park, California | | Owned | | 111,600 | | | Manufacturing and office space |
| Newbury Park, California | | Leased | | 108,400 | | | Design center |
| Adamstown, Maryland | | Owned | | 146,100 | | | Manufacturing and office space |
| Cedar Rapids, Iowa | | Leased | | 28,500 | | | Design center |
| Mexicali, Mexico | | Owned | | 380,000 | | | Assembly and test facility |
Haverhill, Massachusetts | | Owned | | Vacant – building and land (under contract) |
We believe our properties have been well maintained, are in sound operating condition and contain all the equipment and facilities necessary to operate at present levels.
Certain of our facilities, including our California and Mexico facilities, are located near major earthquake fault lines. We maintain no earthquake insurance with respect to these facilities.
In fiscal 2003, we relocated our operations from our Haverhill, Massachusetts facility to our Woburn, Massachusetts, and Mexicali, Mexico facilities. In March 2004, we entered into a contractual arrangement for the sale of the property, contingent upon obtaining specific regulatory approvals. As of September 30, 2005, the prospective buyer had received a portion of these regulatory approvals and anticipates receiving the remaining regulatory approval in 2006. If the prospective buyer does not receive all regulatory approvals by June 30, 2006, the prospective buyer has the option of terminating the original contract. Alternatively, the prospective buyer can renegotiate or extend the original contract with our approval.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, various lawsuits, claims and proceedings have been, and may in the future be, instituted or asserted against Skyworks,the Company, including those pertaining to patent infringement, intellectual property, environmental, product liability, safety and health, employment and contractual matters.
Additionally, the semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark and
25
other intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their technology. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to Skyworks.the Company. Intellectual property disputes often have a risk of injunctive relief, which, if imposed against Skyworks,the Company, could materially and adversely affect the Company’s financial condition, or results of operationsoperations.
From time to time we are a party in legal proceedings in the ordinary course of Skyworks.business. We believe that there is no such ordinary course litigation pending that will have, individually or in the aggregate, a material adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the quarter ended September 30, 2005.October 3, 2008.
1126
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the NASDAQ NationalGlobal Select Market under the symbol “SWKS”. The following table sets forth the range of high and low sale prices for our common stock for the periods indicated, as reported by the NASDAQ NationalGlobal Select Market. The number of stockholders of record of Skyworks’ common stock as of December 8, 2005,November 24, 2008, was approximately 34,860.30,915.
| | | | | | | | | | | | | | | | | |
| | | High | | Low | | | High | | Low |
| Fiscal year ended September 30, 2005: | | |
Fiscal year ended October 3, 2008: | | |
| | | |
| First quarter | | $ | 10.91 | | $ | 8.74 | | | $ | 9.36 | | $ | 8.01 | |
| Second quarter | | 8.99 | | 6.07 | | | 9.03 | | 6.71 | |
| Third quarter | | 7.94 | | 5.07 | | | 11.20 | | 7.28 | |
| Fourth quarter | | 8.38 | | 6.67 | | | 10.85 | | 7.47 | |
| | | |
Fiscal year ended October 1, 2004: | | |
Fiscal year ended September 28, 2007: | | |
| | | |
| First quarter | | $ | 11.25 | | $ | 7.40 | | | $ | 7.86 | | $ | 5.06 | |
| Second quarter | | 12.45 | | 9.13 | | | 7.48 | | 5.67 | |
| Third quarter | | 12.68 | | 7.98 | | | 7.47 | | 5.69 | |
| Fourth quarter | | 10.04 | | 6.98 | | | 9.44 | | 6.93 | |
|
Neither Skyworks nor its corporate predecessor, Alpha, havehas not paid cash dividends on its common stock since an Alpha dividend made in fiscal 1986, and Skyworks doeswe do not anticipate paying cash dividends in the foreseeable future. Our expectation is to retain all of our future earnings, if any, to finance future growth.
ForThe following table provides information regarding securities authorized for issuance under equity compensation plans, see Item 12repurchases of this Annual Report on Form 10-K.common stock made by us during the fiscal quarter ended October 3, 2008:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Maximum Number |
| | | | | | | | | | | | | | | (or Approximately |
| | | | | | | | | | | Total Number of | | Dollar Value) of |
| | | | | | | | | | | Shares Purchased | | Shares that May |
| | | | | | | | | | | as Part of Publicly | | Yet Be Purchased |
| | | Total Number of | | Averaged Price | | Announced Plans | | Under the Plans or |
| Period | | Shares Purchased | | Paid per Share | | or Programs | | Programs |
| August 4, 2008 | | | 894 | (1) | | $ | 9.17 | | | | N/A | (2) | | | N/A | (2) |
| August 20, 2008 | | | 1,985 | (1) | | $ | 9.30 | | | | N/A | (2) | | | N/A | (2) |
| August 21, 2008 | | | 281 | (1) | | $ | 9.12 | | | | N/A | (2) | | | N/A | (2) |
| September 18, 2008 | | | 3,579 | (1) | | $ | 8.45 | | | | N/A | (2) | | | N/A | (2) |
| September 29, 2008 | | | 34,508 | (1) | | $ | 8.04 | | | | N/A | (2) | | | N/A | (2) |
| | |
| (1) | | All shares of common stock reported in the table above were repurchased by Skyworks at the fair market value of the common stock on August 4, 2008, August 20, 2008, August 21, 2008, September 18, 2008, and September 29, 2008, respectively, in connection with the satisfaction of tax withholding obligations under restricted stock agreements between Skyworks and certain of its key employees. |
|
| (2) | | Skyworks has no publicly announced plans or programs. |
27
ITEM 6. SELECTED FINANCIAL DATA.
You should read the data set forth below in conjunction with Item 7, “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. OurThe Company’s fiscal year ends on the Friday closest to September 30. Fiscal 20032008 consisted of 53 weeks and ended on October 3, 2003,2008, and fiscal years 20052007 and 20042006 each consisted of 52 weeks and ended on September 30, 2005,28, 2007 and October 1, 2004,September 29, 2006, respectively. For convenience, the consolidated financial statements have been shown as ending on the last day of the calendar month. The following balance sheet data and statements of operations data for the five years ended September 30, 2005,October 3, 2008 were derived from our audited consolidated financial statements. Consolidated balance sheets at October 3, 2008 and at September 30, 2005, and 2004,28, 2007, and the related consolidated statements of operations and of cash flows for each of the three years in the period ended September 30, 2005,October 3, 2008, and notes thereto appear elsewhere in this Annual Report on Form 10-K.
Because the Merger was accounted for as a reverse acquisition, a purchase of Alpha by Washington/Mexicali, the historical financial statements of Washington/Mexicali became the historical financial statements of Skyworks after the Merger. The historical information provided below does not include the historical financial results of Alpha for periods prior to June 26,
12
2002, the date the Merger was consummated. The historical financial information may not be indicative of our future performance and does not reflect what the results of operations and financial position prior to the Merger would have been had Washington/Mexicali operated independently of Conexant during the periods presented prior to the Merger or had the results of Alpha been combined with those of Washington/Mexicali during the periods presented prior to the Merger.| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | |
| (In thousands except per share data) | | 2008 (6) | | | 2007 (6) | | | 2006 (6) | | | 2005 | | | 2004 | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 860,017 | | | $ | 741,744 | | | $ | 773,750 | | | $ | 792,371 | | | $ | 784,023 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cost of goods sold (1) | | | 517,054 | | | | 454,359 | | | | 511,071 | | | | 484,599 | | | | 470,807 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 342,963 | | | | 287,385 | | | | 262,679 | | | | 307,772 | | | | 313,216 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Research and development | | | 146,013 | | | | 126,075 | | | | 164,106 | | | | 152,215 | | | | 152,633 | |
| | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative (2) | | | 100,007 | | | | 94,950 | | | | 135,801 | | | | 103,070 | | | | 97,522 | |
| | | | | | | | | | | | | | | | | | | | | |
| Amortization of intangible assets (3) | | | 6,005 | | | | 2,144 | | | | 2,144 | | | | 2,354 | | | | 3,043 | |
| | | | | | | | | | | | | | | | | | | | | |
| Restructuring and special charges (4) | | | 567 | | | | 5,730 | | | | 26,955 | | | | — | | | | 17,366 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 252,592 | | | | 228,899 | | | | 329,006 | | | | 257,639 | | | | 270,564 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | 90,371 | | | | 58,486 | | | | (66,327 | ) | | | 50,133 | | | | 42,652 | |
| | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | (7,330 | ) | | | (12,026 | ) | | | (14,797 | ) | | | (14,597 | ) | | | (17,947 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Loss on early retirement of convertible debt (5) | | | (6,836 | ) | | | (564 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Other income, net | | | 5,983 | | | | 10,874 | | | | 8,350 | | | | 5,453 | | | | 1,691 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 82,188 | | | | 56,770 | | | | (72,774 | ) | | | 40,989 | | | | 26,396 | |
| | | | | | | | | | | | | | | | | | | | | |
| Provision (benefit) for income taxes (7) | | | (28,818 | ) | | | (880 | ) | | | 15,378 | | | | 15,378 | | | | 3,984 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 111,006 | | | $ | 57,650 | | | $ | (88,152 | ) | | $ | 25,611 | | | $ | 22,412 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Per share information: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss), basic | | $ | 0.69 | | | $ | 0.36 | | | $ | (0.55 | ) | | $ | 0.16 | | | $ | 0.15 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss), diluted | | $ | 0.68 | | | $ | 0.36 | | | $ | (0.55 | ) | | $ | 0.16 | | | $ | 0.15 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
| Working capital | | $ | 345,916 | | | $ | 316,494 | | | $ | 245,223 | | | $ | 337,747 | | | $ | 282,613 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 1,236,099 | | | | 1,189,908 | | | | 1,090,496 | | | | 1,187,843 | | | | 1,168,806 | |
| | | | | | | | | | | | | | | | | | | | | |
| Long-term liabilities | | | 143,143 | | | | 206,338 | | | | 185,783 | | | | 237,044 | | | | 235,932 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stockholders’ equity | | | 944,216 | | | | 786,347 | | | | 729,093 | | | | 792,564 | | | | 751,623 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Fiscal Year | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 (1) | | | 2001 (1) | |
| |
(In thousands) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 792,371 | | | $ | 784,023 | | | $ | 617,789 | | | $ | 457,769 | | | $ | 260,451 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cost of goods sold (2) | | | 484,599 | | | | 470,807 | | | | 370,940 | | | | 329,701 | | | | 311,503 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross profit (loss) | | | 307,772 | | | | 313,216 | | | | 246,849 | | | | 128,068 | | | | (51,052 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Research and development | | | 152,215 | | | | 152,633 | | | | 156,077 | | | | 133,614 | | | | 111,053 | |
| | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 103,070 | | | | 97,522 | | | | 85,432 | | | | 51,074 | | | | 51,267 | |
| | | | | | | | | | | | | | | | | | | | | |
| Amortization of intangible assets (3) | | | 2,354 | | | | 3,043 | | | | 4,386 | | | | 12,929 | | | | 15,267 | |
| | | | | | | | | | | | | | | | | | | | | |
| Purchased in-process research and development (4) | | | — | | | | — | | | | — | | | | 65,500 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Special charges (5) | | | — | | | | 17,366 | | | | 34,493 | | | | 116,321 | | | | 88,876 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 257,639 | | | | 270,564 | | | | 280,388 | | | | 379,438 | | | | 266,463 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | 50,133 | | | | 42,652 | | | | (33,539 | ) | | | (251,370 | ) | | | (317,515 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | (14,597 | ) | | | (17,947 | ) | | | (21,403 | ) | | | (4,227 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Other income (expense), net | | | 5,453 | | | | 1,691 | | | | 1,317 | | | | (56 | ) | | | 210 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes and cumulative effect of change in accounting principle | | | 40,989 | | | | 26,396 | | | | (53,625 | ) | | | (255,653 | ) | | | (317,305 | ) |
| Provision (benefit) for income taxes | | | 15,378 | | | | 3,984 | | | | 652 | | | | (19,589 | ) | | | 1,619 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before cumulative effect of change in accounting principle | | | 25,611 | | | | 22,412 | | | | (54,277 | ) | | | (236,064 | ) | | | (318,924 | ) |
| | | | | | | | | | | | | | | | |
| Cumulative effect of change in accounting principle, net of tax (6) | | | — | | | | — | | | | (397,139 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 25,611 | | | $ | 22,412 | | | $ | (451,416 | ) | | $ | (236,064 | ) | | $ | (318,924 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Per share information (7): | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before cumulative effect of change in accounting principle, basic and diluted | | $ | 0.16 | | | $ | 0.15 | | | $ | (0.39 | ) | | $ | (1.72 | ) | | | | |
| Cumulative effect of change in accounting principle, net of tax, basic and diluted (6) | | | — | | | | — | | | | (2.85 | ) | | | — | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income (loss), basic and diluted | | $ | 0.16 | | | $ | 0.15 | | | $ | (3.24 | ) | | $ | (1.72 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
| Working capital | | $ | 337,747 | | | $ | 282,613 | | | $ | 249,279 | | | $ | 79,769 | | | $ | 60,540 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 1,187,843 | | | | 1,168,806 | | | | 1,090,668 | | | | 1,346,912 | | | | 314,287 | |
| | | | | | | | | | | | | | | | | | | | | |
| Long-term liabilities | | | 237,044 | | | | 235,932 | | | | 280,677 | | | | 184,309 | | | | 3,806 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stockholders’ equity | | | 792,564 | | | | 751,623 | | | | 673,175 | | | | 1,014,976 | | | | 287,661 | |
13
| | |
| (1) | | The Merger was completed on June 25, 2002. Financial statements for periods priorIn the fourth quarter of fiscal 2006, we recorded $23.3 million of inventory charges and reserves primarily related to June 26, 2002, represent Washington/Mexicali’s combined results and financial condition. Financial statements for periods after June 25, 2002, represent the consolidated results and financial conditionexit of Skyworks, the combined company.our baseband product area. |
| |
| (2) | | In the fourth quarter of fiscal 2001,2006, we recorded $58.7 millionbad debt expense of inventory write-downs.$35.1 million. Specifically, we recorded charges related to two customers: Vitelcom Mobile and an Asian component distributor. |
| |
| (3) | | AmountsThe increase in amortization expense in fiscal 2005, 2004,2008 is due to the acquisitions completed in October 2007 and 2003 primarily reflect amortization of current technology andthe associated amortizable customer relationships, acquired inpatents, order backlog, foundry services agreement and developed technology that were acquired. During fiscal 2008, the Merger. Amounts in fiscal 2002 and 2001 primarily reflect amortizationbase of goodwill and otherour amortizable intangible assets related to the acquisition of Philsar Semiconductor, Inc. in fiscal 2000.increased by approximately $13.2 million. |
29
| | |
| (4) | | In fiscal 2002,2008, we recorded purchased in-process researchrestructuring and developmentother special charges of $65.5$0.6 million related to lease obligations associated with the closure of certain locations associated with the baseband product area. |
|
| | In fiscal 2007, we recorded restructuring and other special charges of $4.9 million related to the Merger.exit of the baseband product area. These charges consist of $4.5 million relating to the exit of certain operating leases, $0.5 million relating to additional severance, $1.4 million related to the write-off of technology licenses and design software, offset by a $1.5 million credit related to the reversal of a reserve originally recorded to account for an engineering vendor charge associated with the exit of the baseband product area. We also recorded an additional approximate $0.8 million charge in restructuring reserves. This charge consists of a single lease obligation that expires in 2008. |
| |
(5) | | In fiscal 2006, we recorded restructuring and other special charges of $27.0 million related to the exit of our baseband product area. Of the $27.0 million, $13.1 million related to severance and benefits, $7.4 million related to the write-down of technology licenses and design software associated with the baseband product area, $4.2 million related to the impairment of baseband related long-lived assets and $2.3 million related to other charges. |
|
| | In fiscal 2004, we recorded restructuring and special charges of $17.4 million, principally related to the impairment of legacy technology licenses related to our cellular systems business and certain restructuring charges. baseband product area. |
|
| (5) | | In the fourth quarter of fiscal 2003,2008, we recorded special chargesapproximately $5.8 million of $34.5premium in excess of par value and $1.0 million principally relatedof deferred financing costs relating to the impairmentearly retirement of assets related to our infrastructure products$62.4 million of 1.25% and certain restructuring charges. In fiscal 2002, we recorded special charges of $116.3 million, principally related to the impairment of the assembly and test machinery and equipment and the related facility in Mexicali, Mexico, and the write-off of goodwill and other intangible assets related to Philsar Semiconductor, Inc. In fiscal 2001, we recorded special charges of $88.9 million, principally related to the impairment of certain wafer fabrication assets and restructuring activities.1.50% convertible subordinated notes. |
| |
| (6) | | We adoptedFiscal years ended October 3, 2008, September 28, 2007 and September 29, 2006 included $23.2 million, $13.7 million and $14.2 million, respectively, of share-based compensation expense due to the adoption of the Statement of Financial Accounting Standards No. 142, “Goodwill123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). Fiscal year ended October 3, 2008 includes share-based compensation expense of approximately $3.0 million, $8.7 million and Other Intangible Assets,” on October 1, 2002. As a result$11.5 million in cost of this adoption, we performed a transitional evaluationgoods sold, research and development expense, and selling, general and administrative expense, respectively. Fiscal year ended September 28, 2007 includes share-based compensation expense of our goodwillapproximately $1.3 million, $5.6 million and intangible assets with indefinite lives. Based on this transitional evaluation, we determined that our goodwill was impaired$6.8 million in cost of goods sold, research and recorded a $397.1development expense, and selling, general and administrative expense, respectively, and fiscal year ended September 29, 2006 includes share-based compensation expense of approximately $2.2 million, charge for the cumulative effect$6.3 million and $5.7 million in cost of a change in accounting principle in fiscal 2003.goods sold, research and development expense and selling, general and administrative expense, respectively. |
| |
| (7) | | PriorBased on the Company’s evaluation of the realizability of its United States net deferred tax assets through the generation of future taxable income, $40.0 million and $14.2 million of the Company’s valuation allowance was reversed at October 3, 2008 and September 28, 2007, respectively. For fiscal 2008, the amount reversed consisted of $36.4 million recognized as income tax benefit, and $3.6 million recognized as a reduction to goodwill. For fiscal 2007, the Merger with Alpha Industries, Inc., Washington/Mexicali had no separate capitalization. Therefore,amount reversed consisted of $1.7 million recognized as income tax benefit, and $12.5 million recognized as a calculation cannot be performed for weighted average shares outstandingreduction to then calculate earnings per share.goodwill. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report onForm 10-K.10-K. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially and adversely from those referred to herein due to a number of factors, including but not limited to those described below and elsewhere in this Annual Report on Form 10-K.
OVERVIEW
Skyworks Solutions, Inc. (“Skyworks” or the “Company”) is an industry leader in radio solutionsdesigns, manufactures and precision analog semiconductors servicingmarkets a diversified set of mobile communications customers. Our front-end modules, radio solutions and multimode transceivers are at the heart of many of today’s leading-edge multimedia handsets and wireless networking platforms. Skyworks also offers a portfolio of highly innovative linear products, supporting a widebroad range of applications including automotive, broadband, consumer, industrial, infrastructure, medical, military, Radio Frequency Identification (“RFID”), satellitehigh performance analog and mixed signal semiconductors that enable wireless data.
The wireless communications semiconductor industry is highly cyclical and is characterized by rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. In the past, average selling prices of established products have generally declined over time and this trend is expected to continue in the future.connectivity. Our operating results have been, and our operating results may continue to be, negatively affected by substantial quarterly and annual fluctuations and market downturns due to a number of factors, such as changes in demand for end-user equipment, the timing of the receipt, reduction or cancellation of significant customer orders, the gain or loss of significant customers, market acceptance of our products and our customers’ products, our ability to develop, introduce and market new products and technologies on a timely basis, availability and cost of products from suppliers, new product and technology introductions by competitors, changes in the mix of products produced and sold, intellectual property disputes, thepower amplifiers
1430
timing(PAs), front-end modules (FEMs) and extentintegrated radio frequency (RF) solutions can be found in many of product development coststhe cellular handsets sold by the world’s leading manufacturers. Leveraging our core analog technologies, we also offer a diverse portfolio of linear integrated circuits (ICs) that support automotive, broadband, cellular infrastructure, industrial and general economic conditions. In addition, we may discover from time to time defects in our products after they have been shipped, which may require us to pay warranty claims, replace products, or pay costs associated with the recall of a customer’s products containing our parts.medical applications.
BUSINESS FRAMEWORK
To address the wireless industry opportunities discussed above and execute to our strategy, weWe have aligned our product portfolio around two markets: mobile platforms and linear products. We believe we possess a broad technology capabilityOur mobile platform solutions include highly customized PAs, FEMs, and oneintegrated RF transceivers that are at the heart of the most complete wireless communications product portfolios that, when coupled with key customer relationships with all majormany of today’s leading-edge multimedia handsets. Our primary customers for these products include top-tier handset manufacturers positions ussuch as Sony Ericsson, Motorola, Samsung, LG Electronics and Research in Motion. In parallel, we offer over 900 different catalogue linear products to a highly diversified non-handset customer base. Our linear products are typically precision analog integrated circuits that target markets in cellular infrastructure, broadband networking, medical, automotive and industrial applications, among others. Representative linear products include synthesizers, mixers, switches, diodes and RF receivers. Our primary customers for linear products include Ericsson, Huawei, Cisco, Nokia-Siemens, Alcatel ·Lucent and ZTE, as well as leading distributors such as Avnet.
We are a leader in the PA and FEM market for cellular handsets, and plan to meet industry needs.build upon our position by continuing to develop more highly integrated and higher performance products necessary for the next generation of multimedia handsets. Our competitors in the mobile platforms market include RF Micro Devices, Anadigics and TriQuint Semiconductor. In the linear products market, we plan to continue to grow by both expanding distribution of our standard components and by leveraging its core analog technologies to develop integrated products for specific customer applications. Our competitors in the linear products market include Analog Devices, Hittite Microwave, Linear Technology and Maxim Integrated Products.
BASIS OF PRESENTATION
On June 25, 2002, pursuant to an Agreement and Plan of Reorganization, dated as of December 16, 2001, as amended as of April 12, 2002, by and among Alpha Industries, Inc. (“Alpha”), Conexant Systems, Inc. (“Conexant”) and Washington Sub, Inc. (“Washington”), a wholly-owned subsidiary of Conexant to which Conexant spun off its wireless communications business, including its gallium arsenide wafer fabrication facility located in Newbury Park, California, but excluding certain assets and liabilities, Washington merged with and into Alpha with Alpha as the surviving entity (the “Merger”). Immediately following the Merger, we purchased Conexant’s semiconductor assembly and test facility located in Mexicali, Mexico and certain related operations (the “Mexicali Operations”). The Washington business and the Mexicali Operations are collectively referred to herein as “Washington/Mexicali”. Following the Merger, Alpha changed its corporate name to Skyworks Solutions, Inc.
OurCompany’s fiscal year ends on the Friday closest to September 30. Fiscal 20032008 consisted of 53 weeks and ended on October 3, 2003,2008. The extra week occurred in the fourth quarter and fiscalthe Company does not believe it had a material impact on its results from operations. Fiscal years 20052007 and 20042006 each consisted of 52 weeks and ended on September 30, 200528, 2007 and October 1, 2004,September 29, 2006, respectively. For convenience, the consolidated financial statements have been shown as ending on the last day of the calendar month.
GENERAL
During fiscal 2005, certain key factors contributed to our overall results of operations and cash flows from operations. More specifically, we:
| § | | experienced an increase in revenues from our Radio Frequency (“RF”) products of 16.2% in aggregate dollars and 21.0% in units shipped from fiscal 2004 to fiscal 2005, tempered somewhat by a decrease in revenues for our cellular systems products of 13.9% in aggregate dollars and 7.8% in units shipped; |
|
| § | | experienced a 1.1% increase in aggregate revenue in fiscal 2005 as compared to fiscal 2004, despite an approximate 20% decline in average selling prices of our more mature single functionality products and an approximate 5% average selling price decline in our more highly integrated, complex next generation products. We achieved an 8.3% increase in overall units sold; |
|
| § | | experienced a 62.6% decrease in revenues from our assembly and test services area in fiscal 2005 as compared to fiscal 2004, as we fulfilled our agreement with Conexant and have exited this product area; |
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| § | | experienced a 1.7% decrease in gross profits in fiscal 2005 as compared to fiscal 2004 principally due to product mix shifts, a one-time payment to a customer and continued additional costs associated with our highly integrated products; |
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| § | | reduced overall operating expenses by 4.8% (primarily due to lower incentive compensation expenses) from fiscal year 2004 and increased operating income by 17.5% from fiscal year 2004 to 2005; |
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| § | | increased revenues from our family of iPAC™ power amplifiers and Intera™ transmit front-end modules in fiscal 2005 as compared to 2004. We also introduced Helios™, our patented and highly innovative EDGE radio solution in fiscal 2005; and |
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| § | | Increased cash and short-term investments by $21.3 million while still investing an additional $38.1 million in capital equipment. |
15
RESULTS OF OPERATIONS
YEARS ENDED OCTOBER 3, 2008, SEPTEMBER 30, 2005, 200428, 2007, AND 2003SEPTEMBER 29, 2006
The following table sets forth the results of our operations expressed as a percentage of net revenues for the fiscal years below:
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 2008 | | 2007 | | 2006 |
| | | 2005 | | 2004 | | 2003 | | |
| Net revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of goods sold | | 61.2 | | 60.1 | | 60.0 | | | 60.1 | | 61.3 | | 66.1 | |
| | | | | | | | | | | | | | | |
| Gross margin | | 38.8 | | 39.9 | | 40.0 | | | 39.9 | | 38.7 | | 33.9 | |
| Operating expenses: | | |
| Research and development | | 19.2 | | 19.5 | | 25.3 | | | 17.0 | | 17.0 | | 21.2 | |
| Selling, general and administrative | | 13.0 | | 12.4 | | 13.8 | | | 11.6 | | 12.8 | | 17.6 | |
| Amortization of intangible assets | | 0.3 | | 0.4 | | 0.7 | | | 0.7 | | 0.3 | | 0.3 | |
| | | |
| Special charges | | — | | 2.2 | | 5.6 | | |
| Restructuring and special charges | | | 0.1 | | 0.8 | | 3.5 | |
| | | | | | | | | | | | | | | |
| Total operating expenses | | 32.5 | | 34.5 | | 45.4 | | | 29.4 | | 30.9 | | 42.6 | |
| | | | | | | | | | | | | | | |
| Operating income (loss) | | 6.3 | | 5.4 | | | (5.4 | ) | | 10.5 | | 7.8 | | | (8.7 | ) |
| Interest expense | | | (1.8 | ) | | | (2.3 | ) | | | (3.5 | ) | | | (0.9 | ) | | | (1.6 | ) | | | (1.9 | ) |
| Loss on early retirement of convertible debt | | | | (0.8 | ) | | | (0.1 | ) | | — | |
| Other income, net | | 0.7 | | 0.2 | | 0.2 | | | 0.7 | | 1.5 | | 1.1 | |
| | | | | | | | | | | | | | | |
| Income (loss) before income taxes and cumulative effect of change in accounting principle | | 5.2 | | 3.3 | | | (8.7 | ) | |
| Provision for income taxes before cumulative effect of change in accounting principle | | 2.0 | | 0.5 | | 0.1 | | |
| | | | | | | | | |
| Income (loss) before cumulative effect of change in accounting principle | | 3.2 | | 2.8 | | | (8.8 | ) | |
| Cumulative effect of change in accounting principle, net of tax. | | — | | — | | | (64.2 | ) | |
| Income (loss) before income taxes | | | 9.5 | | 7.6 | | | (9.5 | ) |
| Provision (benefit) for income taxes | | | | (3.4 | ) | | | (0.1 | ) | | 2.0 | |
| | | | | | | | | | | | | | | |
| Net income (loss) | | | 3.2 | % | | | 2.8 | % | | | (73.0 | )% | | | 12.9 | % | | | 7.7 | % | | | (11.5 | )% |
| | | | | | | | | | | | | | | |
31
GENERAL
During fiscal 2008, certain key factors contributed to our overall results of operations and cash flows from operations. More specifically:
| § | | We increased revenues by $118.3 million, a 15.9% increase for the fiscal year ended October 3, 2008, as compared to fiscal year 2007. This revenue growth was principally due to the ramp of new mobile platforms products, the addition of new customers, our entrance into new, adjacent markets and the expansion of our market share in increasingly complex front-end modules at our existing customers. |
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| § | | We generated $173.7 million in cash from operations for fiscal 2008 as compared to $84.8 million in fiscal 2007. At October 3, 2008, we had $231.1 million in cash, cash equivalents and restricted cash. |
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| § | | We increased gross profit by $55.6 million in the fiscal year ended October 3, 2008 as compared to fiscal year 2007, reflecting a gross profit margin of 39.9%, principally the result of a more favorable revenue mix, higher equipment efficiencies at our factories, progress on yield improvement initiatives, and year-over-year material cost reductions. |
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| § | | We increased operating income to $90.4 million for fiscal 2008, as compared to operating income of $58.5 million in fiscal 2007. This 54.5% increase in operating income was primarily the result of increases in revenues of 15.9%, gross margin improvements driven by the yield improvement initiatives discussed above, equipment efficiencies, and year-over-year material cost reductions, partially offset by higher operating expenses. |
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| § | | In October 2007, we paid $32.6 million in cash to acquire certain assets from two separate companies. We acquired raw materials, die bank, finished goods, proprietary GaAs PA/FEM designs and related intellectual property in a business combination from Freescale Semiconductor. We also acquired sixteen fundamental HBT and RF MEMs patents from another company in an asset acquisition. |
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| § | | In November 2007, we retired the entire $49.3 million balance of our 4.75% convertible notes and in the process reduced the related potential dilution of stockholder ownership. In September 2008, we also retired $62.4 million of our 1.25% and 1.50% convertible subordinated notes thereby further reducing related potential dilution of stockholder ownership by approximately 6.6 million shares. |
NET REVENUES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | | | Fiscal Years Ended |
| | | 2005 | | Change | | 2004 | | Change | | 2003 | | | October 3, | | September 28, | | September 29, |
| (in thousands) | | |
| (dollars in thousands) | | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | | |
| Net revenues | | $ | 792,371 | | | 1.1 | % | | $ | 784,023 | | | 26.9 | % | | $ | 617,789 | | | $ | 860,017 | | | 15.9 | % | | $ | 741,744 | | | (4.1 | )% | | $ | 773,750 | |
We market and sell our semiconductormobile platforms and linear products and system solutions to leadingtop tier Original Equipment Manufacturers (“OEMs”) of communication electronicselectronic products, third-party original design manufacturersOriginal Design Manufacturers (“ODMs”) and contract manufacturers, and indirectly through electronic components distributors. We periodically enter into strategic arrangements leveraging our broad intellectual property portfolio by licensing or selling our patents or other intellectual property. We anticipate continuing this intellectual property strategy in future periods.
NetOverall revenues increased slightly overall in fiscal 2005 when compared to2008 increased by $118.3 million, or 15.9%, from fiscal 2004 primarily as a result of increased demand in our RF product area. Revenues in aggregate dollars from our highly integrated complex RF products more than doubled between fiscal 2004 and fiscal 2005.2007. This increase in revenuesrevenue growth was partially offset by an overall decrease in average selling prices in nearly all of our product areas. Additionally, cellular systems revenue in aggregate dollars declined 13.9% and revenues from test and assembly declined by 63%principally due to the terminationramp of new mobile platform products, the testaddition of new mobile platform customers, diversification into new, adjacent markets and assembly services arrangement with Conexant. Ourthe expansion of our market share in increasingly complex front-end modules at our existing customers. Net revenues from our top three customers decreased to 43.5% for the test and assembly business averaged $10.0 million per quarter in fiscal 2004 and were $5.0 millionyear ended October 3, 2008 as compared to 48.5% for the corresponding period in the second fiscal quarter of 2005. We fulfilled our manufacturing support obligation to Conexant on June 30, 2005.
Net revenues increased for fiscal 2004 when compared to the previous fiscalprior year, primarily as the result of increased demand for our wireless product portfolio. More specifically, we had launched a number of more highly integrated product offerings, added to our customer base and expanded our geographical market presence. Additionally, power amplifiers, front-end modules, RF subsystems and complete cellular systems exhibited strong year-over-year growth. These increases in net revenues were tempered by a decrease in average selling prices primarily within our single function products and a decrease of approximately $15 million in net revenues for our assembly and test services as demand for these services declined in fiscal 2004. During fiscal 2004, the number of units we sold increased by approximately 53% when compared to fiscal 2003, however our average selling price across all products decreased in the aggregate by approximately 17% when compared to the previous fiscal year.reflecting continued
1632
expansion of our customer base. Average selling prices declined 6.6% year over year compared to a decline of 8.1% in the prior year.
Overall revenues in fiscal 2007 declined by $32.0 million, or 4.1%, from fiscal 2006 due to the exit of our baseband product area at the end of fiscal year 2006. Revenues from our mobile platforms and linear product areas remained relatively unchanged over that same period. We experienced a more favorable product mix in fiscal 2007 which was offset by a decline in average selling prices of 8.1%.
For information regarding net revenues by geographic region and customer concentration for each of the last three fiscal years, see Note 1517 of Item 8 of this Annual Report on Form 10-K.
GROSS PROFIT
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | | | Fiscal Years Ended |
| | | 2005 | | Change | | 2004 | | Change | | 2003 | | | October 3, | | September 28, | | September 29, |
| (in thousands) | | |
| (dollars in thousands) | | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | | |
| Gross profit | | $ | 307,772 | | | (1.7 | )% | | $ | 313,216 | | | 26.9 | % | | $ | 246,849 | | | $ | 342,963 | | | 19.3 | % | | $ | 287,385 | | | 9.4 | % | | $ | 262,679 | |
| % of net revenues | | | 38.8 | % | | | 39.9 | % | | | 40.0 | % | | | 39.9 | % | | | 38.7 | % | | | 33.9 | % |
Gross profit represents net revenues less cost of goods sold. Cost of goods sold consists primarily of purchased materials, labor and overhead (including depreciation)depreciation and equity based compensation expense) associated with product manufacturing, royalty and other intellectual property costs and sustaining engineering expenses pertaining to products sold.manufacturing.
Gross profit foras a percentage of net revenues improved to 39.9% in fiscal 2005 decreased by $5.4 millionyear 2008, from 38.7% in fiscal year 2007, and was principally the result of a more favorable revenue mix. Additionally, gross profit margin decreased from 39.9%improved as a result of higher equipment efficiencies at all of our factories as our established hybrid manufacturing model with multiple external foundries allows us to 38.8% from fiscal 2004. The decreasemaintain high internal capacity utilization by using second-sources for high fixed cost services like foundry and assembly. This approach provides supply chain flexibility, lower capital investment, the ability to meet upside demand and provides cost advantages. Furthermore, yield improvements and year-over-year material cost reductions along with the increased overall revenue contributed to the gross profit and margin improvement in both absoluteaggregate dollars and as a percentage of sales was primarily duesales. In fiscal year 2008, we continued to 1) continued additional costsbenefit from higher contribution margins associated with the ongoing launchlicensing and/or sale of intellectual property.
Gross profit as a numberpercentage of our more highly integrated products, 2) an unfavorable shiftnet revenues improved to 38.7% in product mixfiscal year 2007, from 33.9% in the fourth fiscal quarter, and 3) a one time payment to a customer of $3.2 million in the fourth fiscal quarter. A decline in the assembly and test services provided to Conexant in conjunction with fixed overhead and manufacturing costs in the assembly and test area also contributed to the decreasedyear 2006, as higher gross profit margin betweenmobile platforms and linear products became a greater percentage of our overall net revenues since we exited the lower margin baseband product area at the end of fiscal 20052006. Additionally, inventory related charges recorded in fiscal 2006 related to the exit of our baseband product area did not recur in fiscal 2007. Furthermore, we improved absorption as our factory utilization increased and fiscal 2004.
Gross profit for fiscal 2004we experienced improved overall yields and greater equipment efficiency. Finally, we benefited from increased operational efficiency through capacity utilization whenhigher contribution margins received from the licensing and sale of intellectual property in fiscal year 2007 as compared to the previous fiscal year. This benefit was partially offset by the aforementioned decline in average selling prices and additional costs we incurred as we launched and ramped a number of more highly integrated RF product offerings including our front-end modules and single package radios.year 2006.
RESEARCH AND DEVELOPMENT
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | | | Fiscal Years Ended |
| | | 2005 | | Change | | 2004 | | Change | | 2003 | | | October 3, | | September 28, | | September 29, |
| (in thousands) | | |
| (dollars in thousands) | | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | | |
| Research and development | | $ | 152,215 | | | (0.3 | )% | | $ | 152,633 | | | (2.2 | )% | | $ | 156,077 | | | $ | 146,013 | | | 15.8 | % | | $ | 126,075 | | | (23.2 | )% | | $ | 164,106 | |
| % of net revenues | | | 19.2 | % | | | 19.5 | % | | | 25.3 | % | | | 17.0 | % | | | 17.0 | % | | | 21.2 | % |
Research and development expenses consist principally of direct personnel costs, costs for pre-production evaluation and testing of new devices, and design and test tool costs.
ResearchThe increase in research and development expenses in aggregate dollars for fiscal 2005 declined slightlyyear 2008 when compared to fiscal 2004. The declineyear 2007 is principally dueattributable to decreased incentive compensation costs. We remain committedincreased labor and benefit costs and increases in elot and mask expenditures and variable materials and supplies expenses as we continued to streamlininginvest in new product developments in both our mobile platforms and focusinglinear product development efforts on next-generation, highly integrated products to meet the needs of our customers.areas.
33
We also reducedThe decrease in research and development expendituresexpenses in our cellular systems product area. More specifically, we focused our product development on core front-end modules, RF subsystems, infrastructureaggregate dollars and next-generation solutions. Research and development expenses were loweras a percentage of net revenues in fiscal 2004year 2007 when compared to fiscal year 2006 is predominantly attributable to decreased labor and benefit costs as a result of the previous year as we realized benefits from cost saving initiatives implementedworkforce reductions associated with the exit of our baseband product area at the end of fiscal 2006. In addition, efficiencies were achieved in the previous twoutilization of outside services, fixed materials and supplies, rent costs, relocation costs, business travel and hardware/software costs. The reductions in the labor intensive research and development costs associated with the exit of our baseband product area enabled us to refocus, enhance and target our research and development spending on our higher growth core product areas in fiscal years.year 2007.
SELLING, GENERAL AND ADMINISTRATIVE
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative...... | | $ | 103,070 | | | | 5.7 | % | | | 97,522 | | | | 14.2 | % | | $ | 85,432 | |
| % of net revenues | | | 13.0 | % | | | | | | | 12.4 | % | | | | | | | 13.8 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| Selling, general and administrative | | $ | 100,007 | | | | 5.3 | % | | $ | 94,950 | | | | (30.1 | )% | | $ | 135,801 | |
| % of net revenues | | | 11.6 | % | | | | | | | 12.8 | % | | | | | | | 17.6 | % |
Selling, general and administrative expenses include personnel costs (legal,legal, accounting, treasury, human resources, information systems, customer service, etc.),bad debt expense, sales representative commissions, advertising, marketing and other marketing costs.
17
TheSelling, general and administrative expenses increased in aggregate dollars for fiscal year 2008 as compared to fiscal year 2007, primarily due to higher share-based compensation expense, higher incentive compensation costs and higher sales commissions. Selling, general and administrative expenses as a percentage of net revenues decreased for fiscal 2008, as compared to fiscal 2007, as a result of the overall increase in net revenues along with selling, general and administrative costs increasing at a lower rate than the revenue growth rate.
Selling, general and administrative expenses decreased in aggregate dollars and as a percentage of revenues for fiscal 2005year 2007 as compared to fiscal 2004 isyear 2006 primarily due to an increaseour recording of $35.1 million in bad debt expense in the fourth quarter of $4.8 million between fiscal 2005 and fiscal 2004. Additionally, costs incurred to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 contributed to the increase. The increased bad debt expense and Sarbanes-Oxley fees were partially offset by reductions in incentive compensation costs and legal costs due to the settlement of an intellectual property lawsuit.
The increase in selling, general and administrative expenses in fiscal 2004 when compared to the previous year is primarily attributable to an increase of approximately $5 million in legal expenses related to protecting2006 as we exited our intellectual property portfolio.baseband product area. In addition, we incurred incentive related compensation expenseslower sales commissions and professional fees in fiscal 2004, which were not incurred in fiscal 2003. We tie incentive compensation to the accomplishment of specific financial objectives each fiscal year and met these objectives in fiscal 2004, whereas these objectives were not met in fiscal 2003. During fiscal 2004, we also incurred information systems conversion costs, whereas these expenses were not incurred in fiscal 2003. We transitioned our information systems services from Conexant Systems, Inc. to a third-party service provider during the third quarter of fiscal 2004. These increases in selling, general and administrative expenses for fiscal 2004 when compared to the previous year were partially offset by realization of the benefit of cost saving initiatives implemented in the previous two fiscal years.2007.
AMORTIZATION OF INTANGIBLE ASSETS AND WARRANTS
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | |
| Amortization of intangible assets | | $ | 2,354 | | | | (22.6 | )% | | $ | 3,043 | | | | (30.6 | )% | | $ | 4,386 | |
| % of net revenues | | | 0.3 | % | | | | | | | 0.4 | % | | | | | | | 0.7 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| Amortization | | $ | 6,005 | | | | 180.1 | % | | $ | 2,144 | | | | 0.0 | % | | $ | 2,144 | |
| % of net revenues | | | 0.7 | % | | | | | | | 0.3 | % | | | | | | | 0.3 | % |
The increase in amortization expense during the fiscal year ended October 3, 2008 as compared to fiscal 2007 is due to the acquisitions completed in October 2007 and the associated amortizable customer relationships, patents, order backlog, foundry services agreement and developed technology that were acquired. In fiscal 2008, the gross of our amortizable intangible assets increased by approximately $13.2 million.
In 2002, we recorded $36.4 million of intangible assets related to the Merger consisting of developed technology, customer relationships and a trademark.trademark acquired by the Company. These assets are principally being amortized on a straight-line basis over a 10-year period. Amortization expense in fiscal 2005, 2004,2007 and 20032006 primarily represents the amortization of these intangible assets.
The decrease in amortization expense on intangible assets between fiscal 2005 and fiscal 2004 is the result of $0.8 million in amortization expense recognized on certain warrants in 2004, while only $0.2 million was recognized in fiscal 2005.
During the fourth quarter of fiscal 2003, we wrote down certain intangible assets related to our infrastructure business based on a recoverability analysis prepared by management in response to a decline in demand for, and a decision to discontinue, certain infrastructure products. This write-down established a new cost basis for these assets and resulted in a decrease in amortization expense for fiscal 2004 when compared to fiscal 2003.
For additional information regarding goodwill and intangible assets, see Note 6 to the Consolidated Financial Statements.7 of Item 8 of this Annual Report on Form 10-K.
34
RESTRUCTURING AND SPECIAL CHARGES
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | |
| Special charges | | $ | — | | | | (100.0 | )% | | $ | 17,366 | | | | (49.7 | )% | | $ | 34,493 | |
| % of net revenues | | | 0.0 | % | | | | | | | 2.2 | % | | | | | | | 5.6 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| Restructuring and special charges | | $ | 567 | | | | (90.1 | )% | | $ | 5,730 | | | | (78.7 | )% | | $ | 26,955 | |
| % of net revenues | | | 0.1 | % | | | | | | | 0.8 | % | | | | | | | 3.5 | % |
NoRestructuring and special charges were recorded in fiscal 2005.
Special charges consist of charges for asset impairments and restructuring activities, as follows:
ASSET IMPAIRMENTSOn September 29, 2006, the Company exited its baseband product area in order to focus on its mobile platforms and linear product areas. The Company recorded various charges associated with this action.
During the second quarter of fiscal 2004,year ended September 29, 2006, we recorded a $13.2$13.1 million charge primarilyrelated to severance and benefits, $7.4 million related to the write-down of technology licenses and design software, $4.2 million related to the impairment of obsoletecertain long-lived assets and $2.3 million related to other charges.
During the fiscal year ended September 28, 2007, we recorded additional restructuring charges of $4.9 million related to the exit of the baseband product area. These charges consist of $4.5 million relating to the exit of certain operating leases, $0.5 million relating to additional severance, $1.4 million related to the write-off of technology licenses that were established priorand design software, offset by a $1.5 million credit related to the Merger. The impairmentreversal of a reserve originally recorded to account for an engineering vendor charge was based on a recoverability analysis prepared by management in response toassociated with the decision to discontinue certain products and the related impact on its current and projected outlook. Management believed these factors indicated that the carrying valueexit of the related assets
18
(intangible assets, machinery and equipment) was impaired andbaseband product area. In addition, the Company recorded an additional $0.8 million charge for a single lease obligation that an impairment analysis should be performed. In performing the analysis for recoverability, management estimated the future cash flows expectedexpires in 2008 relating to result from these products (salvage value). Since the estimated undiscounted cash flows were less than the carrying value of the related assets, it was concluded that an impairment loss should be recognized. In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the impairment charge was determined by comparing the estimated fair value of the related assets to their carrying value. The write down established a new cost basis for the impaired assets.our 2002 restructuring.
During the fourth quarter of fiscal 2003, we2008, additional restructuring charges of $0.6 million were recorded a $26.0 million charge for the impairment of assets relatedrelating to certain infrastructure products manufactured in our Woburn, Massachusetts and Adamstown, Maryland facilities. The Woburn facility primarily manufactures semiconductor products based on both silicon wafer technology and gallium arsenide technology. Our Adamstown, Maryland facility primarily manufactures ceramics components. We experienced a significant decline in factory utilization resulting from a downturn in the market for products manufactured at these two facilities and a decision to discontinue certain products. The impairment charge was based on a recoverability analysis prepared by management based on these factors and the related impact on our current and projected outlook. We projected lower revenues and new order volume for these products and management believed these factors indicated that the carrying value of the related assets (machinery, equipment and intangible assets) may have been impaired and that an impairment analysis should be performed. In performing the analysis for recoverability, management estimated the future cash flows expected to result from these products over a five-year period. Since the estimated undiscounted cash flows were less than the carrying value of the related assets, it was concluded that an impairment loss should be recognized. In accordance with SFAS No. 144, the impairment charge was determined by comparing the estimated fair value of the related assets to their carrying value. The fair value of the assets was determined by computing the present value of the estimated future cash flows using a discount rate of 16%, which management believed was commensurate with the underlying risks associated with the projected future cash flows. Management believes the assumptions used in the discounted cash flow model represented a reasonable estimate of the fair value of the assets. The write down established a new cost basis for the impaired assets. The anticipated pre-tax cost savings related to these impairment charges is expected to be $5.3 million from fiscal 2006 through fiscal 2008 and $8.6 million from fiscal 2009 through fiscal 2023. We realized actual savings from this asset impairment of $12.1 million in fiscal 2004 and 2005. This amount related to depreciation expense that was not recordedlease obligations due to the impairmentclosure of certain locations that formerly supported the assets.
In addition, during the fourth quarter of fiscal 2003 we recorded a $2.3 million charge for the impairment of our Haverhill, Massachusetts property based on a third party estimate of its fair value. In fiscal 2003, we relocated our operations from this facility to our Woburn, Massachusetts facility. In March 2004, we entered into a contractual arrangement for the sale of the property, contingent upon obtaining specific regulatory approvals. As of September 30, 2005, the prospective buyer (with our approval) had received a portion of these regulatory approvals and anticipates receiving the remaining regulatory approval in 2006. If the prospective buyer does not receive all regulatory approvals by June 30, 2006, the prospective buyer has the option of terminating the original contract. Alternatively, the prospective buyer can renegotiate or extend the original contract with our approval.
RESTRUCTURING CHARGES
During fiscal 2004, we consolidated cellular systems software design centers in an effort to improve our overall time-to market for next-generation multimedia systems development. These actions aligned our structure with our current business environment. We implemented reductions in force at three remote facilities and recorded restructuring charges of approximately $4.2 million for costs related to severance benefits for affected employees and lease obligations. Substantially all amounts accrued for these actions have been paid as of September 30, 2005.
During fiscal 2003, we recorded $6.2 million in restructuring charges to provide for workforce reductions and the consolidation of facilities. The charges were based upon estimates of the cost of severance benefits for affected employees and lease cancellation, facility sales, and other costs related to the consolidation of facilities. All amounts accrued for these actions have been paid as of September 30, 2005.baseband product area.
For additional information regarding restructuring charges and liability balances, see Note 14 to the Consolidated Financial Statements.15 of Item 8 of this Annual Report on Form 10-K.
19
INTEREST EXPENSE
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | | | Fiscal Years Ended |
| | | 2005 | | Change | | 2004 | | Change | | 2003 | | | October 3, | | September 28, | | September 29, |
| (in thousands) | | |
| (dollars in thousands) | | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | | |
| Interest expense | | $ | 14,597 | | | (18.7 | )% | | $ | 17,947 | | | (16.1 | )% | | $ | 21,403 | | | $ | 7,330 | | | (39.0 | )% | | $ | 12,026 | | | (18.7 | )% | | $ | 14,797 | |
| % of net revenues | | | 1.8 | % | | | 2.3 | % | | | 3.5 | % | | | | 0.9 | % | | | 1.6 | % | | | 1.9 | % |
Interest expense is comprised principally of payments on ourin connection with the $50.0 million credit facility between Skyworks USA, Inc., our wholly owned subsidiary, and Wachovia Bank, N.A. (“Facility Agreement”), the Company’s 4.75% convertible subordinated notes (the “Junior Notes”), and Juniorthe Company’s 1.25% and 1.50% convertible subordinated notes payable.(the “2007 Convertible Notes”).
The decrease in interest expense for the fiscal 2005 whenyear ended October 3, 2008 as compared to the previous fiscal year2007 in aggregate dollars and as a percentage of net revenues is due to the conversionretirement of our $45the remaining $49.3 million of senior subordinated notes into shareshigher interest rate Junior Notes during the first quarter of our common stock during fiscal 2004. Specifically, we recorded $12.52008 and the early retirement of $62.4 million of the Company’s 2007 Convertible Notes in interest expense and deferred financing costs amortization on our $230 million Junior notes payable and $2.1 million in interest expense on our $50 million linethe fourth quarter of credit facility.fiscal 2008.
The decrease in interest expense both in aggregate dollars and as a percentage of net revenues for fiscal 20042007, when compared to the previous fiscal year2006, is primarily relateddue to the conversionretirement of $130.0 million of our $45 million of senior subordinated notes into shares of our common stock duringhigher interest rate Junior Notes coupled with the third quarter of fiscal 2004. On April 22, 2004, we notified the holderissuance of the senior notes that we would redeem such notessubstantially lower interest rate 2007 Convertible Notes in full on May 12, 2004. On May 6, 2004, the holder of the senior notes converted such notes in full for approximately 5.7 million shares of our common stock. We paid interest in cash on the senior notes on the last business day of each March June, September and December of each year. Interest paid on the senior notes is not deductible for tax purposes because of the conversion feature.2007.
35
For additional information regarding our borrowing arrangements, see Note 78 of Item 8 of this Annual Report on Form 10-K.
LOSS ON EARLY RETIREMENT OF CONVERTIBLE DEBT
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| Loss on early retirement of convertible debt | | $ | 6,836 | | | | 1112.1 | % | | $ | 564 | | | | N/A | | | $ | — | |
| % of net revenues | | | 0.8 | % | | | | | | | 0.1 | % | | | | | | | — | |
In September 2008, we retired $50.0 million and $12.4 million of our 2007 Convertible Notes due in 2010 and 2012, respectively. We recorded a loss of $6.8 million during the three months and fiscal year ended October 3, 2008 related to the Consolidated Financial Statements.early retirement of these notes. Approximately $5.8 million of this charge represents a premium paid to retire the notes and $1.0 million of the charge represents a write-off of deferred financing costs.
OTHER INCOME, NET
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | | | Fiscal Years Ended |
| | | 2005 | | Change | | 2004 | | Change | | 2003 | | | October 3, | | September 28, | | September 29, |
| (in thousands) | | |
| (dollars in thousands) | | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | | |
| Other income, net | | $ | 5,453 | | | 222.5 | % | | $ | 1,691 | | | 28.4 | % | | $ | 1,317 | | | $ | 5,983 | | | (45.0 | )% | | $ | 10,874 | | | 30.2 | % | | $ | 8,350 | |
| % of net revenues | | | 0.7 | % | | | 0.2 | % | | | 0.2 | % | | | 0.7 | % | | | 1.5 | % | | | 1.1 | % |
Other income, net is comprised primarily of interest income on invested cash balances, foreign exchange gains/losses and other non-operating income and expense items.items and foreign exchange gains/losses.
The decreases in other income in both aggregate dollars and as a percentage of net revenues for the fiscal year ended October 3, 2008 as compared to fiscal 2007 is due to an overall decline in interest income on invested cash balances due to lower interest rates in fiscal 2008.
The increase in other income, net between fiscal 20042007 and fiscal 20052006 is primarily due to higher levelsan increase in interest income on invested cash balances as a result of increased interest bearing short-term investments in fiscal 2005 as compared to fiscal 2004rates and higher average interest rates in fiscal 2005 as compared to fiscal 2004.
The increase in other income, net between fiscal 2004 and fiscal 2003 is primarily due to higher levels of interest bearing short-term investments in fiscal 2004 and slightly higher short-term interest rates.invested cash balances.
(BENEFIT) PROVISION FOR INCOME TAXES
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | |
| Provision for income taxes | | $ | 15,378 | | | | 286.0 | % | | $ | 3,984 | | | | 511.0 | % | | $ | 652 | |
| % of net revenues | | | 2.0 | % | | | | | | | 0.5 | % | | | | | | | 0.1 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| (Benefit) Provision for income taxes | | $ | (28,818 | ) | | | 3174.8 | % | | $ | (880 | ) | | | (105.7 | )% | | $ | 15,378 | |
| % of net revenues | | | 3.4 | % | | | | | | | 0.1 | % | | | | | | | 2.0 | % |
Based uponIncome tax (benefit) for fiscal 2008 was $(28.8) million as compared to $(0.9) million benefit for fiscal 2007. Income tax (benefit) expense for fiscal 2008 and fiscal 2007 consists of approximately $(28.2) million and $(2.2) million, respectively, of United States income tax benefit. The fiscal 2008 benefit of $(28.2) million is due to a history$(36.4) million reduction in the valuation allowance related to the partial recognition of significantfuture tax benefits on United States federal and state net operating losses,loss and credit carryforwards, U.S. income tax expense of $1.2 million, and a charge in lieu of tax expense of $7.0 million. The charge in lieu of tax expense resulted from a partial recognition of certain acquired tax benefits that were subject to a valuation allowance at the time of acquisition, the realization of which required a reduction of goodwill. The fiscal 2007 United States income tax (benefit) of $(2.2) million is due to a $(1.7) million reduction in the valuation allowance related to the partial recognition of future tax benefits on United States federal and state net operating carryforwards and the reversal of $(0.5) million of tax reserve no longer required. The income tax provision for fiscal 2006 was comprised of a favorable adjustment of $(0.1) million between fiscal 2005’s tax provision and tax return liability, and foreign tax expense of $15.5 million.
36
The provision (benefit) for foreign income taxes for fiscal 2008, 2007, and 2006 was $(0.6) million, $1.3 million, and $15.5 million, respectively. The foreign tax benefit for fiscal 2008 included a reversal of $(1.0) million of reserves for tax uncertainties that are no longer required. Foreign tax expense for fiscal 2006 included a one time charge of $14.6 million to write off a deferred tax asset as a result of reorganizing our Mexico business.
In accordance with Statement of Financial Accounting Standards 109,Accounting for Income Taxes (“SFAS 109”) management has determined that it is more likely than not that a portion of our historic and current year income tax benefits will not be realized except for certain future deductions associated with the Mexicali Operations in the post-Merger period. Consequently, no U. S. income tax benefit has been recognized relating to the U.S. operating losses. Asrealized. Accordingly, as of September 30, 2005,October 3, 2008, we have established a valuation allowance againstof $82.9 million of which $81.6 million relates to our United States deferred tax assets and $1.3 million relates to our foreign operations.
Realization of the Company’s deferred tax assets is dependent upon generating taxable income in the future. The Company considered several factors in evaluating the Company’s capacity to generate future earnings. Skyworks has produced a strong earnings trend generating cumulative earnings of $66.2 million in fiscal years 2006 through 2008. In addition, 2008 revenue increased 15.9% over 2007 and gross profit as a percentage of sales has improved in the last three years. Based on the aforementioned positive factors, Skyworks projected future earnings to determine the realizability of our income tax benefit. Our projections considered the business uncertainty resulting from the current economic crisis, market forecasts and the cyclical nature of our business. Based on the Company’s evaluation of the realizability of its net deferred tax assets through the generation of future income, $40.0 million of the Company’s valuation allowance was reversed at October 3, 2008. The amount reversed consisted of $36.4 million recognized as income tax benefit, and $3.6 million recognized as a reduction to goodwill. The remaining valuation allowance as of October 3, 2008 is $82.9 million. When recognized, the tax benefits relating to any future reversal of the valuation allowance on deferred tax assets will be accounted for as follows: approximately $71.4 million will be recognized as an income tax benefit, $7.6 million will be recognized as a reduction to goodwill and $3.9 million will be recognized as an increase to shareholders’ equity for certain tax deductions from employee stock options.
The Company will continue to evaluate its valuation allowance in future periods and depending upon the outcome of that assessment, additional amounts could be reversed or recorded and recognized as a reduction to goodwill or an adjustment to income tax benefit or expense. Such adjustments could cause our effective income tax rate to vary in future periods. We will need to generate $327.2 million of future United States federal taxable income to utilize all of our net U.S.operating loss carryforwards, research and experimentation tax credit carryforwards, and deferred tax assets.
During fiscal 2005 we reduced the carrying value of our deferred tax assets by $3.7 million relating to the tax benefit recorded in fiscal 2002 for the impairment of our assembly and test machinery and equipment in Mexicali, Mexico. In the first quarter of fiscal 2005, a charge of $2.2 million resulted from a reduction of the statutory income tax rate in Mexico. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilitiesas of a change in tax rates is recognized in income in the period that includes the enactment date. A charge of $2.3 million related to normal amortization of
20
the tax benefit for tax over book depreciation. A favorable foreign translation adjustment of $0.8 million increased the deferred tax asset’s carrying value.
In addition, the provision for income taxes for fiscal 2005, 2004 and 2003 consists of foreign income taxes incurred by foreign operations. We do not expect to recognize any income tax benefits relating to future operating losses generated in the United States until management determines that such benefits are more likely than not to be realized.
The provision for income taxes for fiscal 2005 and fiscal 2004 consists of approximately $11.1 million and $1.0 million, respectively, of U.S. income taxes recorded as a charge reducing the carrying value of goodwill. No benefit has been recognized for utilizing certain pre-Merger deferred tax assets. The utilization of these deferred items reduces the carrying value of goodwill, i.e., charge in lieu of tax expense, instead of reducing income tax expense. We will evaluate the realization of the pre-Merger deferred tax assets periodically and adjust the provision for income taxes accordingly. As a result, the effective tax rate may vary in subsequent periods.October 3, 2008.
No provision has been made for United States, federal, state, or additional foreign income taxes related to approximately $11.6$8.9 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested. It is not practicable to determine the U.S.United States federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested.
In fiscal 2005 our subsidiaryOn September 29, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Mexico dividended approximately $25.6Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This statement also provides guidance on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure, and transition. The provisions of FIN 48 will be applied to all income tax provisions commencing from that date.
During the year ended October 3, 2008, the statute of limitations period expired relating to an unrecognized tax benefit. The expiration of the statute of limitations period resulted in the recognition of $1.0 million of earningspreviously unrecognized tax benefit, including accrued interest on our tax position which impacted the effective tax rate as a discrete item. Including this reversal, total year-to-date accrued interest related to the United States. Such earnings, which were not subject to Mexico withholdingCompany’s unrecognized tax and could be applied against U.S. net operating loss carryforwards, resulted in no significant U.S. incomebenefits was a benefit of $0.4 million.
Of the total unrecognized tax expense. Earnings of our Mexico subsidiarybenefits at October 3, 2008, $0.6 million would impact the effective tax rate, if recognized. There are no longer considered permanently reinvested, and accordingly, U.S. income taxes are provided on current earnings attributable to our earnings in Mexico.positions which we anticipate could change within the next twelve months.
37
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | |
| Cumulative effect of change in accounting principle | | $ | — | | | | — | | | $ | — | | | | 100.0 | % | | $ | (397,139 | ) |
We adopted SFAS No. 142, “Goodwill and Other Intangible Assets”,On October 1, 2002 and performed2007, Mexico enacted a transitional impairment test for goodwill. As a result, we determinednew “flat tax” regime which became effective January 1, 2008. SFAS 109 prescribes that the carrying amount of our goodwill was $397.1 million greater than its implied fair value. This transitional impairment charge was recorded as a cumulative effect of a changethe new tax on deferred taxes must be included in accounting principle and is reflectedtax expense in our resultsthe period that includes the enactment date. The effect of operations as of the beginning of fiscal 2003. We test our goodwill for impairment annually as ofrecording deferred taxes in the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating thatof 2008 to the carrying valueforeign tax provision (benefit) was $(0.2) million. In addition to the deferred taxes, the Company has accrued flat tax for the year ended October 3, 2008 of goodwill may be impaired. We completed our annual goodwill impairment test for fiscal 2005 and determined that as of July 5, 2005, our goodwill was not impaired.$0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
| | | | | | | | | | | | | |
| | | Years Ended September 30 | |
| (in thousands) | | 2005 | | | 2004 | | | 2003 | |
| Cash and cash equivalents at beginning of period | | $ | 123,505 | | | $ | 161,506 | | | $ | 53,358 | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | | 54,197 | | | | 91,913 | | | | (72,052 | ) |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | | (66,424 | ) | | | (141,044 | ) | | | (44,282 | ) |
| | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 5,244 | | | | 11,130 | | | | 224,482 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 116,522 | | | $ | 123,505 | | | $ | 161,506 | |
| | | | | | | | | | |
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FISCAL 2005
During fiscal 2005, we generated $54.2 million in cash from operating activities. This was principally attributable to increased revenues and lower overall operating expenses combined with reduced interest expense and higher other income (primarily interest income). Non-cash charges (including depreciation, charge in lieu of income tax expense, amortization and contribution of common shares to savings and retirement plans) totaled $62.8 million. This was offset by a reduction in liabilities of $21.1 million primarily related to payment of prior year incentive compensation. Annualized inventory turns for the fourth quarter of fiscal 2005 were 6.2. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements. Other decreases to cash provided by operating activities resulted from an net increase in our receivable balances of $18.8 million offset by bad debt provisions of $5.1 million. The increase in accounts receivable balances is due to the timing and collection of customer receivables. The timing of purchasing patterns by our customers in our industry affects the timing of our revenue recognition and our collections and is one of the principal reasons for the increase in days sales outstanding from 66 at the end of fiscal 2004 to 82 at the end of fiscal 2005.
In October 2005, we were notified by Vitelcom Mobile (one of our tier three customers) that it had sustained significant weather related damage to one of its manufacturing facilities in Mexico. Due to the business interruption caused by this event, the customer notified us that it would defer making cash payments on a previously arranged payment plan. While we currently anticipate that this receivable will ultimately be collectible, the customer nevertheless is not making timely payments on the amounts owed to us and thus our near term cash payments from this customer remain uncertain.
Cash used in investing activities for the year ended September 30, 2005 consisted of $28.3 million of net investments in auction rate securities and capital expenditures of $38.1 million. We anticipate our capital expenditures will approximate $40 million in fiscal 2006. We believe a focused program of capital expenditures will be required to sustain our current manufacturing capabilities. Future capital expenditures will be funded by the generation of positive cash flows from operations. We may also consider acquisition opportunities to extend our technology portfolio and design expertise and to expand our product offerings.
Cash provided by financing activities for the year ended September 30, 2005, consisted of $5.2 million of proceeds received from the exercise of stock options. We have short-term debt which consists of a $50 million credit facility and long-term debt which consists of a $230 million 4.75% convertible subordinated note payable which will become due in November 2007. There were no changes to the long-term and short-term debt balances in fiscal 2005. We expect to maintain these balances through fiscal 2006. For additional information regarding our borrowing arrangements, see Note 7 to the Consolidated Financial Statements.| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | �� | | September 29, | |
| (dollars in thousands) | | 2008 | | | 2007 | | | 2006 | |
| | | |
| Cash and cash equivalents at beginning of period | | $ | 241,577 | | | $ | 136,749 | | | $ | 116,522 | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 173,678 | | | | 84,778 | | | | 27,226 | |
| Net cash provided by (used in) investing activities | | | (94,959 | ) | | | (20,146 | ) | | | 42,383 | |
| Net cash provided by (used in) financing activities | | | (95,192 | ) | | | 40,196 | | | | (49,382 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 225,104 | | | $ | 241,577 | | | $ | 136,749 | |
| | | | | | | | | | |
FISCAL 20042008
During fiscal 2004, we made progress in several key areas as we focused our efforts on both cash and inventory management. We significantly reduced the number of days sales outstanding in the fourth quarter of fiscal 2004 to 66 from 88 for the same period in the previous fiscal year. Annualized inventory turns for the fourth quarter of fiscal 2004 were 6.6. During fiscal 2004, we also converted our 15 percent convertible senior subordinated notes into shares of our common stock, ultimately reducing our future cash outflows and expenses related to the interest incurred on these senior subordinated notes.
In fiscal 2004, we generated $91.9 million in cash from operating activities as we experienced a significant improvement in our operating results when compared to the previous fiscal year. This improvement was primarily attributable to increased net revenues in fiscal 2004, when compared to the previous fiscal year, primarily resulting from increased demand for our wireless product portfolio. More specifically, we had launched a number of more highly integrated product offerings, added to our customer base and expanded our geographical market presence. In addition, we reduced research and development expenses and selling, general and administrative expense as a percentage of net revenues to 31.9% in fiscal 2004, from 39.1% for the previous fiscal year. During fiscal 2004, we invested $60.0 million in capital equipment primarily related to the design of new highly integrated products and processes, enabling us to address new opportunities and to meet our customers’ demands. In fiscal 2004 we made net investments of approximately $81 million in short-term auction rate securities.
Cash provided by financing activities in fiscal 2004 primarily represents an increase in borrowings under our $50 million credit facility secured by the purchased accounts receivable with Wachovia Bank, N.A.
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FISCAL 2003
Cash used in operating activities was $72.1 million for fiscal 2003, reflecting a net loss of $451.4 million, offset by non-cash charges (primarily asset impairments, depreciation and amortization) of $489.2 million and a net decrease in working capital items of approximately $109.9 million, including $40.0 million of merger-related expense payments. As of September 30, 2003, substantially all amounts accrued for merger-related expenses had been paid. We adopted SFAS No. 142 on October 1, 2002, and recorded a $397.1 million charge for the cumulative effect of a change in accounting principle, representing the difference between the implied fair value and carrying value of our goodwill.
Cash used in investing activities for fiscal 2003 primarily consisted of capital expenditures of $40.3 million. The capital expenditures for fiscal 2003 represented our continued investment in production and test facilities in addition to our commitment to invest in the capital needed to design new products and processes and address new opportunities to meet our customers’ demands. Cash used in investing activities for fiscal 2003 also included $4.0 million of purchases of short-term investments. Our short-term investments were classified as held-to-maturity and consisted primarily of commercial paper with original maturities of more than 90 days and less than twelve months.
On August 11, 2003, we filed a shelf registration statement on Form S-3 with the SEC with respect to the issuance of up to $250 million aggregate principal amount of securities, including debt securities, common or preferred shares, warrants or any combination thereof. This registration statement, which the SEC declared effective on August 28, 2003, provides us with greater flexibility and access to capital. On September 9, 2003, we issued 9.2 million shares of common stock under our shelf registration statement. Cash provided by financing activities for fiscal 2003 included approximately $102.2 million of net proceeds from this offering. We may from time to time issue securities under the remaining balance of the shelf registration statement for general corporate purposes.
Cash provided by financing activities for fiscal 2003 also included the net impact of our private placement of $230 million of 4.75 percent convertible subordinated notes due November 2007 and related debt refinancing with Conexant on November 13, 2002. These subordinated notes could be converted into 110.4911 shares of common stock per $1,000 principal balance, which is the equivalent of a conversion price of approximately $9.05 per share. The net proceeds from the note offering were principally used to prepay $105 million of the $150 million debt to Conexant relating to the purchase of the Mexicali Operations and to prepay the $65 million principal amount outstanding as of November 13, 2002, under a separate loan facility with Conexant. In connection with our prepayment of $105 million of the $150 million debt owed to Conexant relating to the purchase of the Mexicali Operations, the remaining $45 million principal balance was exchanged for new 15% convertible senior subordinated notes with a maturity date of June 30, 2005. On April 22, 2004, we notified the holder of the senior notes that we would redeem such notes in full on May 12, 2004. On May 6, 2004, the holder of the senior notes converted such notes in full for approximately 5.7 million shares of our common stock. In addition to the retirement of $170 million in principal amount of indebtedness owing to Conexant, we also retained approximately $53 million of net proceeds of the private placement to support our working capital needs. In addition, as of September 30, 2003, we had borrowings outstanding of $41.7 million under our $50 million credit facility secured by the purchased accounts receivable with Wachovia Bank, N.A.
CONTRACTUAL CASH FLOWS
Following is a summary of our contractual payment obligations for consolidated debt, purchase agreements and operating leases at September 30, 2005 (see Notes 7 and 11 of the Consolidated Financial Statements), in thousands:
| | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due By Period | |
| | | | | | | Less Than 1 | | | | | | | | | | |
| Obligation | | Total | | | Year | | | 1-3 years | | | 3-5 Years | | | Thereafter | |
| Debt | | $ | 280,000 | | | $ | 50,000 | | | $ | 230,000 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating leases | | | 30,838 | | | | 6,980 | | | | 11,385 | | | | 10,167 | | | | 2,306 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other commitments | | | 9,372 | | | | 4,298 | | | | 5,074 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 320,210 | | | $ | 61,278 | | | $ | 246,459 | | | $ | 10,167 | | | $ | 2,306 | |
| | | | | | | | | | | | | | | | |
Based on our results of operations for fiscal 2005 and2008, along with current trends, we expect our existing sources of liquidity, together with cash expected to be generated from operations, and short term investments, will be sufficient to fund our research and development, capital expenditures, debt obligations, purchase obligations, working capital and other cash requirements for at least the next 12 months. However, we cannot assure yoube certain that the capital required to fund these expenses will be available in the
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future. In addition, any strategic investments and acquisitions that we may make to help us grow our business may require additional capital resources. If we are unable to obtain enoughsufficient capital to meet our capital needs on a timely basis orand on favorable terms (if at all,all), our business and operations could be materially adversely affected.
Cash and cash equivalent balances decreased $16.5 million to $225.1 million at October 3, 2008 from $241.6 million at September 28, 2007. We generated $173.7 million in cash from operations during the fiscal year ended October 3, 2008, which was offset by the retirement of $49.3 million of Junior Notes, $62.4 million of the 2007 Convertible Notes, capital expenditures of $64.8 million and expenditures on acquisitions of $32.6 million. The number of days sales outstanding for the fiscal year ended October 3, 2008 decreased to 57 from 80 for fiscal 2007.
During fiscal 2008, we generated net income of $111.0 million. We experienced a decrease in receivables and other assets of $21.2 million and $2.9 million, respectively, an increase in accounts payable balances of $2.1 million and incurred multiple non-cash charges (e.g., depreciation, amortization, charge in lieu of income tax expense, contribution of common shares to savings and retirement plans, share-based compensation expense and non-cash restructuring expense) totaling $94.9 million. This was offset by an increase in inventories of $16.1 million, a decrease in other accrued liabilities of $5.1 million and an increase to our deferred tax assets of $36.6 million (primarily the result of a partial release of our tax valuation allowance in fiscal 2008).
Cash used in investing activities for the fiscal year ended October 3, 2008, consisted of net sales of $2.5 million in auction rate securities and investments in capital equipment of $64.8 million primarily to expand fabrication and assembly and test capacity. We believe a focused program of capital expenditures will be required to sustain our current manufacturing capabilities. We expect that future capital expenditures will be funded by the generation of positive cash flows from operations. In addition, we paid $32.6 million in cash to acquire certain assets from two separate companies. We acquired Freescale Semiconductor’s handset power amplifier business and also acquired patents from another company. We may also consider additional future acquisition opportunities to extend our technology portfolio and design expertise and to expand our product offerings.
Cash used in financing activities for the fiscal year ended October 3, 2008, consisted of the retirement of the remaining $49.3 million in Junior Notes, the retirement of $62.4 million of our 2007 Convertible Notes, and the repurchase of treasury stock of $2.1 million, offset by cash provided by stock option exercises of $18.0 million. For additional information regarding our borrowing arrangements, see Note 8 of Item 8 of this Annual Report on Form 10-K.
In connection with our exit of the baseband product area, we anticipate making remaining cash payments of approximately $2.4 million in future periods. Certain payments on severance and long-term lease obligations resulting from facility closures will be remitted primarily in fiscal 2009.
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Our invested cash balances primarily consist of United States treasury obligations, United States agency obligations, overnight repurchase agreements backed by United States treasuries or United States agency obligations, highly rated commercial paper and certificates of deposit. At October 3, 2008, we also held a $3.2 million auction rate security which historically has provided liquidity through a Dutch auction process. The recent disruptions in the credit markets have substantially eliminated the liquidity of this process resulting in failed auctions. During the fiscal year ended October 3, 2008, we performed a comprehensive valuation and discounted cash flow analysis on the auction rate security. We concluded the value of the auction rate security was $2.3 million, and the carrying value of these securities was reduced by $0.9 million, reflecting this change in fair value. Accordingly, in the fiscal year ended October 3, 2008, we recorded unrealized losses on this auction rate security of approximately $0.9 million. We assessed these declines in fair market value to be temporary and consider the security to be illiquid until there is a successful auction. Accordingly, the remaining auction rate security balance has been reclassified to non-current other assets and the loss has been recorded in Other Comprehensive Income. We will continue to monitor the liquidity and accounting classification of this security in future periods. If in a future period, we determine that the impairment is other than temporary, we will impair the security to its fair value and charge the loss to earnings.
After the close of fiscal 2008, we retired an additional $40.5 million of our 2007 Convertible Notes (due in 2012) at an average discounted price of $92.58 per $100.00 of par value. These retirements reduced the remaining principal balance on our 2007 Convertible Notes to $97.1 million as of November 12, 2008.
On July 15, 2003, we entered into a receivables purchase agreement under which we have agreed to sell from time to time certain of our accounts receivable to Skyworks USA, Inc. (“Skyworks USA”), a wholly-owned special purpose entity that is fully consolidated for accounting purposes. Concurrently, Skyworks USA entered into an agreement with Wachovia Bank, N.A. providing for a $50.0 million credit facility (“Facility Agreement’’) secured by the purchased accounts receivable. As a part of the consolidation, any interest incurred by Skyworks USA related to monies it borrows under the Facility Agreement is recorded as interest expense in the Company’s results of operations. We perform collections and administrative functions on behalf of Skyworks USA. Interest related to the Facility Agreement is at LIBOR plus 0.75%. We renewed the Facility Agreement for another year in July 2008, and as of October 3, 2008, Skyworks USA had borrowed $50.0 million under this agreement.
FISCAL 2007
Our cash and cash equivalent balances increased by $104.8 million to $241.6 million at September 28, 2007 from $136.7 million at September 29, 2006. Cash and cash equivalent balances and short-term investments increased by $82.6 million to $253.8 million at September 28, 2007 from $171.2 million at September 29, 2006. The number of days sales outstanding for the fiscal year ended September 28, 2007 increased to 80 from 73 as compared to fiscal 2006.
During fiscal 2007, we generated $84.8 million in cash from operating activities. Contributing to these positive operating cash flows was net income of $57.7 million. We also incurred multiple non-cash charges (e.g., depreciation, amortization, contribution of common shares to savings and retirement plans, share-based compensation expense and non-cash restructuring expense) totaling $66.6 million. In fiscal 2007, we also experienced a decrease in accounts payable balances of $16.7 million, a decrease in other accrued liability balances of $10.8 million and an increase in receivable balances of $10.7 million. Furthermore, we experienced an increase in deferred tax assets of $1.7 million primarily resulting from the partial release of our tax valuation allowance in the fourth quarter of fiscal 2007. Finally, provision for losses on accounts receivable increased by $2.2 million principally due to further reserves recorded for baseband product area customers.
During fiscal 2007, we utilized $20.1 million in cash from investing activities. Cash provided by investing activities in fiscal 2007 consisted of net proceeds of $22.5 million from the sale of auction rate securities. Capital expenditures of $42.6 million offset these net proceeds and were primarily related to the purchase of equipment utilized in our fabrication facilities to support and enhance our assembly and test capacity.
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During fiscal 2007, we generated $40.2 million in cash from financing activities. This principally resulted from the issuance of our 2007 Convertible Notes offering which generated gross proceeds of $200.0 million, and stock option exercises of $8.3 million, offset by repayment of $130.0 million on our Junior Notes, a common stock buyback of 4.3 million shares at a cost of approximately $31.7 million, and financing costs associated with our 2007 Convertible Notes offering of $6.2 million. As of September 28, 2007 our Facility Agreement of $50.0 million was fully drawn. We paid approximately $12.4 million in interest to service the 2007 Convertible Notes, the Junior Notes and the Facility Agreement in fiscal 2007. For additional information regarding our borrowing arrangements, see Note 8 of Item 8 of this Annual Report on Form 10-K.
CONTRACTUAL CASH FLOWS
Following is a summary of our contractual payment obligations for consolidated debt, purchase agreements, operating leases, other commitments and long-term liabilities at October 3, 2008 (see Notes 8 and 12 of Item 8 of this Annual Report on Form 10-K), in thousands:
| | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due By Period | |
| | | | | | | Less Than 1 | | | | | | | | | | |
| Obligation | | Total | | | Year | | | 1-3 years | | | 3-5 Years | | | Thereafter(1) | |
| Long-Term Debt Obligations | | $ | 137,616 | | | $ | — | | | $ | 50,000 | | | $ | 87,616 | | | $ | — | |
| Other Commitments (1) | | | 8,713 | | | | 3,858 | | | | 4,450 | | | | 405 | | | | — | |
| Operating Lease Obligations | | | 15,520 | | | | 7,045 | | | | 7,920 | | | | 555 | | | | — | |
| Other Long-Term Liabilities (2) | | | 4,909 | | | | 811 | | | | 1,121 | | | | 78 | | | | 2,899 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 166,758 | | | $ | 11,714 | | | $ | 63,491 | | | $ | 88,654 | | | $ | 2,899 | |
| | | | | | | | | | | | | | | | |
| | |
| (1) | | Other Commitments consist of contractual license and royalty payments. |
|
| (2) | | Other Long-Term Liabilities includes $2.7 million of Executive Deferred Compensation for which there is a corresponding long term asset. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, our future results of operations may be affected. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required.
INVENTORIES
We assess the recoverability of inventories through an on-going review of inventory levels relative to sales backlog and forecasts, product marketing plans and product life cycles. When the inventory on hand exceeds the foreseeable demand (generally in excess of six months), we write down the value of those excess inventories. In determining the net realizable value of our inventories, we review the valuations of inventory considered excessively old, and therefore subject to obsolescence. We also adjust the valuation of inventory when estimated actual cost is significantly different than standard cost and to value inventory at the lower of cost or market. Once established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory. We sell our products to communications equipment original equipment manufacturers (“OEMs”) that have designed our products into equipment such as cellular handsets. These design wins are gained through a lengthy sales cycle, which includes providing technical support to the OEM customer. In the event of the loss of business from existing OEM customers, we may be unable to secure new customers for our existing products without first achieving new design wins. Consequently, when the quantities of inventory on hand exceed forecasted demand from existing OEM customers into whose products our products have been designed, we generally will be unable to sell our excess inventories to others, and the net realizable value of such inventories is generally estimated to be zero. The amount of the write-down is the excess of historical cost over estimated realizable value (generally zero). Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those projected by management. In the event that actual demand is lower than originally projected, additional inventory write-downs may be required.
VALUATION OF LONG-LIVED ASSETS, GOODWILL AND INTANGIBLE ASSETS
Carrying values for long-lived assets and definite-lived intangible assets, excluding goodwill, are reviewed for possible impairment as circumstances warrant in connection with SFAS No. 144, which was adopted on October 1, 2002. Impairment reviews are conducted at the judgment of management whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined using discounted cash flows.
Carrying values of goodwill and other intangible assets with indefinite lives are reviewed annually for possible impairment in accordance with SFAS No. 142, which was adopted on October 1, 2002. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value to our net book value. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. Step two of the analysis compares the implied fair value of goodwill to its carrying amount in a manner similar to purchase price allocation. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter (July 1) and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired.
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DEFERRED INCOME TAXES
We have provided a valuation allowance related to our substantial United States deferred tax assets. If sufficient evidence of our ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, we may be required to reduce our valuation allowance, which may result in income tax benefits in our statement of operations. The future realization of certain deferred tax assets will be applied to reduce the carrying value of goodwill. The portion of the valuation allowance for these deferred tax assets for which subsequently recognized tax benefits may be applied to reduce goodwill related to the purchase consideration of the Merger is approximately $32 million. We evaluate the realizability of the deferred tax assets and assess the need for a valuation allowance quarterly. In fiscal 2002, we recorded a tax benefit of approximately $23 million related to the impairment of our Mexicali assets. A valuation allowance has not been established because we believe that the related deferred tax asset will be recovered during the carryforward period.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment and transfer of title, in accordance with the shipping terms specified in the arrangement with the customer. Revenue from license fees and intellectual property is recognized when these fees are due and payable, and all other criteria of SEC Staff Accounting Bulletin No. 104, —
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Revenue Recognition (“SAB 104”), have been met. We ship product on consignment to certain customers and only recognize revenue when the customer notifies us that the inventory has been consumed. Revenue recognition is deferred in all instances where the earnings process is incomplete. Certain product sales are made to electronic component distributors under agreements allowing for price protection and/or a right of return on unsold products. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. The Company provides for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions. The recoverability of inventories is assessed through an on-going review of inventory levels in relation to sales backlog and forecasts, product marketing plans and product life cycles. When the inventory on hand exceeds the foreseeable demand (generally in excess of twelve months), the value of such inventory that is not expected to be sold at the time of the review is written down. The amount of the write-down is the excess of historical cost over estimated realizable value (generally zero).
Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Some or all of the inventories that have been written-down may be retained and made available for sale. In the event that actual demand is higher than originally projected, a portion of these inventories may be able to be sold in the future. Inventories that have been written-down and are identified as obsolete are generally scrapped.
SHARE-BASED COMPENSATION
The Company applies Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, employee stock purchases related to the Company’s 2002 Employee Stock Purchase Plan, restricted stock and other special equity awards based on estimated fair values. The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the applicable accounting standard as of October 1, 2005, the first day of the Company’s fiscal year 2006.
Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Share-based compensation expense recognized in the Company’s Consolidated Statement of Operations for the fiscal year ended October 3, 2008 included compensation expense for share-based payment awards granted on or before, but not yet vested as of, September 30, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123, and compensation expense for the share-based payment awards granted subsequent to September 30, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As share-based compensation expense recognized in the Consolidated Statement of Operations for the fiscal year ended October 3, 2008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Upon adoption of SFAS 123(R), the Company elected to retain its method of valuation for share-based awards using the Black-Scholes option-pricing model (“Black-Scholes model”) which was also previously used for the Company’s pro forma information required under SFAS 123. The Company’s determination of fair value of share-based payment awards on the date of grant using the Black-Scholes model is affected by the Company’s stock price
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as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to; the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. For more complex awards with market-based performance conditions, the Company employs a Monte Carlo simulation method which calculates many potential outcomes for an award and establishes fair value based on the most likely outcome.
SFAS 123(R) requires the Company to evaluate and periodically validate several assumptions in conjunction with calculating share-based compensation expense. These assumptions include the expected life of a stock option or other equity based award, expected volatility, pre-vesting forfeiture, risk free rate and expected dividend yield. All of these assumptions affect to one degree or another, the valuation of the Company’s equity based awards or the recognition of the resulting share-based compensation expense. The most significant assumptions in the Company’s calculations are described below.
Expected Life of an Option or other Equity Based Award
Since employee options are non-transferable, SFAS 123(R) allows the use of an expected life to more accurately estimate the value of an employee stock option rather than using the full contractual term.
The vesting of the majority of the Company’s stock options are graded over four years (25% at each anniversary) and the contractual term is either 7 years or 10 years. The Company analyzed its historical exercise experience and exercise behavior by job group. The Company analyzed the following three exercise metrics: exercise at full vesting, exercise at midpoint in the contractual life and exercise at the end of the full contractual term. The Company chose the mid-point alternative as the estimate which most closely approximated actual exercise experience of its employee population. The valuation and resulting share-based compensation expense recorded is sensitive to what alternative is chosen and the choice of another alternative in the future could result in a material difference in the amount of share-based compensation expense recorded in a reporting period.
Expected Volatility
Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. SFAS 123(R) does not specify a method for estimating expected volatility; instead it provides a list of factors that should be considered when estimating volatility: historical volatility that is generally commensurate with the expected option life, implied volatilities, the length of time a stock has been publicly traded, regular intervals for price observations, corporate and capital structure and the possibility of mean reversion. The Company analyzed its volatility history and determined that the selection of a weighting of 50% to historical volatility and 50% to implied volatility (as measured by examining the underlying volatility in the open market of publicly traded call options) would provide the best estimate of expected future volatility of the stock price. The selection of another methodology to calculate volatility or even a different weighting between implied volatility and historical volatility could materially impact the valuation of stock options and other equity based awards and the resulting amount of share-based compensation expense recorded in a reporting period.
Pre-Vesting Forfeiture
SFAS 123(R) specifies that initial accruals of share-based compensation expense should be based on the estimated number of instruments for which the requisite service is expected to be rendered. The Company examined its options forfeiture history and computed an average annualized forfeiture percentage. The Company determined that a weighted average of historical annualized forfeitures is the best estimate of future actual forfeiture experience. The application of a different methodology for calculating estimated forfeitures could materially impact the amount of share-based compensation expense recorded in a reporting period.
VALUATION OF LONG-LIVED ASSETS
Carrying values for long-lived assets and definite lived intangible assets, which excludes goodwill, are reviewed for possible impairment as circumstances warrant in connection with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Impairment reviews are conducted at the judgment of management whenever events or changes in circumstances indicate
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that the carrying amount of any such asset or asset group may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to the Company’s business model or changes in its operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value of an asset or asset group, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is determined using discounted cash flows.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets with indefinite lives are tested at least annually for impairment in accordance with the provisions of SFAS No. 142,Goodwill and Other Intangible Assets. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares the Company’s fair value to its net book value to determine if there is an indicator of impairment. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. The Company calculates fair value using the average market price of its common stock over a seven-day period surrounding the annual impairment testing date of the first day of the fourth fiscal quarter and the number of shares of common stock outstanding on the date of the annual impairment test (the first day of the fourth fiscal quarter). If the assessment in the first step indicates impairment then the Company performs step two. Step two of the analysis compares the implied fair value of goodwill to its carrying amount in a manner similar to a purchase price allocation for a business combination. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. Intangible assets are tested for impairment using an estimate of discounted cash flows expected to result from the use of the asset. We test our goodwill and other intangible assets for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill or other intangible assets may be impaired. Indicators such as unexpected adverse business conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel, and acts by governments and courts, may signal that an asset has become impaired.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. This method also requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The carrying value of the Company’s net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company’s consolidated statement of operations. Management evaluates the realizability of the deferred tax assets and assesses the adequacy of the valuation allowance quarterly. Likewise, in the event that the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income or decrease the carrying value of goodwill in the period such determination was made.
The calculation of our tax liabilities includes addressing uncertainties in the application of complex tax regulations. With the implementation effective September 29, 2007, FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
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We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our recognition threshold and measurement attribute of whether it is more likely than not that the positions we have taken in tax filings will be sustained upon tax audit, and the extent to which, additional taxes would be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period in which it is determined the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS 157
In November 2004,September 2006, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. The amendments made by 157,Fair Value Measurements(“SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidanceexpands disclosures about fair value measurements. SFAS 157 is effective for inventory costs incurred duringfinancial statements issued for fiscal years beginning after JuneNovember 15, 2005.2007 for financial assets carried at fair value, and years beginning after November 15, 2008 for non-financial assets not carried at fair value. The Company has not yet determined the impact that SFAS 157 will have on its results from operations or financial position.
SFAS 159
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”) including an amendment of SFAS No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for the Company beginning in fiscal 2009. The adoption of SFAS 159 will not have a material impact on the Company’s results from operations or financial position.
SFAS 141(R)
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations(“SFAS 141(R)”).SFAS 141(R) applies to any transaction or other event that meets the definition of a business combination. Where applicable, SFAS 141(R) establishes principles and requirements for how the acquirer recognizes and measures identifiable assets acquired, liabilities assumed, noncontrolling interest in the acquiree and goodwill or gain from a bargain purchase. In addition, SFAS 141(R) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is to be applied prospectively for fiscal years beginning after December 15, 2008. The Company will evaluate the impact of SFAS 141(R) on its Consolidated Financial Statements in the event future business combinations are contemplated.
SFAS 160
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51(“SFAS 160”). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS 141(R). This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The statement shall be applied prospectively as of the beginning of the fiscal year in which the statement is initially adopted. The Company does not expect the adoption of SFAS No. 151 will160 to impact its results of operations or financial position because the Company does not have a material impact on its financial statements.any minority interests.
SFAS 161
In December 2004,March 2008, the FASB issued SFAS No. 123 (revised 2004)161, “Share-Based Payment”. SFAS No. 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights,Disclosures about Derivative Instruments and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) were initially required to apply SFAS No. 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. In April 2005, the SEC issued a rule amending the compliance date, which allows companies to implement SFAS No. 123(R) at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. As a result, we will implement SFAS No. 123(R) using the modified prospective method starting October 1, 2005. Under this method, the Company will begin recognizing compensation cost for equity-based compensation for all new and existing unvested share-based awards after the date of adoption. The Company will also be required to recognize compensation expense for the fair value of the discount and option features provided to employees on all shares issued through its Employee Stock Purchase Plan under the provisions of SFAS No. 123(R). Under the provisions of SFAS No. 123(R), the Company anticipates it will recognize $25.5 million as compensation expense in fiscal years 2006 thru 2011. This assumes the current Black-Scholes valuation assumptions at September 30, 2005 remain constant in future periods. It also does not take into account future adjustments to compensation expense due to actual cancellations or new awards granted.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—Hedging Activities—an amendment of APB OpinionFASB Statement No. 29”133(“SFAS 161”). The guidance in APB OpinionSFAS 161 amends FASB Statement No. 29, “Accounting133 to require enhanced disclosures about an entity’s derivative and hedging activities thereby improving the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for Nonmonetary Transactions”, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assetsunder Statement 133 and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for such exchange transactions occurring infinancial statements issued
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for fiscal years and interim periods beginning after JuneNovember 15, 2005.2008, with early application encouraged. The Company does not believecurrently hold any positions in derivative instruments or participate in hedging activities and thus does not expect the impactadoption of adopting SFAS No. 153 will161 to have a materialany impact on its results of operations or financial statements.position.
FSP No. 142-3
In December 2004,April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP No. 109-1, “Application142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 109, Accounting142,Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for Income Taxes, to the Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”. The American Jobs Creation Act of 2004 (“AJCA”) introduces a special 9% tax deduction on qualified production activities. FSP No. 109-1 clarifies that this tax deduction should be accountedfinancial statements issued for as a special tax deduction in accordance with SFAS No. 109.fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption of FSP No. 109-1142-3 to have aany material impact on our consolidated financial position,its results of operations or cash flows because of its historical net operating loss carryforwards.financial position.
FSP No. APB 14-1
In December 2004,May 2008, the FASB issued FSP No. 109-2, “AccountingAPB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 alters the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. FSP APB 14-1 is expected to impact the Company’s accounting for its 2007 Convertible Notes and previously held Junior Notes. This FSP requires registrants with specified convertible note features to recognize (non-cash) interest expense based on the market rate for similar debt instruments without the conversion feature. Furthermore, pursuant to its retrospective accounting treatment, the FSP requires prior period interest expense recognition. FSP APB 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company is currently evaluating FSP APB 14-1 and the impact that it will have on its Consolidated Financial Statements. The Company is not required to adopt FSP APB 14-1 until the first quarter of fiscal 2010.
FSP No. 133-1 and FIN 45-4
In September 2008, the FASB issued FSP No. 133-1,Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133(“FSP 133-1”) and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP amends FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities,to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP also amends FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure GuidanceRequirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,to require an additional disclosure about the Foreign Earnings Repatriation Provision withincurrent status of the American Jobs Creation Actpayment/performance risk of 2004”a guarantee. Further, this FSP clarifies the Board’s intent about the effective date of FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities. The AJCA introducesprovisions of this FSP that amend Statement 133 and Interpretation 45 shall be effective for a limited time an 85% dividend deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP 109-2 provides accountingreporting periods (annual or interim) ending after November 15, 2008. The Company does not currently hold any positions in derivative instruments or participate in hedging activities and disclosure guidance for the repatriation provision. The Companythus does not expect the adoption of FSP No. 109-2133-1 and FIN 45-4 to have a materialany impact on our consolidated financial position,its results of operations or cash flows because of its historical net operating loss carryforwards.financial position.
FSP No. FAS 157-3
In March 2005,October 2008, the FASB issued FASB InterpretationFSP No. 47, “AccountingFAS 157-3,Determining the Fair Value of a Financial Asset When the Market for ConditionalThat Asset Retirement Obligations—Is Not Active (“FSP 157-3”) which clarifies the application of SFAS 157 in a market that is not active and provides an interpretation of FASB Statement No. 143”. This interpretation provides additional guidance asexample to when companies should recordillustrate key considerations in determining the fair value of a liability for a conditional asset retirement obligation when there is uncertainty about the timing and/or method of settlement of the obligation. The Company is currently evaluating the potential impact of this issue on its financial statements, but does not believe the impact of any change, if necessary, will be material. FASB Interpretation No. 47asset. SFAS 157 is effective for fiscal years ending after December 15, 2005.
In May 2005, the FASBfinancial statements issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3”. This Statement replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements—an amendment of APB Opinion No. 28”, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and error corrections occurring in fiscal years beginning after DecemberNovember 15, 2005.2007 for financial assets carried at fair value, and years beginning after November 15, 2008 for non-financial assets not carried at fair value. The Company has not yet determined the impact that SFAS 157 will have on its results from operations or financial position.
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OTHER MATTERS
Inflation did not have a material impact upon our results of operations during the three-year period ended September 30, 2005.
CERTAIN BUSINESS RISKS
We operate in a rapidly changing environment that involves a number of risks, many of which are beyond our control. This discussion highlights some of the risks, which may affect our future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.
We operate in the highly cyclical wireless communications semiconductor industry, which is subject to significant downturns.
We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From time to time, changes in general economic conditions, together with other factors, cause significant upturns and downturns in the industry. Periods of industry downturn are characterized by diminished product demand, production overcapacity, excess inventory levels and accelerated erosion of average selling prices. These characteristics, and in particular their impact on the level of demand for digital cellular handsets, may cause substantial fluctuations in our revenues and results of operations. Furthermore, downturns in the semiconductor industry may be severe and prolonged, and any prolonged delay or failure of the industry or the wireless communications market to recover from downturns would materially and adversely affect our business, financial condition and results of operations. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to meet customer demand for our products. We have experienced these cyclical fluctuations in our business and may experience cyclical fluctuations in the future.
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We have incurred substantial operating losses in the past and may experience future losses.
Our operating results for fiscal years 2002 and 2003 were adversely affected by a global economic slowdown, decreased consumer confidence, reduced capital spending, and adverse business conditions and liquidity concerns in the telecommunications and related industries. These factors led to a slowdown in customer orders, an increase in the number of cancellations and reschedulings of backlog, higher overhead costs as a percentage of our reduced net revenue, and an abrupt decline in demand for many of the end-user products that incorporate our wireless communications semiconductor products and system solutions. Although we emerged from this period of economic weakness in fiscal 2004, should economic conditions deteriorate for any reason, it could result in underutilization of our manufacturing capacity, reduced revenues or changes in our revenue mix, and other impacts that would materially and adversely affect our operating results. Due to this economic uncertainty, although we were profitable in fiscal 2004 and fiscal 2005, we cannot assure you that we will be able to sustain such profitability or that we will not experience future operating losses.
Additionally, the conflict in Iraq, as well as other contemporary international conflicts, natural disasters, acts of terrorism, and civil and military unrest contributes to the economic uncertainty. These continuing and potentially escalating conflicts can also be expected to place continued pressure on economic conditions in the United States and worldwide. These conditions make it extremely difficult for our customers, our vendors and for us to accurately forecast and plan future business activities. If such uncertainty continues or economic conditions worsen (or both), our business, financial condition and results of operations will likely be materially and adversely affected.
The wireless semiconductor markets are characterized by intense competition.
The wireless communications semiconductor industry in general and the markets in which we compete in particular are intensely competitive. We compete with U.S. and international semiconductor manufacturers of all sizes in terms of resources and market share. We currently face significant competition in our markets and expect that intense price and product competition will continue. This competition has resulted in, and is expected to continue to result in, declining average selling prices for our products and increased challenges in maintaining or increasing market share. Furthermore, additional competitors may enter our markets as a result of growth opportunities in communications electronics, the trend toward global expansion by foreign and domestic competitors and technological and public policy changes. We believe that the principal competitive factors for semiconductor suppliers in our markets include, among others:
| • | | time-to-market, |
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| • | | timely new product innovation, |
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| • | | product quality, reliability and performance, |
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| • | | product price, |
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| • | | features available in products, |
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| • | | compliance with industry standards, |
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| • | | strategic relationships with customers, and |
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| • | | access to and protection of intellectual property. |
We cannot assure you that we will be able to successfully address these factors. Many of our competitors enjoy the benefit of:
| • | | long presence in key markets, |
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| • | | name recognition, |
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| • | | high levels of customer satisfaction, |
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| • | | ownership or control of key technology or intellectual property, and |
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| • | | strong financial, sales and marketing, manufacturing, distribution, technical or other resources. |
As a result, certain competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products than we can.
Current and potential competitors have established or may in the future establish, financial or strategic relationships among themselves or with customers, resellers or other third parties. These relationships may affect customers’ purchasing decisions. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Furthermore, some of our customers have divisions that internally develop or manufacture products similar to ours, and may compete with us. We cannot assure you that we will be able to compete successfully against current and potential competitors. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.
Changes in the accounting treatment of stock-based compensation will adversely affect our results of operations.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), “Share-Based Payment” to require companies to expense employee stock options for financial reporting purposes, effective for interim or annual periods beginning after June 15, 2005. Such stock option expensing will require us to value our employee stock option grants pursuant to an option
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valuation formula and amortize that value against our earnings over the vesting period in effect for those options. We currently account for stock-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and have adopted the disclosure-only alternative of SFAS No. 123(R), “Accounting for Stock-Based Compensation.” In April 2005, the SEC issued a rule amending the compliance date which allows companies to implement SFAS 123(R) at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. As a result, we implemented SFAS 123(R) in the reporting period starting October 1, 2005. When we are required to expense employee stock options in the first quarter of fiscal 2006, this change in accounting treatment will materially affect our reported results of operations as the stock-based compensation expense will be charged directly against our reported earnings but will have no impact on cash flows from operations. We anticipate that our stock-based compensation expense will approximate $25.5 million in fiscal 2006 through 2011. This expense projection is calculated as of September 30, 2005 and does not taken into account any future equity awards that we might issue nor does it account for future actual stock-based award forfeitures. We will be required to adjust future stock-based compensation expense for actual future stock option forfeitures.
Our manufacturing processes are extremely complex and specialized.
Our manufacturing operations are complex and subject to disruption, including for causes beyond our control. The fabrication of integrated circuits is an extremely complex and precise process consisting of hundreds of separate steps. It requires production in a highly controlled, clean environment. Minor impurities, contamination of the clean room environment, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer, defects in equipment or materials, human error, or a number of other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to malfunction. Because our operating results are highly dependent upon our ability to produce integrated circuits at acceptable manufacturing yields, these factors could have a material adverse affect on our business. In addition, we may discover from time to time defects in our products after they have been shipped, which may require us to pay warranty claims, replace products, or pay costs associated with the recall of a customer’s products containing our parts.
Additionally, our operations may be affected by lengthy or recurring disruptions of operations at any of our production facilities or those of our subcontractors. These disruptions may include electrical power outages, fire, earthquake, flooding, war, acts of terrorism, health advisories or risks, or other natural or man-made disasters. Disruptions of our manufacturing operations could cause significant delays in shipments until we are able to shift the products from an affected facility or subcontractor to another facility or subcontractor. In the event of such delays, we cannot assure you that the required alternative capacity, particularly wafer production capacity, would be available on a timely basis or at all. Even if alternative wafer production or assembly and test capacity is available, we may not be able to obtain it on favorable terms, which could result in higher costs and/or a loss of customers. We may be unable to obtain sufficient manufacturing capacity to meet demand, either at our own facilities or through external manufacturing or similar arrangements with others.
Due to the highly specialized nature of the gallium arsenide integrated circuit manufacturing process, in the event of a disruption at the Newbury Park, California or Woburn, Massachusetts semiconductor wafer fabrication facilities, alternative gallium arsenide production capacity would not be immediately available from third-party sources. These disruptions could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to maintain and improve manufacturing yields that contribute positively to our gross margin and profitability.
Minor deviations or perturbations in the manufacturing process can cause substantial manufacturing yield loss, and in some cases, cause production to be suspended. Manufacturing yields for new products initially tend to be lower as we complete product development and commence volume manufacturing, and typically increase as we bring the product to full production. Our forward product pricing includes this assumption of improving manufacturing yields and, as a result, material variances between projected and actual manufacturing yields will have a direct effect on our gross margin and profitability. The difficulty of accurately forecasting manufacturing yields and maintaining cost competitiveness through improving manufacturing yields will continue to be magnified by the increasing process complexity of manufacturing semiconductor products. Our manufacturing operations will also face pressures arising from the compression of product life cycles, which will require us to manufacture new products faster and for shorter periods while maintaining acceptable manufacturing yields and quality without, in many cases, reaching the longer-term, high-volume manufacturing conducive to higher manufacturing yields and declining costs.
We are dependent upon third parties for the manufacture, assembly and test of our products.
We rely upon independent wafer fabrication facilities, called foundries, to provide silicon-based products and to supplement our gallium arsenide wafer manufacturing capacity. We also utilize subcontractors to package, assemble and test our products. There are significant risks associated with reliance on third-party foundries, including:
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| • | | the lack of ensured wafer supply, potential wafer shortages and higher wafer prices, |
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| • | | limited control over delivery schedules, manufacturing yields, production costs and quality assurance, and |
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| • | | the inaccessibility of, or delays in obtaining access to, key process technologies. |
Although we have long-term supply arrangements to obtain additional external manufacturing capacity, the third-party foundries we use may allocate their limited capacity to the production requirements of other customers. If we choose to use a new foundry, it will typically take an extended period of time to complete the qualification process before we can begin shipping products from the new foundry. The foundries may experience financial difficulties, be unable to deliver products to us in a timely manner or suffer damage or destruction to their facilities, particularly since some of them are located in earthquake zones. If any disruption of manufacturing capacity occurs, we may not have alternative manufacturing sources immediately available. We may therefore experience difficulties or delays in securing an adequate supply of our products, which could impair our ability to meet our customers’ needs and have a material adverse effect on our operating results.
We are dependent upon third parties for the supply of raw materials and components.
Our manufacturing operations depend on obtaining adequate supplies of raw materials and the components used in our manufacturing processes. We believe we have adequate sources for the supply of raw materials and components for our manufacturing needs with suppliers located around the world. We cannot assure you that we will not lose a significant or sole supplier or that a supplier will be able to meet performance and quality specifications or delivery schedules. If we lost a supplier or a supplier were unable to meet performance or quality specifications or delivery schedules, our ability to satisfy customer obligations could be materially and adversely affected. In addition, we review our relationships with suppliers of raw materials and components for our manufacturing needs on an ongoing basis. In connection with our ongoing review, we may modify or terminate our relationship with one or more suppliers. We may also enter into other sole supplier arrangements to meet certain of our raw material or component needs. While we do not typically rely on a single source of supply for our raw materials, we are currently dependent on a sole-source supplier for epitaxial wafers used in the gallium arsenide semiconductor manufacturing processes at our manufacturing facilities. To the extent we enter into additional sole supplier arrangements for any of our raw materials or components, the risks associated with our supply arrangements would be exacerbated.
Our success depends upon our ability to develop new products and reduce costs in a timely manner.
The wireless communications semiconductor industry generally and, in particular, the markets into which we sell our products are highly cyclical and characterized by constant and rapid technological change, rapid product evolution, price erosion, evolving technical standards, short product life cycles, increasing demand for higher levels of integration, increased miniaturization, and wide fluctuations in product supply and demand. Our operating results depend largely on our ability to continue to cost-effectively introduce new and enhanced products on a timely basis. The successful development and commercialization of semiconductor devices and modules is highly complex and depends on numerous factors, including:
| • | | the ability to anticipate customer and market requirements and changes in technology and industry standards, |
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| • | | the ability to obtain capacity sufficient to meet customer demand, |
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| • | | the ability to define new products that meet customer and market requirements, |
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| • | | the ability to complete development of new products and bring products to market on a timely basis, |
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| • | | the ability to differentiate our products from offerings of our competitors, |
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| • | | overall market acceptance of our products, and |
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| • | | the ability to obtain adequate intellectual property protection for our new products. |
Our ability to manufacture current products, and to develop new products, depends, among other factors, on the viability and flexibility of our own internal information technology systems (“IT Systems”). We upgrade and change our IT Systems from time to time, and recently completed a system upgrade, and there can be no assurance that such upgrade will be successful.
We cannot assure you that we will have sufficient resources to make the substantial investment in research and development needed to develop and bring to market new and enhanced products in a timely manner. We will be required to continually evaluate expenditures for planned product development and to choose among alternative technologies based on our expectations of future market growth. We cannot assure you that we will be able to develop and introduce new or enhanced wireless communications semiconductor products in a timely and cost-effective manner, that our products will satisfy customer requirements or achieve market acceptance or that we will be able to anticipate new industry standards and technological changes. We also cannot assure you that we will be able to respond successfully to new product announcements and
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introductions by competitors or to changes in the design or specifications of complementary products of third parties with which our products interface. If we fail to rapidly and cost-effectively introduce new and enhanced products in sufficient quantities and that meet our customers requirements, our business and results of operations would be materially and adversely harmed.
In addition, prices of many of our products decline, sometimes significantly, over time. We believe that to remain competitive, we must continue to reduce the cost of producing and delivering existing products at the same time that we develop and introduce new or enhanced products. We cannot assure you that we will be able to continue to reduce the cost of our products to remain competitive.
The markets into which we sell our products are characterized by rapid technological change.
The demand for our products can change quickly and in ways we may not anticipate. Our markets generally exhibit the following characteristics:
| • | | rapid technological developments and product evolution, |
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| • | | rapid changes in customer requirements, |
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| • | | frequent new product introductions and enhancements, |
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| • | | demand for higher levels of integration, decreased size and decreased power consumption, |
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| • | | short product life cycles with declining prices over the life cycle of the product, and |
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| • | | evolving industry standards. |
These changes in our markets may contribute to the obsolescence of our products. Our products could become obsolete or less competitive sooner than anticipated because of a faster than anticipated change in one or more of the above-noted factors.
The ability to attract and retain qualified personnel to contribute to the design, development, manufacture and sale of our products is critical to our success.
As the source of our technological and product innovations, our key technical personnel represent a significant asset. Our success depends on our ability to continue to attract, retain and motivate qualified personnel, including executive officers and other key management and technical personnel. The competition for management and technical personnel is intense in the semiconductor industry, and therefore we cannot assure you that we will be able to attract and retain qualified management and other personnel necessary for the design, development, manufacture and sale of our products. We may have particular difficulty attracting and retaining key personnel during periods of poor operating performance, given, among other things, the use of equity-based compensation by us and our competitors. The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel, could have a material adverse effect on our ability to operate our business.
If OEMs and ODMs of communications electronics products do not design our products into their equipment, we will have difficulty selling those products. Moreover, a “design win” from a customer does not guarantee future sales to that customer.
Our products are not sold directly to the end-user, but are components or subsystems of other products. As a result, we rely on OEMs and ODMs of wireless communications electronics products to select our products from among alternative offerings to be designed into their equipment. Without these “design wins,” we would have difficulty selling our products. If a manufacturer designs another supplier’s product into one of its product platforms, it is more difficult for us to achieve future design wins with that platform because changing suppliers involves significant cost, time, effort and risk on the part of that manufacturer. Also, achieving a design win with a customer does not ensure that we will receive significant revenues from that customer. Even after a design win, the customer is not obligated to purchase our products and can choose at any time to reduce or cease use of our products, for example, if its own products are not commercially successful, or for any other reason. We cannot assure you that we will continue to achieve design wins or to convert design wins into actual sales, and any failure to do so could materially and adversely affect our operating results.
Lengthy product development and sales cycles associated with many of our products may result in significant expenditures before generating any revenues related to those products.
After our product has been developed, tested and manufactured, our customers may need three to six months or longer to integrate, test and evaluate our product and an additional three to six months or more to begin volume production of equipment that incorporates the product. This lengthy cycle time increases the possibility that a customer may decide to cancel or change product plans, which could reduce or eliminate our sales to that customer. As a result of this lengthy sales cycle, we may incur significant research and development expenses, and selling, general and administrative expenses, before we generate the related
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revenues for these products. Furthermore, we may never generate the anticipated revenues from a product after incurring such expenses if our customer cancels or changes its product plans.
Uncertainties involving the ordering and shipment of our products could adversely affect our business.
Our sales are typically made pursuant to individual purchase orders and not under long-term supply arrangements with our customers. Our customers may cancel orders before shipment. Additionally, we sell a portion of our products through distributors, some of whom have rights to return unsold products. We may purchase and manufacture inventory based on estimates of customer demand for our products, which is difficult to predict. This difficulty may be compounded when we sell to OEMs indirectly through distributors or contract manufacturers, or both, as our forecasts of demand will then be based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously sold products, or overproduction due to a change in anticipated order volumes could result in us holding excess or obsolete inventory, which could result in inventory write-downs and, in turn, could have a material adverse effect on our financial condition.
Our reliance on a small number of customers for a large portion of our sales could have a material adverse effect on the results of our operations.
A significant portion of our sales are concentrated among a limited number of customers. If we lost one or more of these major customers, or if one or more major customers significantly decreased its orders of our products, our business would be materially and adversely affected. Sales to our three largest customers, including sales to their manufacturing subcontractors, represented approximately 38.4% of our net revenue for fiscal 2005. We expect that our largest customers will continue to account for a substantial portion of our net revenue in fiscal 2006 and for the foreseeable future.
Average product life cycles in the semiconductor industry tend to be very short.
In the semiconductor industry, product life cycles tend to be short relative to the sales and development cycles. Therefore, the resources devoted to product sales and marketing may not result in material revenue, and from time to time we may need to write off excess or obsolete inventory. If we were to incur significant marketing expenses and investments in inventory that we are not able to recover, and we are not able to compensate for those expenses, our operating results would be materially and adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.
Our leverage and our debt service obligations may adversely affect our cash flow.
On September 30, 2005, we had total indebtedness of approximately $280 million, which represented approximately 27% of our total capitalization.
As long as our 4.75 percent convertible subordinated notes due November 2007 remain outstanding, we will have debt service obligations on such notes of approximately $10,925,000 per year in interest payments. If we issue other debt securities in the future, our debt service obligations will increase. If we are unable to generate sufficient cash to meet these obligations and must instead use our existing cash or investments, we may have to reduce or curtail other activities of our business.
We intend to fulfill our debt service obligations from cash expected to be generated by our operations, and from our existing cash and investments. If necessary, among other alternatives, we may add lease lines of credit to finance capital expenditures and we may obtain other long-term debt, lines of credit and other financing.
Our indebtedness could have significant negative consequences, including:
| • | | increasing our vulnerability to general adverse economic and industry conditions, |
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| • | | limiting our ability to obtain additional financing, |
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| • | | requiring the dedication of a substantial portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures, |
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| • | | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete, and |
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| • | | placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources. |
Despite our current debt levels, we are able to incur substantially more debt, which would increase the risks described above.
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We face a risk that capital needed for our business will not be available when we need it.
We may need to obtain sources of financing in the future. We expect our existing sources of liquidity, together with cash expected to be generated from operations, will be sufficient to fund our research and development, capital expenditures, debt obligations, purchase obligations, working capital and other cash requirements for at least the next twelve months. However, we cannot assure you that the capital required to fund these expenses will be available in the future. To the extent that existing cash and securities and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Conditions existing in the U.S. capital markets, if and when we seek additional financing as well as the then current condition of the Company, will affect our ability to raise capital, as well as the terms of any such financing. We may not be able to raise enough capital to meet our capital needs on a timely basis or at all. Failure to obtain capital when required would have a material adverse effect on us.
In addition, any strategic investments and acquisitions that we may make to help us grow our business may require additional capital resources. We cannot assure you that the capital required to fund these investments and acquisitions will be available in the future.
Remaining competitive in the semiconductor industry requires transitioning to smaller geometry process technologies and achieving higher levels of design integration.
In order to remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products, design new products to more stringent standards, and to redesign some existing products. In the past, we have experienced some difficulties migrating to smaller geometry process technologies or new manufacturing processes, which resulted in sub-optimal manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes in the future. In some instances, we depend on our relationships with our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to maintain our foundry relationships. If our foundries or we experience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operations could be materially and adversely affected. As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, or at all.
We are subject to the risks of doing business internationally.
A substantial majority of our net revenues are derived from customers located outside the United States, primarily countries located in the Asia-Pacific region and Europe. In addition, we have design centers and suppliers located outside the United States, and third-party packaging, assembly and test facilities and foundries located in the Asia-Pacific region. Finally, we have our own packaging, assembly and test facility in Mexicali, Mexico. Our international sales and operations are subject to a number of risks inherent in selling and operating abroad. These include, but are not limited to, risks regarding:
| • | | currency exchange rate fluctuations, |
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| • | | local economic and political conditions, including social, economic and political instability, |
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| • | | disruptions of capital and trading markets, |
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| • | | restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including export duties, quotas, customs duties, import or export controls and tariffs), |
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| • | | changes in legal or regulatory requirements, |
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| • | | natural disasters, acts of terrorism, widespread illness and war, |
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| • | | limitations on the repatriation of funds, |
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| • | | difficulty in obtaining distribution and support, |
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| • | | cultural differences in the conduct of business, |
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| • | | the laws and policies of the United States and other countries affecting trade, foreign investment and loans, and import or export licensing requirements, |
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| • | | tax laws, |
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| • | | the possibility of being exposed to legal proceedings in a foreign jurisdiction, and |
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| • | | limitations on our ability under local laws to protect or enforce our intellectual property rights in a particular foreign jurisdiction. |
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Additionally, we are subject to risks in certain global markets in which wireless operators provide subsidies on handset sales to their customers. Increases in handset prices that negatively impact handset sales can result from changes in regulatory policies or other factors, which could impact the demand for our products. Limitations or changes in policy on phone subsidies in South Korea, Japan, China and other countries may have additional negative impacts on our revenues.
Our operating results may be adversely affected by substantial quarterly and annual fluctuations and market downturns.
Our revenues, earnings and other operating results have fluctuated in the past and our revenues, earnings and other operating results may fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control.
These factors include, among others:
| • | | changes in end-user demand for the products (principally digital cellular handsets) manufactured and sold by our customers, |
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| • | | the effects of competitive pricing pressures, including decreases in average selling prices of our products, |
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| • | | production capacity levels and fluctuations in manufacturing yields, |
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| • | | availability and cost of products from our suppliers, |
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| • | | the gain or loss of significant customers, |
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| • | | our ability to develop, introduce and market new products and technologies on a timely basis, |
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| • | | new product and technology introductions by competitors, |
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| • | | changes in the mix of products produced and sold, |
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| • | | market acceptance of our products and our customers, and |
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| • | | intellectual property disputes. |
The foregoing factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly or annual operating results. If our operating results fail to meet the expectations of analysts or investors, it could materially and adversely affect the price of our common stock.
Global economic conditions that impact the wireless communications industry could negatively affect our revenues and operating results.
Global economic weakness can have wide-ranging effects on markets that we serve, particularly wireless communications equipment manufacturers and network operators. Although the wireless communications industry has recovered somewhat from an industry-wide recession, such recovery may not continue. In addition, we cannot predict what effects negative events, such as war or other international conflicts, may have on the economy or the wireless communications industry. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the global economy and to the wireless communications industry and create further uncertainties. Further, a continued economic recovery may not benefit us in the near term. If it does not, our ability to increase or maintain our revenues and operating results may be impaired.
Our gallium arsenide semiconductors may cease to be competitive with silicon alternatives.
Among our product portfolio, we manufacture and sell gallium arsenide semiconductor devices and components, principally power amplifiers and switches. The production of gallium arsenide integrated circuits is more costly than the production of silicon circuits. The cost differential is due to higher costs of raw materials for gallium arsenide and higher unit costs associated with smaller sized wafers and lower production volumes. Therefore, to remain competitive, we must offer gallium arsenide products that provide superior performance over their silicon-based counterparts. If we do not continue to offer products that provide sufficiently superior performance to justify the cost differential, our operating results may be materially and adversely affected. We expect the costs of producing gallium arsenide devices will continue to exceed the costs of producing their silicon counterparts. Silicon semiconductor technologies are widely-used process technologies for certain integrated circuits and these technologies continue to improve in performance. We cannot assure you that we will continue to identify products and markets that require performance attributes of gallium arsenide solutions.
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We may be subject to claims of infringement of third-party intellectual property rights, or demands that we license third-party technology, which could result in significant expense and prevent us from using our technology.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their technology or refrain from using it.
Any litigation to determine the validity of claims that our products infringe or may infringe intellectual property rights of another, including claims arising from our contractual indemnification of our customers, regardless of their merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. Regardless of the merits of any specific claim, we cannot assure you that we would prevail in litigation because of the complex technical issues and inherent uncertainties in intellectual property litigation. If litigation were to result in an adverse ruling, we could be required to:
| • | | pay substantial damages, |
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| • | | cease the manufacture, import, use, sale or offer for sale of infringing products or processes, |
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| • | | discontinue the use of infringing technology, |
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| • | | expend significant resources to develop non-infringing technology, and |
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| • | | license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms. |
We cannot assure you that our operating results or financial condition will not be materially adversely affected if we were required to do any one or more of the foregoing items.
Many of our products incorporate technology licensed or acquired from third parties.
We sell products in markets that are characterized by rapid technological changes; evolving industry standards, frequent new product introductions, short product life cycles and increasing levels of integration. Our ability to keep pace with this market depends on our ability to obtain technology from third parties on commercially reasonable terms to allow our products to remain in a competitive posture. If licenses to such technology are not available on commercially reasonable terms and conditions, and we cannot otherwise integrate such technology, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. In such instances, we could also incur substantial unanticipated costs or scheduling delays to develop substitute technology to deliver competitive products.
If we are not successful in protecting our intellectual property rights, it may harm our ability to compete.
We rely on patent, copyright, trademark, trade secret and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary technologies, information, data, devices, algorithms and processes. In addition, we often incorporate the intellectual property of our customers, suppliers or other third parties into our designs, and we have obligations with respect to the non-use and non-disclosure of such third-party intellectual property. In the future, it may be necessary to engage in litigation or like activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. This could require us to expend significant resources and to divert the efforts and attention of our management and technical personnel from our business operations. We cannot assure you that:
| • | | the steps we take to prevent misappropriation, infringement, dilution or other violation of our intellectual property or the intellectual property of our customers, suppliers or other third parties will be successful, |
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| • | | any existing or future patents, copyrights, trademarks, trade secrets or other intellectual property rights or ours will not be challenged, invalidated or circumvented, or |
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| • | | any of the measures described above would provide meaningful protection. |
Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, develop similar technology independently or design around our patents. If any of our intellectual property protection mechanisms fails to protect our technology, it would make it easier for our competitors to offer similar products, potentially resulting in loss of market share and price erosion. Even if we receive a patent, the patent claims may not be broad enough to adequately protect our technology. Furthermore, even if we receive patent protection in the United States, we may not seek, or may not be granted, patent protection in foreign countries. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for certain technologies and in certain foreign countries.
There is a growing industry trend to include or adapt “open source” software that is generally made available to the public by its developers, authors or third parties. Often such software includes license provisions, requiring public disclosure of any derivative works containing open source code. There is little legal precedent in the area of open source software or its effects on
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copyright law or the protection of proprietary works. We take steps to avoid the use of open source works in our proprietary software, and are taking steps to limit our suppliers from doing so. However, in the event a copyright holder were to demonstrate in court that we have not complied with a software license, we may be required to cease production or distribution of that work or to publicly disclose the source code for our proprietary software, which may negatively affect our operations or stock price.
We attempt to control access to and distribution of our proprietary information through operational, technological and legal safeguards. Despite our efforts, parties, including former or current employees, may attempt to copy, disclose or obtain access to our information without our authorization. Furthermore, attempts by computer hackers to gain unauthorized access to our systems or information could result in our proprietary information being compromised or interrupt our operations. While we attempt to prevent such unauthorized access we may be unable to anticipate the methods used, or be unable to prevent the release of our proprietary information.
Our success depends, in part, on our ability to effect suitable investments, alliances and acquisitions, and to integrate companies we acquire.
Although we have in the past and intend to continue to invest significant resources in internal research and development activities, the complexity and rapidity of technological changes and the significant expense of internal research and development make it impractical for us to pursue development of all technological solutions on our own. On an ongoing basis, we intend to review investment, alliance and acquisition prospects that would complement our product offerings, augment our market coverage or enhance our technological capabilities. However, we cannot assure you that we will be able to identify and consummate suitable investment, alliance or acquisition transactions in the future. Moreover, if we consummate such transactions, they could result in:
| • | | issuances of equity securities dilutive to our stockholders, |
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| • | | large one-time write-offs, |
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| • | | the incurrence of substantial debt and assumption of unknown liabilities, |
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| • | | the potential loss of key employees from the acquired company, |
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| • | | amortization expenses related to intangible assets, and |
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| • | | the diversion of management’s attention from other business concerns. |
Moreover, integrating acquired organizations and their products and services may be difficult, expensive, time-consuming and a strain on our resources and our relationship with employees and customers and ultimately may not be successful. Additionally, in periods following an acquisition, we will be required to evaluate goodwill and acquisition-related intangible assets for impairment. When such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings. For instance, we recorded a cumulative effect of a change in accounting principle in fiscal 2003 in the amount of $397.1 million as a result of the goodwill obtained in connection with the Merger.
Certain provisions in our organizational documents and Delaware law may make it difficult for someone to acquire control of us.
We have certain anti-takeover measures that may affect our common stock. Our certificate of incorporation, our by-laws and the Delaware General Corporation Law contain several provisions that would make more difficult an acquisition of control of us in a transaction not approved by our Board of Directors. Our certificate of incorporation and by-laws include provisions such as:
| • | | the division of our Board of Directors into three classes to be elected on a staggered basis, one class each year, |
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| • | | the ability of our Board of Directors to issue shares of preferred stock in one or more series without further authorization of stockholders, |
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| • | | a prohibition on stockholder action by written consent, |
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| • | | elimination of the right of stockholders to call a special meeting of stockholders, |
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| • | | a requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders, |
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| • | | a requirement that the affirmative vote of at least 66 2/3 percent of our shares be obtained to amend or repeal any provision of our by-laws or the provision of our certificate of incorporation relating to amendments to our by-laws, |
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| • | | a requirement that the affirmative vote of at least 80% of our shares be obtained to amend or repeal the provisions of our certificate of incorporation relating to the election and removal of directors, the classified board or the right to act by written consent, |
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| • | | a requirement that the affirmative vote of at least 80% of our shares be obtained for business combinations unless approved by a majority of the members of the Board of |
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Directors and, in the event that the other party to the business combination is the beneficial owner of 5% or more of our shares, a majority of the members of Board of Directors in office prior to the time such other party became the beneficial owner of 5% or more of our shares,
| • | | a fair price provision, and |
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| • | | a requirement that the affirmative vote of at least 90% of our shares be obtained to amend or repeal the fair price provision. |
In addition to the provisions in our certificate of incorporation and by-laws, Section 203 of the Delaware General Corporation Law generally provides that a corporation shall not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder, unless a majority of the directors then in office approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder or specified stockholder approval requirements are met.
Increasingly stringent environmental laws, rules and regulations may require us to redesign our existing products and processes, and could adversely affect our ability to cost-effectively produce our products.
The semiconductor and electronics industries have been subject to increasing environmental regulations. A number of domestic and foreign jurisdictions seek to restrict the use of various substances, a number of which have been used in our products or processes. For example, the European Union Restriction of Hazardous Substances in Electrical and Electronic Equipment (RoHS) Directive requires that certain substances be removed from all electronics components by July 1, 2006. Removing such substances requires the expenditure of additional research and development funds to seek alternative substances, as well as increased testing by third-parties to ensure the quality of our products and compliance with the RoHS Directive. Alternative substances may not be readily available or commercially feasible, may only be available from a single source, or may be significantly more expensive than their restricted counterparts. While we have implemented a compliance program to ensure our product offering meets these regulations, if we are unable to complete the transition in a timely manner, or ensure consistent quality and product yields with redesigned processes, our operations may be adversely affected.
We may be liable for penalties under environmental laws, rules and regulations, which could adversely impact our business.
We have used, and will continue to use, a variety of chemicals and compounds in manufacturing operations and have been and will continue to be subject to a wide range of environmental protection regulations in the United States and in foreign countries. We cannot assure you that current or future regulation of the materials necessary for our products would not have a material adverse effect on our business, financial condition and results of operations. Environmental regulations often require parties to fund remedial action for violations of such regulations regardless of fault. Consequently, it is often difficult to estimate the future impact of environmental matters, including potential liabilities. Furthermore, our customers increasingly require warranties or indemnity relating to compliance with environmental regulations. We cannot assure you that the amount of expense and capital expenditures that might be required to satisfy environmental liabilities, to complete remedial actions and to continue to comply with applicable environmental laws will not have a material adverse effect on our business, financial condition and results of operations.
Our stock price has been volatile and may fluctuate in the future. Accordingly, you might not be able to sell your shares of common stock at or above the price you paid for them.
The trading price of our common stock has and may continue to fluctuate significantly. Such fluctuations may be influenced by many factors, including:
| • | | our performance and prospects, |
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| • | | the performance and prospects of our major customers, |
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| • | | the depth and liquidity of the market for our common stock, |
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| • | | investor perception of us and the industry in which we operate, |
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| • | | changes in earnings estimates or buy/sell recommendations by analysts, |
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| • | | general financial and other market conditions, and |
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| • | | domestic and international economic conditions. |
Public stock markets have recently experienced extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may materially and adversely affect the market price of our common stock.
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In addition, fluctuations in our stock price, volume of shares traded, and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis. Our company has been, and in the future may be, the subject of commentary by financial news media. Such commentary may contribute to volatility in our stock price. If our operating results do not meet the expectations of securities analysts or investors, our stock price may decline, possibly substantially over a short period of time. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid.3, 2008.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to foreign currency, market rate and interest risks as described below:
Investment and Interest Rate Risk
Our exposure to interest and market risks suchrelates principally to our investment portfolio, which as changes in currency and interest rates that arise from normal business operation. Our financial instruments include cash and cash equivalents, short-term investments, short-term debt and long-term debt. of October 3, 2008 consisted of the following (in thousands):
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| Cash and cash equivalents (time deposits, overnight repurchase agreements and money market funds) | | $ | 225,104 | |
| Restricted cash (time deposits and certificates of deposit) | | | 5,962 | |
| Available for sale securities (auction rate securities) | | | 2,288 | |
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| | | $ | 233,354 | |
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Our main investment objective is the preservation of investment capital. Consequently, weOur policy is to invest with only high-credit-quality issuers and we limit the amount of our credit exposure to any one issuer. We do not use derivative instruments for speculative or investment purposes.
Our cash and cash equivalents
and restricted cash are not subject to significant interest rate risk due to the short maturities of these instruments.
AsWe are however, subject to overall financial market risks, such as changes in market liquidity, credit quality and interest rates.Available for sale securities carry a longer maturity period (contractual maturities exceed ten years). In fiscal 2008 we experienced a temporary unrealized loss on our investment in auction rate securities primarily caused by a disruption in the liquidity of
September 30, 2005,the Dutch auction process which resets interest rates each month. We classified auction rate securities in prior periods as current assets under “Short Term Investments”. In fiscal 2008, we determined the fair value of our auction rate securities to be $2.3 million. Given the failed auctions, the auction rate securities are effectively illiquid until there is a successful auction. Accordingly, the remaining auction rate securities balance has been reclassified to non-current other assets. We believe we have the ability to hold these investments until the lack of liquidity in these markets is resolved or they mature. If current market conditions deteriorate further, we may be required to record additional unrealized losses. If the credit ratings of the security issuers deteriorate, the anticipated recovery in market values does not occur, or we need funds from the auction-rate securities to meet working capital needs, we may be required to adjust the carrying value of
our cash and cash equivalents approximates fair value.these investments through impairment charges recorded to earnings as appropriate, which could be material.Our short-term debt primarily consists of borrowings under our credit facility with Wachovia Bank, N.A. As of September 30, 2005, we had borrowings of $50.0 million outstanding under this credit facility.million. Interest related to our short-term debtborrowings under our credit facility with Wachovia Bank, N.A. is at LIBOR plus 0.4%0.75% and was approximately 4.2%4.7% at September 30, 2005.October 3, 2008. Consequently, we do not have significant cash flow exposure on ourthis short-term debt.
We issued fixed-rateOur long-term debt
at November 12, 2008 consists of $97.1 million aggregate principal amount of convertible subordinated notes (“2007 Convertible Notes”). These 2007 Convertible Notes contain cash settlement provisions, which
is convertible into ourpermit the application of the treasury stock method in determining potential share dilution of the conversion spread should the share price of the Company’s common stock
at a predetermined conversion price.exceed $9.52. It has been the Company’s historical practice to cash settle the principal and interest components of convertible debt instruments, and it is our intention to continue to do so in the future, including settlement of the 2007 Convertible
debt has characteristics that give riseNotes issued in March 2007. These shares have not been included in the computation of earnings per share for the fiscal year ended October 3, 2008, as their effect would have been anti-dilutive.Exchange Rate Risk
Substantially all sales to both interest-rate riskcustomers and market risk becausearrangements with third-party manufacturers provide for pricing and payment in United States dollars, thereby reducing the fairimpact of foreign exchange rate fluctuations on our results. A small percentage of our international operational expenses are denominated in foreign currencies. Exchange rate volatility could negatively or positively impact those operating costs. For the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006, the Company incurred unrealized foreign exchange gains/(losses) of $(0.6) million, $0.4 million, and $0.1 million, respectively. Increases in the value of the convertible security is affected by bothU.S. dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the current interest-rate environment and the pricevalue of the underlying common stock. For the year ended September 30, 2005,U.S. dollar relative to other currencies could result in our convertible debt, on an if-converted basis, was not dilutive and, as a result, had no impact on our net income per share (assuming dilution). In future periods, the debt may be converted, or the if-converted method may be dilutive and net income per share (assuming dilution) would be reduced. Our long-term debt consists of $230 million of 4.75% unsecured convertible subordinated notes due November 2007. We do not believe that we have significant cash flow exposure on our long-term debt.
Based on our overall evaluation of our market risk exposures from all of our financial instruments at September 30, 2005, a near-term changesuppliers raising their prices to continue doing business with us. Fluctuations in interest rates would not materially affect our consolidated financial position, results of operations or cash flows.
Our exposure to fluctuations in foreign currency exchange rates is primarilycould have a greater effect on our business in the result offuture to the extent our expenses increasingly become denominated in foreign subsidiaries domiciled in various foreign countries. We do not currently use financial derivative instruments to hedge foreign currency exchange rate risks associated with our foreign subsidiaries. We estimate that we do not have any significant foreign exchange rate fluctuation risk.currencies.
3646
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements of the Company for the fiscal year ended September 30, 2005October 3, 2008 are included herewith:
| | | | | |
| (1) | | Report of Independent Registered Public Accounting Firm | | Page 3848 |
| | | | | |
| (2) | | Consolidated Balance Sheets atStatements of Operations for the Years Ended October 3, 2008, September 30, 200528, 2007, and 2004September 29, 2006 | | Page 3949 |
| | | | | |
| (3) | | Consolidated Statements of Operations for the Years EndedBalance Sheets at October 3, 2008 and September 30, 2005, 2004 and 200328, 2007 | | Page 4050 |
| | | | | |
| (4) | | Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)Cash Flows for the Years Ended October 3, 2008, September 30, 2005, 200428, 2007, and 2003September 29, 2006 | | Page 4151 |
| | | | | |
| (5) | | Consolidated Statements of Cash FlowsStockholders’ Equity and Comprehensive Income (Loss) for the Years Ended October 3, 2008, September 30, 2005, 200428, 2007, and 2003September 29, 2006 | | Page 4252 |
| | | | | |
| (6) | | Notes to Consolidated Financial Statements | | Pages 4353 through 6579 |
3747
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Skyworks Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Skyworks Solutions, Inc. and subsidiaries as of October 3, 2008 and September 30, 2005 and 2004,28, 2007, and the related consolidated statements of operations, cash flows, and stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended September 30, 2005. Our auditsOctober 3, 2008. In connection with our audit of the consolidated financial statements, we also includedhave audited the financial statement schedule listed in the Index at Item 15 of the 2008 Form 10-K. We also have audited Skyworks Solutions Inc.’s internal control over financial reporting as of October 3, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Skyworks Solutions, Inc.’s management is responsible for the years ended September 30, 2005, 2004 and 2003. Thesethese consolidated financial statements and financial statement schedule, are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Skyworks Solutions, Inc. and subsidiaries as of October 3, 2008 and September 30, 2005 and 2004,28, 2007, and the results of theirits operations and theirits cash flows for each of the years in the three-year period ended September 30, 2005,October 3, 2008, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America. Also in our opinion, the related financial statement schedule, for the years ended September 30, 2005, 2004, and 2003, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, Also in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness ofour opinion, Skyworks Solutions, Inc.’s maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005,October 3, 2008, based on criteria established in Internal Control —- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 14, 2005, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.Commission.
/s/ KPMG LLP
Boston, Massachusetts
December 14, 20052, 2008
3848
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | | | | | | | | |
| | | September 30, | |
| | | 2005 | | | 2004 | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 116,522 | | | $ | 123,505 | |
| Short-term investments | | | 113,325 | | | | 85,034 | |
| Restricted cash | | | 6,013 | | | | 6,013 | |
| Receivables, net of allowance for doubtful accounts of $5,815 and $1,987, respectively | | | 171,454 | | | | 157,772 | |
| Inventories | | | 77,400 | | | | 79,572 | |
| Other current assets | | | 11,268 | | | | 11,968 | |
| | | | | | | |
| Total current assets | | | 495,982 | | | | 463,864 | |
| Property, plant and equipment, less accumulated depreciation and amortization of $260,731 and $261,260, respectively | | | 144,208 | | | | 143,534 | |
| Property held for sale | | | 6,630 | | | | 6,475 | |
| Goodwill | | | 493,389 | | | | 504,493 | |
| Intangible assets, less accumulated amortization of $8,911 and $6,746, respectively | | | 17,730 | | | | 19,895 | |
| Deferred tax assets | | | 16,052 | | | | 19,372 | |
| Other assets | | | 13,852 | | | | 11,173 | |
| | | | | | | |
| Total assets | | $ | 1,187,843 | | | $ | 1,168,806 | |
| | | | | | | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
Current liabilities: | | | | | | | | |
| Short-term debt | | $ | 50,000 | | | $ | 50,000 | |
| Accounts payable | | | 72,276 | | | | 73,405 | |
| Accrued compensation and benefits | | | 19,679 | | | | 36,630 | |
| Other current liabilities | | | 16,280 | | | | 21,216 | |
| | | | | | | |
| Total current liabilities | | | 158,235 | | | | 181,251 | |
| Long-term debt, less current maturities | | | 230,000 | | | | 230,000 | |
| Other long-term liabilities | | | 7,044 | | | | 5,932 | |
| | | | | | | |
| Total liabilities | | | 395,279 | | | | 417,183 | |
| | | | | | | | | |
| Commitments and contingencies (Note 11 and Note 12) | | | | | | | | |
| | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
| Preferred stock, no par value: 25,000 shares authorized, no shares issued | | | — | | | | — | |
| Common stock, $0.25 par value: 525,000 shares authorized; 158,625 and 156,012 shares issued and outstanding, respectively | | | 39,656 | | | | 39,003 | |
| Additional paid-in capital | | | 1,327,631 | | | | 1,312,603 | |
| Accumulated deficit | | | (573,586 | ) | | | (599,197 | ) |
| Accumulated other comprehensive loss | | | (1,137 | ) | | | (786 | ) |
| | | | | | | |
| Total stockholders’ equity | | | 792,564 | | | | 751,623 | |
| | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 1,187,843 | | | $ | 1,168,806 | |
| | | | | | | |
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Net revenues | | $ | 860,017 | | | $ | 741,744 | | | $ | 773,750 | |
| Cost of goods sold | | | 517,054 | | | | 454,359 | | | | 511,071 | |
| | | | | | | | | | |
| Gross profit | | | 342,963 | | | | 287,385 | | | | 262,679 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Research and development | | | 146,013 | | | | 126,075 | | | | 164,106 | |
| Selling, general and administrative | | | 100,007 | | | | 94,950 | | | | 135,801 | |
| Amortization of intangible assets | | | 6,005 | | | | 2,144 | | | | 2,144 | |
| Restructuring and special charges | | | 567 | | | | 5,730 | | | | 26,955 | |
| | | | | | | | | | |
| Total operating expenses | | | 252,592 | | | | 228,899 | | | | 329,006 | |
| | | | | | | | | | |
| Operating income (loss) | | | 90,371 | | | | 58,486 | | | | (66,327 | ) |
| Interest expense | | | (7,330 | ) | | | (12,026 | ) | | | (14,797 | ) |
| Loss on early retirement of convertible debt | | | (6,836 | ) | | | (564 | ) | | | — | |
| Other income, net | | | 5,983 | | | | 10,874 | | | | 8,350 | |
| | | | | | | | | | |
| Income (loss) before income taxes | | | 82,188 | | | | 56,770 | | | | (72,774 | ) |
| Provision (benefit) for income taxes | | | (28,818 | ) | | | (880 | ) | | | 15,378 | |
| | | | | | | | | | |
| Net income (loss) | | $ | 111,006 | | | $ | 57,650 | | | $ | (88,152 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Per share information: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net income (loss), basic | | $ | 0.69 | | | $ | 0.36 | | | $ | (0.55 | ) |
| | | | | | | | | | |
| Net income (loss), diluted | | $ | 0.68 | | | $ | 0.36 | | | $ | (0.55 | ) |
| | | | | | | | | | |
| Number of weighted-average shares used in per share computations, basic | | | 161,878 | | | | 159,993 | | | | 159,408 | |
| | | | | | | | | | |
| Number of weighted-average shares used in per share computations, diluted | | | 164,755 | | | | 161,064 | | | | 159,408 | |
| | | | | | | | | | |
The following table summarizes share-based compensation expense for the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006 which is included in the financial statement line items above as follows:
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | |
| Cost of goods sold | | | 2,974 | | | | 1,274 | | | | 2,174 | |
| Research and development | | | 8,700 | | | | 5,590 | | | | 6,311 | |
| Selling, general and administrative | | | 11,538 | | | | 6,873 | | | | 5,734 | |
| | | | | | | | | | |
| | | $ | 23,212 | | | $ | 13,737 | | | $ | 14,219 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
3949
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSBALANCE SHEETS
(In thousands, except per share amounts)
| | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Net revenues | | $ | 792,371 | | | $ | 784,023 | | | $ | 617,789 | |
| Cost of goods sold | | | 484,599 | | | | 470,807 | | | | 370,940 | |
| | | | | | | | | | |
| Gross profit | | | 307,772 | | | | 313,216 | | | | 246,849 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Research and development | | | 152,215 | | | | 152,633 | | | | 156,077 | |
| Selling, general and administrative | | | 103,070 | | | | 97,522 | | | | 85,432 | |
| Amortization of intangible assets | | | 2,354 | | | | 3,043 | | | | 4,386 | |
| Special charges | | | — | | | | 17,366 | | | | 34,493 | |
| | | | | | | | | | |
| Total operating expenses | | | 257,639 | | | | 270,564 | | | | 280,388 | |
| | | | | | | | | | |
| Operating income (loss) | | | 50,133 | | | | 42,652 | | | | (33,539 | ) |
| Interest expense | | | (14,597 | ) | | | (17,947 | ) | | | (21,403 | ) |
| Other income, net | | | 5,453 | | | | 1,691 | | | | 1,317 | |
| | | | | | | | | | |
| Income (loss) before income taxes and cumulative effect of change in accounting principle | | | 40,989 | | | | 26,396 | | | | (53,625 | ) |
| Provision for income taxes | | | 15,378 | | | | 3,984 | | | | 652 | |
| | | | | | | | | | |
| Income (loss) before cumulative effect of change in accounting principle | | | 25,611 | | | | 22,412 | | | | (54,277 | ) |
| Cumulative effect of change in accounting principle, net of tax | | | — | | | | — | | | | (397,139 | ) |
| | | | | | | | | | |
| Net income (loss) | | $ | 25,611 | | | $ | 22,412 | | | $ | (451,416 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Per share information: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Income (loss) before cumulative effect of change in accounting principle, basic and diluted | | $ | 0.16 | | | $ | 0.15 | | | $ | (0.39 | ) |
| Cumulative effect of change in accounting principle, net of tax, basic and diluted | | | — | | | | — | | | | (2.85 | ) |
| | | | | | | | | | |
| Net income (loss), basic and diluted | | $ | 0.16 | | | $ | 0.15 | | | $ | (3.24 | ) |
| | | | | | | | | | |
| Number of weighted-average shares used in per share computations, basic | | | 157,453 | | | | 152,090 | | | | 139,376 | |
| | | | | | | | | | |
| Number of weighted-average shares used in per share computations, diluted | | | 158,857 | | | | 154,242 | | | | 139,376 | |
| | | | | | | | | | |
| | | | | | | | | |
| | | As of | |
| | | October 3, | | | September 28, | |
| | | 2008 | | | 2007 | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 225,104 | | | $ | 241,577 | |
| Short-term investments | | | — | | | | 5,700 | |
| Restricted cash | | | 5,962 | | | | 6,502 | |
| Receivables, net of allowance for doubtful accounts of $1,048 and $1,662, respectively | | | 146,710 | | | | 167,319 | |
| Inventories | | | 103,791 | | | | 82,109 | |
| Other current assets | | | 13,089 | | | | 10,511 | |
| | | | | | | |
| Total current assets | | | 494,656 | | | | 513,718 | |
| Property, plant and equipment, less accumulated depreciation and amortization of $318,076 and $280,738, respectively | | | 173,360 | | | | 153,516 | |
| Goodwill | | | 483,671 | | | | 480,890 | |
| Intangible assets, less accumulated amortization of $20,132 and $13,199, respectively | | | 19,746 | | | | 13,442 | |
| Deferred tax assets | | | 53,192 | | | | 14,459 | |
| Other assets | | | 11,474 | | | | 13,883 | |
| | | | | | | |
| Total assets | | $ | 1,236,099 | | | $ | 1,189,908 | |
| | | | | | | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
Current liabilities: | | | | | | | | |
| Short-term debt | | $ | 50,000 | | | $ | 99,335 | |
| Accounts payable | | | 58,527 | | | | 56,417 | |
| Accrued compensation and benefits | | | 32,110 | | | | 28,392 | |
| Other current liabilities | | | 8,103 | | | | 13,079 | |
| | | | | | | |
| Total current liabilities | | | 148,740 | | | | 197,223 | |
| Long-term debt, less current maturities | | | 137,616 | | | | 200,000 | |
| Other long-term liabilities | | | 5,527 | | | | 6,338 | |
| | | | | | | |
| Total liabilities | | | 291,883 | | | | 403,561 | |
| | | | | | | | | |
| Commitments and contingencies (Note 12 and Note 13) | | | | | | | | |
| | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
| Preferred stock, no par value: 25,000 shares authorized, no shares issued | | | — | | | | — | |
| Common stock, $0.25 par value: 525,000 shares authorized; 170,323 shares issued and 165,592 shares outstanding at October 3, 2008 and 165,593 shares issued and 161,101 shares outstanding at September 28, 2007 | | | 41,398 | | | | 40,275 | |
| Additional paid-in capital | | | 1,430,999 | | | | 1,382,230 | |
| Treasury Stock | | | (33,918 | ) | | | (31,855 | ) |
| Accumulated deficit | | | (493,083 | ) | | | (604,089 | ) |
| Accumulated other comprehensive loss | | | (1,180 | ) | | | (214 | ) |
| | | | | | | |
| Total stockholders’ equity | | | 944,216 | | | | 786,347 | |
| | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 1,236,099 | | | $ | 1,189,908 | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
4050
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Par value | | | | | | | | | | | Accumulated | | | | | | | | |
| | | Shares of | | | of | | | Additional | | | | | | | Other | | | | | | | Total | |
| | | Common | | | Common | | | Paid-in | | | Accumulated | | | Comprehensive | | | Unearned | | | Stockholders’ | |
| | | Stock | | | Stock | | | Capital | | | Deficit | | | Loss | | | Compensation | | | Equity | |
| Balance at September 30, 2002 | | | 137,589 | | | $ | 34,397 | | | $ | 1,150,856 | | | $ | (170,193 | ) | | $ | — | | | $ | (84 | ) | | $ | 1,014,976 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | (451,416 | ) | | | — | | | | — | | | | (451,416 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension adjustment | | | — | | | | — | | | | — | | | | — | | | | (632 | ) | | | — | | | | (632 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (632 | ) | | | — | | | | (632 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (452,048 | ) |
| Issuance of common shares in offering, net of expenses | | | 9,200 | | | | 2,300 | | | | 99,888 | | | | — | | | | — | | | | — | | | | 102,188 | |
| Issuance of common shares for stock purchase plans, 401(k) and stock option plans | | | 1,769 | | | | 442 | | | | 8,607 | | | | — | | | | — | | | | — | | | | 9,049 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization of unearned compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | 84 | | | | 84 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment to recapitalization as a result of purchase accounting under a reverse acquisition (1) | | | — | | | | — | | | | (1,543 | ) | | | — | | | | — | | | | — | | | | (1,543 | ) |
| Issuance of common shares in trademark settlement | | | 46 | | | | 12 | | | | 457 | | | | — | | | | — | | | | — | | | | 469 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2003 | | | 148,604 | | | | 37,151 | | | | 1,258,265 | | | | (621,609 | ) | | | (632 | ) | | | — | | | | 673,175 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | 22,412 | | | | — | | | | — | | | | 22,412 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension adjustment | | | — | | | | — | | | | — | | | | — | | | | (154 | ) | | | — | | | | (154 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (154 | ) | | | — | | | | (154 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 22,258 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common shares for stock purchase plans, 401(k) and stock option plans | | | 1,690 | | | | 423 | | | | 11,251 | | | | — | | | | — | | | | — | | | | 11,674 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common shares in conversion of senior notes, net of expenses | | | 5,718 | | | | 1,429 | | | | 42,908 | | | | — | | | | — | | | | — | | | | 44,337 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment to issuance of common shares in offering, net of expenses | | | — | | | | — | | | | 179 | | | | — | | | | — | | | | — | | | | 179 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2004 | | | 156,012 | | | | 39,003 | | | | 1,312,603 | | | | (599,197 | ) | | | (786 | ) | | | — | | | | 751,623 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | 25,611 | | | | — | | | | — | | | | 25,611 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension adjustment | | | — | | | | — | | | | — | | | | — | | | | (351 | ) | | | — | | | | (351 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (351 | ) | | | — | | | | (351 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25,260 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common shares for stock purchase plans, 401(k) and stock option plans | | | 2,452 | | | | 613 | | | | 14,932 | | | | — | | | | — | | | | — | | | | 15,545 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance and expense of restricted stock and acceleration of options | | | 161 | | | | 40 | | | | 96 | | | | — | | | | — | | | | — | | | | 136 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2005 | | | 158,625 | | | $ | 39,656 | | | $ | 1,327,631 | | | $ | (573,586 | ) | | $ | (1,137 | ) | | $ | — | | | $ | 792,564 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | Represents an adjustment to recapitalization as a result of purchase accounting under a reverse acquisition, as reported in fiscal 2002, based on final valuations derived in fiscal 2003. |
The accompanying notes are an integral part of these consolidated financial statements.
41
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Fiscal Years Ended | |
| | | Years Ended September 30, | | | October 3, | | September 28, | | September 29, | |
| | | 2005 | | 2004 | | 2003 | | | 2008 | | 2007 | | 2006 | |
Cash flows from operating activities: | | |
| Net income (loss) | | $ | 25,611 | | $ | 22,412 | | $ | (451,416 | ) | | $ | 111,006 | | $ | 57,650 | | $ | (88,152 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| Share-based compensation expense | | | 23,212 | | 13,737 | | 14,219 | |
| Depreciation | | 37,277 | | 35,829 | | 36,941 | | | 44,712 | | 39,237 | | 38,217 | |
| Charge in lieu of income tax expense | | 11,104 | | 1,022 | | — | | | 7,014 | | — | | — | |
| Amortization | | 2,354 | | 3,043 | | 4,386 | | |
| Amortization of intangible assets | | | 6,933 | | 2,144 | | 2,144 | |
| Amortization of deferred financing costs | | 1,596 | | 2,176 | | 2,123 | | | 1,753 | | 2,311 | | 1,992 | |
| Contribution of common shares to Savings and Retirement Plan | | 10,437 | | 8,162 | | 7,482 | | |
| Gain on sales of assets | | 28 | | 34 | | 1,802 | | |
| Contribution of common shares to savings and retirement plans | | | 10,407 | | 8,565 | | 8,064 | |
| Non-cash restructuring expense | | | 567 | | 419 | | 6,426 | |
| Deferred income taxes | | 3,253 | | 3,055 | | 351 | | | | (36,648 | ) | | | (1,741 | ) | | 16,547 | |
| Loss on sale of assets | | | 276 | | 227 | | 73 | |
| Asset impairments | | — | | 10,853 | | 425,407 | | | — | | — | | 4,197 | |
| Provision for losses on accounts receivable | | 5,127 | | 377 | | 1,156 | | |
| Changes in assets and liabilities, net of acquisition: | | |
| Provision for losses (recoveries) on accounts receivable | | | | (614 | ) | | 2,203 | | 31,206 | |
| Changes in assets and liabilities net of acquired balances: | | |
| Receivables | | | (18,809 | ) | | | (13,882 | ) | | | (50,998 | ) | | 21,223 | | | (10,724 | ) | | | (18,177 | ) |
| Inventories | | 2,172 | | | (21,404 | ) | | | (2,525 | ) | | | (16,082 | ) | | | (247 | ) | | | (3,454 | ) |
| Other assets | | | (3,706 | ) | | 3,794 | | 6,369 | | | 2,860 | | | (1,534 | ) | | | (3,395 | ) |
| Accounts payable | | | (1,129 | ) | | 23,036 | | 5,019 | | | 2,110 | | | (16,654 | ) | | 795 | |
| Other liabilities | | | (21,118 | ) | | 13,406 | | | (58,149 | ) | | | (5,051 | ) | | | (10,815 | ) | | 16,524 | |
| | | | | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | 54,197 | | 91,913 | | | (72,052 | ) | |
| Net cash provided by operating activities | | | 173,678 | | 84,778 | | 27,226 | |
| | | | | | | | | | | | | | | |
| | | |
Cash flows from investing activities: | | |
| Capital expenditures | | | (38,135 | ) | | | (59,998 | ) | | | (40,294 | ) | | | (64,832 | ) | | | (42,596 | ) | | | (49,359 | ) |
| Sale of short-term investments | | 1,223,181 | | 1,049,082 | | — | | |
| Purchase of short-term investments | | | (1,251,470 | ) | | | (1,130,128 | ) | | | (3,988 | ) | |
| Payments for acquisitions | | | | (32,627 | ) | | — | | — | |
| Receipts from property held for sale | | | — | | — | | 6,567 | |
| Sale of investments | | | 10,000 | | 978,046 | | 1,094,985 | |
| Purchase of investments | | | | (7,500 | ) | | | (955,596 | ) | | | (1,009,810 | ) |
| | | | | | | | | | | | | | | |
| Net cash used in investing activities | | | (66,424 | ) | | | (141,044 | ) | | | (44,282 | ) | |
| Net cash provided by (used in) investing activities | | | | (94,959 | ) | | | (20,146 | ) | | 42,383 | |
| | | | | | | | | | | | | | | |
| | | |
Cash flows from financing activities: | | |
| Proceeds from unsecured notes offering | | — | | — | | 230,000 | | |
| Net proceeds from common stock public offering | | — | | — | | 102,188 | | |
| Proceeds from 2007 Convertible Notes | | | — | | 200,000 | | — | |
| Payments on 2007 Convertible Notes | | | | (62,384 | ) | | — | | — | |
| Payments on Junior Subordinated Convertible Notes | | | | (49,335 | ) | | | (130,000 | ) | | | (50,665 | ) |
| Deferred financing costs | | — | | — | | | (10,474 | ) | | — | | | (6,189 | ) | | — | |
| Restricted cash | | — | | | (701 | ) | | | (5,312 | ) | |
| Proceeds from short-term debt | | — | | 8,290 | | 41,652 | | |
| Payments on long-term debt | | — | | 29 | | | (135,139 | ) | |
| Change in restricted cash | | | 541 | | | (200 | ) | | | (290 | ) |
| Repurchase of common stock | | | | (2,063 | ) | | | (31,681 | ) | | | (173 | ) |
| Exercise of stock options | | 5,244 | | 3,512 | | 1,567 | | | 18,049 | | 8,266 | | 1,746 | |
| | | | | | | | | | | | | | | |
| Net cash provided by financing activities | | 5,244 | | 11,130 | | 224,482 | | |
| Net cash provided by (used in) financing activities | | | | (95,192 | ) | | 40,196 | | | (49,382 | ) |
| | | | | | | | | | | | | | | |
| | | |
| Net (decrease) increase in cash and cash equivalents | | | (6,983 | ) | | | (38,001 | ) | | 108,148 | | |
| Net increase (decrease) in cash and cash equivalents | | | | (16,473 | ) | | 104,828 | | 20,227 | |
| Cash and cash equivalents at beginning of period | | 123,505 | | 161,506 | | 53,358 | | | 241,577 | | 136,749 | | 116,522 | |
| | | | | | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 116,522 | | $ | 123,505 | | $ | 161,506 | | | $ | 225,104 | | $ | 241,577 | | $ | 136,749 | |
| | | | | | | | | | | | | | | |
| | | |
Supplemental cash flow disclosures: | | |
| Taxes paid | | $ | 1,221 | | $ | 2,206 | | $ | 517 | | | $ | 1,156 | | $ | 1,117 | | $ | 2,023 | |
| | | | | | | | | | | | | | | |
| Interest paid | | $ | 13,030 | | $ | 15,845 | | $ | 21,061 | | | $ | 6,023 | | $ | 12,479 | | $ | 13,787 | |
| | | | | | | | | | | | | | | |
Supplemental disclosure of non-cash activities: | | |
| Senior Notes conversion | | $ | — | | $ | 45,000 | | $ | — | | |
| Non-cash proceeds received from non-monetary exchange | | | $ | — | | $ | — | | $ | 760 | |
| | | | | | | | | | | | | | | |
| Conexant debt refinancing | | $ | — | | $ | — | | $ | 45,000 | | |
| | | | | | | | | |
| Stock issued for trademark settlement | | $ | — | | $ | — | | $ | 469 | | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
4251
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Par value | | | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | Shares of | | | of | | | Shares of | | | Value of | | | Additional | | | | | | | Other | | | Total | |
| | | Common | | | Common | | | Treasury | | | Treasury | | | Paid-in | | | Accumulated | | | Comprehensive | | | Stockholders’ | |
| | | Stock | | | Stock | | | Stock | | | Stock | | | Capital | | | Deficit | | | Loss | | | Equity | |
| Balance at September 30, 2005 | | | 158,625 | | | $ | 39,656 | | | | — | | | $ | — | | | $ | 1,327,631 | | | $ | (573,586 | ) | | $ | (1,137 | ) | | $ | 792,564 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (88,153 | ) | | | — | | | | (88,153 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 538 | | | | 538 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 538 | | | | 538 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (87,615 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance and expense of common shares for stock purchase plans, 401(k) and stock option plans | | | 1,982 | | | | 496 | | | | — | | | | — | | | | 22,528 | | | | — | | | | — | | | | 23,024 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance and expense of common shares for restricted stock and performance shares | | | 1,083 | | | | 270 | | | | — | | | | — | | | | 1,023 | | | | — | | | | — | | | | 1,293 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares withheld for taxes | | | (31 | ) | | | (8 | ) | | | 31 | | | | (173 | ) | | | 8 | | | | — | | | | — | | | | (173 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at September 29, 2006 | | | 161,659 | | | $ | 40,414 | | | | 31 | | | $ | (173 | ) | | $ | 1,351,190 | | | $ | (661,739 | ) | | $ | (599 | ) | | $ | 729,093 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 57,650 | | | | — | | | | 57,650 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 159 | | | | 159 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 159 | | | | 159 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 57,809 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment to initially apply SFAS 158 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 226 | | | | 226 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance and expense of common shares for stock purchase plans, 401(k) and stock option plans | | | 3,221 | | | | 805 | | | | — | | | | — | | | | 25,468 | | | | — | | | | — | | | | 26,273 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance and expense of common shares for restricted stock and performance shares | | | 682 | | | | 171 | | | | — | | | | — | | | | 4,457 | | | | — | | | | — | | | | 4,628 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase of common stock | | | (4,255 | ) | | | (1,064 | ) | | | 4,255 | | | | (30,083 | ) | | | 1,064 | | | | — | | | | — | | | | (30,083 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares withheld for taxes | | | (206 | ) | | | (51 | ) | | | 206 | | | | (1,599 | ) | | | 51 | | | | — | | | | — | | | | (1,599 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at September 28, 2007 | | | 161,101 | | | $ | 40,275 | | | | 4,492 | | | $ | (31,855 | ) | | $ | 1,382,230 | | | $ | (604,089 | ) | | $ | (214 | ) | | $ | 786,347 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 111,006 | | | | — | | | | 111,006 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impairment of Auction Rate Security | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (912 | ) | | | (912 | ) |
| Pension adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (54 | ) | | | (54 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (966 | ) | | | (966 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 110,040 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance and expense of common shares for stock purchase plans, 401(k) and stock option plans | | | 3,951 | | | | 988 | | | | — | | | | — | | | | 40,308 | | | | — | | | | — | | | | 41,296 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance and expense of common shares for restricted stock and performance shares | | | 780 | | | | 195 | | | | — | | | | — | | | | 8,401 | | | | — | | | | — | | | | 8,596 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares withheld for taxes | | | (240 | ) | | | (60 | ) | | | 240 | | | | (2,063 | ) | | | 60 | | | | — | | | | — | | | | (2,063 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at October 3, 2008 | | | 165,592 | | | $ | 41,398 | | | | 4,732 | | | $ | (33,918 | ) | | $ | 1,430,999 | | | $ | (493,083 | ) | | $ | (1,180 | ) | | $ | 944,216 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Skyworks Solutions, Inc. (“Skyworks” or the “Company”) is an industry leader in radio solutionsdesigns, manufactures and precisionmarkets a broad range of high performance analog and mixed signal semiconductors servicing a diversified set of mobile communications customers. The Company’sthat enable wireless connectivity. Our power amplifiers (PAs), front-end modules (FEMs) and integrated radio frequency (RF) solutions and multimode transceivers are at the heart ofcan be found in many of today’s leading-edge multimediathe cellular handsets and wireless networking platforms. Skyworkssold by the world’s leading manufacturers. Leveraging our core analog technologies, we also offersoffer a diverse portfolio of highly innovative linear products, supporting a wide range of applications includingintegrated circuits (ICs) that support automotive, broadband, consumer,cellular infrastructure, industrial infrastructure,and medical military, Radio Frequency Identification (“RFID”), satellite and wireless data.
Skyworks was formed through the merger (“Merger”) of the wireless business of Conexant Systems, Inc. (“Conexant”) and Alpha Industries, Inc. (“Alpha”) on June 25, 2002, pursuant to an Agreement and Plan of Reorganization, dated as of December 16, 2001, and amended as of April 12, 2002, by and among Alpha, Conexant and Washington Sub, Inc. (“Washington”), a wholly-owned subsidiary of Conexant to which Conexant spun off its wireless communications business. Pursuant to the Merger, Washington merged with and into Alpha, with Alpha as the surviving corporation. Immediately following the Merger, Alpha purchased Conexant’s semiconductor assembly and test facility located in Mexicali, Mexico and certain related operations (the “Mexicali Operations”). For purposes of this Annual Report on Form 10-K, the Washington business and the Mexicali Operations are collectively referred to as “Washington/Mexicali”. Shortly thereafter, Alpha changed its corporate name to Skyworks Solutions, Inc.applications.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The application of the Company’s accounting policies involves the exercise of judgment and assumptions that pertain to future uncertainties and, as a result, actual results could differ from these estimates. All majority owned subsidiaries are included in the Company’s Consolidated Financial Statements and all intercompany balances are eliminated in consolidation.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment and transfer of title, in accordance with the shipping terms specified in the arrangement with the customer. Revenue from license fees and intellectual property is recognized when these fees are due and payable, and all other criteria of SABSEC Staff Accounting Bulletin No. 104,Revenue Recognition, have been met. We ship product on consignment to certain customers and only recognize revenue when the customer notifies us that the inventory has been consumed. Revenue recognition is deferred in all instances where the earnings process is incomplete. Certain product sales are made to electronic component distributors under agreements allowing for price protection and/or a right of return on unsold products. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required.
PRINCIPLES OF CONSOLIDATION
All majority owned subsidiaries are included in the Company’s Consolidated Financial Statements and all intercompany balances are eliminated in consolidation.
FISCAL YEAR
The Company’s fiscal year ends on the Friday closest to September 30. Fiscal 20032008 consisted of 53 weeks and fiscalended on October 3, 2008. The extra week occurred in the fourth quarter and the Company does not believe it had a material impact on its results from operations. Fiscal years 20052007 and 20042006 each consisted of 52 weeks. Fiscal years 2005, 2004weeks and 2003 ended on September 30, 2005, October 1, 2004,28, 2007 and October 3, 2003,September 29, 2006, respectively. For convenience, the consolidated financial statements have been shown as ending on the last day of the calendar month.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews its estimates based upon currently available information. Actual results could differ materially from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash deposited in demand deposits at banks and highly liquid investments with original maturities of 90 days or less as well as commercial paper with original maturities of 90 days or less.
4353
SHORT-TERM INVESMENTSINVESTMENTS
The Company’s short-term investments are classified as available for sale. These investments consist of an auction rate securitiessecurity (ARS) which havehas long-term underlying maturities (ranging from 1420 to 4440 years), however. Due to the recent disruptions in the credit markets the dutch auction process that normally would allow the Company to sell the security every 28-35 days has failed since August 2007. This investment and the auction rate security market is highly liquid andilliquid at this time. During the interest rates reset every 7, 28 or 35 days. The company’s intent is not to hold these securities to maturity, but rather to use the interest rate reset feature to sell securities to provide liquidity as needed. The company’s practice is to invest in these securities for higher yields compared to cash equivalents. In prior years, auction rate securities have been classified as cash equivalents due to their highly liquid nature. They have now been reclassified as short-term investments for all periods presented in the accompanying consolidated financial statements. Such short-term investments are carried at amortized cost, which approximates fair value, due to the short period of time to maturity. Gains and losses are included in investment income in the period they are realized.
RECLASSIFICATION
In the second quarter of fiscal 2005,year ended October 3, 2008, the Company concluded that it was appropriate to classify its auction rate securities as short-term investments. Previously, such investments had been classified asperformed a comprehensive valuation and discounted cash and cash equivalents.flow analysis on the ARS. The Company made adjustments amounting to $81.0concluded the value of the ARS was $2.3 million to its Consolidated Balance Sheet as of September 30, 2004, to reflect this reclassification and made adjustments to its Consolidated Statement of Cash Flows forthus the year ended September 30, 2004 amounting to $81.0 million to reflect the gross purchases and salescarrying value of these securities as investing activities rather than as a component of cash and cash equivalents.was reduced by $0.9 million, reflecting this change in fair value. The Company did not have any auction rate security investmentsassessed the decline in fiscal 2003. This changefair value to be temporary and recorded this reduction in classification did not affect cash flows from operations or cash flows from financing activitiesshareholders’ equity in accumulated other comprehensive loss. The Company will continue to closely monitor the previously reported Consolidated Statements of Cash Flows,ARS and had no impact onevaluate the previously reported Consolidated Statements of Operations.
Certain other reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year’s presentation.appropriate accounting treatment in each reporting period.
RESTRICTED CASH
Restricted cash is primarily used to collateralize the Company’s obligation under a receivables purchase agreement under which it has agreed to sell from time to time certain of its accounts receivable to Skyworks USA, Inc. (“Skyworks USA”), a wholly-owned special purpose entity that is fully consolidated for accounting purposes. Concurrently, Skyworks USA entered into an agreement with Wachovia Bank, N.A. providing for a $50 million credit facility (“Facility Agreement’’) secured by the purchased accounts receivable. For further information regarding the Facility Agreement, please see Note 78 to the Consolidated Financial Statements.
LEASES AND AMORTIZATION OF LEASEHOLD IMPROVEMENTSINVENTORIES
In fiscal 2005,Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. The Company recognized a $0.9 million chargeprovides for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions. The recoverability of inventories is assessed through an on-going review of inventory levels in relation to sales backlog and forecasts, product marketing plans and product life cycles. When the correctioninventory on hand exceeds the foreseeable demand (generally in excess of an error intwelve months), the manner in which it accounted for scheduled rent increases and amortizationvalue of leasehold improvements. The cumulative effect of this errorsuch inventory that is being reported innot expected to be sold at the cost of goods sold, research and development and selling, general and administrative linestime of the statementreview is written down. The amount of operations amounting to $0.2 million, $0.1 million and $0.6 million, respectively.the write-down is the excess of historical cost over estimated realizable value (generally zero).
ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from normal business activities. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make future payments, additional allowances may be required. |
INVENTORIES |
|
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. The Company provides for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions. The recoverability of inventories is assessed through an on-going review of inventory levels in relation to sales backlog and forecasts, product marketing plans and product life cycles. When the inventory on hand exceeds the foreseeable demand (generally in excess of six months), the value of such inventory that is not expected to be sold at the time of the review is written down. The amount of the write-down is the excess of historical cost over estimated realizable value (generally zero). |
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| Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Some or all of the inventories that have been written-down may be retained and made available for sale. In the event that actual demand is higher than originally projected, a portion of these inventories may be able to be sold in the future. Inventories that have been written-down and are identified as obsolete are generally scrapped. |
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method. Significant renewals and betterments are capitalized and equipment taken out of service is written off. Maintenance and repairs, as well as renewals of a minor amount, are expensed as incurred.
Estimated useful lives used for depreciation purposes are 5 to 30 years for buildings and improvements and 3 to 10 years for machinery and equipment. Leasehold improvements are depreciated over the lesser of the economic life or the life of the associated lease.
PROPERTY HELD FOR SALE
Property held for sale at September 30, 2005, relates to land and buildings no longer in use and is recorded at estimated fair value less estimated selling costs. In March 2004, we entered into a contractual arrangement for the sale of the property, contingent upon obtaining specific regulatory approvals. As of September 30, 2005, the prospective buyer had received a portion of these regulatory approvals and anticipates receiving the remaining regulatory approval in 2006. If the prospective buyer does not receive all regulatory approvals by June 30, 2006, the prospective buyer has the option of terminating the original contract. Alternatively, the prospective buyer can renegotiate or extend the original contract with the Company’s approval.
VALUATION OF LONG-LIVED ASSETS
Carrying values for long-lived assets and definite lived intangible assets, which excludes goodwill, are reviewed for possible impairment as circumstances warrant in connection with Statement of Financial Accounting Standards (“SFAS”) No. 144, “AccountingAccounting for the Impairment or Disposal of Long-Lived Assets.”Assets. Impairment reviews are conducted at the judgment of management whenever events or changes in circumstances indicate that the carrying amount of any such asset or asset group may not be recoverable.
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The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to the Company’s business model or changes in its operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value of an asset or asset group, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is determined using discounted cash flows.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets with indefinite lives are tested at least annually for impairment in accordance with the provisions of SFAS No. 142, “GoodwillGoodwill and Other Intangible Assets.”Assets. The goodwill and other intangible asset impairment test is a two-step process. The first step of the impairment analysis compares the Company’s fair value to its net book value to determine if there is an indicator of impairment. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. The Company calculates fair value using the average market price of its common stock over a seven-day period surrounding the annual impairment testing date of July 1the first day of the fourth fiscal quarter and the number of shares of common stock outstanding on the date of the annual impairment test (July 1)(the first day of the fourth fiscal quarter). If the assessment in the first step indicates impairment then the Company performs step two. Step two of the analysis compares the implied fair value of goodwill and other intangible assets to its carrying amount in a manner similar to a purchase price allocation for a business combination. If the carrying amount of goodwill and other intangible assets exceeds its implied fair value, an impairment loss is recognized equal to that excess. Intangible assets are tested for impairment using an estimate of discounted cash flows expected to result from the use of the asset. We test our goodwill and other intangible assets for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill or other intangible assets may be impaired. Indicators such as unexpected adverse business conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel, and acts by governments and courts, may signal that an asset has become impaired.
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DEFERRED FINANCING COSTS
Financing costs are capitalized as an asset on the Company’s balance sheet and amortized on a straight-line basis over the life of the financing. If debt is extinguished early, a proportionate amount of deferred financing costs is charged to earnings.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.basis. This method also requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The carrying value of the Company’s net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company’s consolidated statement of operations. Management evaluates the realizability of the deferred tax assets and assesses the adequacy of the valuation allowance quarterly. Likewise, in the event that the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income or decrease the carrying value of goodwill in the period such determination was made.
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It was previously the Company’s intention to permanently reinvest the undistributed earnings of all its foreign subsidiaries in accordance with Accounting Principles Board (“APB”) Opinion No. 23.23,Accounting for Income Taxes – Special Areas. During the fiscal year ended September 30, 2005, the Company reversed its policy of permanently reinvesting the earnings of its Mexican business. This policy reversal increasedFor the 2005fiscal year ended October 3, 2008, U.S. income tax provision by $9.0 million.was provided on current earnings attributable to our operations in Mexico. No provision has been made for U.S. federal, state, or additional foreign income taxes that would be due upon the actual or deemed distribution of undistributed earnings of ourthe other foreign subsidiaries, which have been, or are, intended to be, permanently reinvested.
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3,Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards the (“FASB Staff Position”). The Company adopted the alternative transition method provided in the FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123(R) during the year ended September 29, 2006. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123(R). Under the simplified method the Company’s beginning APIC pool is zero and the ending APIC pool balance at October 3, 2008 remains zero.
The calculation of our tax liabilities includes addressing uncertainties in the application of complex tax regulations. With the implementation effective September 29, 2007, Financial Accounting Standards Board (FASB) Interpretation (FIN) 48,Accounting for Uncertainty in Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our recognition threshold and measurement attribute of whether it is more likely than not that the positions we have taken in tax filings will be sustained upon tax audit, and the extent to which, additional taxes would be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period in which it is determined the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, short-term debt and accrued liabilities approximates fair value due to short-term maturities of these assets and liabilities. Fair values of long-term debt and short-term investments are based on quoted market prices if available, and if not available a fair value is determined through a discounted cash flow analysis at the date of measurement.
FOREIGN CURRENCY ACCOUNTING
The foreign operations of the Company are subject to exchange rate fluctuations and foreign currency transaction costs. The functional currency for the Company’s foreign operations is the U.S. dollar. Exchange gains and losses resulting from transactions denominated in currencies other than the functional currency are included in the results of operations for the year. Inventories, property, plant and equipment, goodwill and intangible assets, costs of goods sold, and depreciation and amortization are remeasured from the foreign currency into U.S. dollars at historical exchange rates; other accounts are translated at current exchange rates. Gains and losses resulting from the remeasurement of the Company’s long-term deferred tax assets are included in the provision for income taxes and reduced tax expense by $0.8 million in fiscal 2005. Gains and losses resulting from the remeasurement of all other accounts are included in other income, net. The Company recognized a gain of $0.2 million related to these remeasurements in fiscal 2005.
STOCK-BASEDSHARE-BASED COMPENSATION
The Company has electedapplies Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to follow Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”,employees and related interpretations, in accounting fordirectors including employee stock options, and restrictedemployee stock rather than the alternative fair value accounting allowed by SFAS No. 123, “Accounting for Stock-Based Compensation”. APB No. 25 provides that compensation expense relativepurchases related to the Company’s employee2002 Employee Stock Purchase Plan, restricted stock options is measuredand other special equity awards based on estimated fair values. The Company adopted SFAS 123(R) using the intrinsicmodified prospective transition method, which requires the application of the applicable accounting standard as of October 1, 2005, the first day of the Company’s fiscal year 2006.
The fair value of stock options granted at the grant date and the Company recognizes compensation expense, if any, in its statement of operations using the straight-line methodstock-based awards is amortized over the vestingrequisite service period, which is defined as the period during which an employee is required to provide service in exchange for an award. The Company uses a straight-line attribution method for all grants that include only a service condition. Due to the existence of a market condition, certain restricted stock grants are expensed over the service period for fixed awards.each separately vesting tranche.
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Under SFAS No. 123,Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Share-based compensation expense recognized in the Company’s Consolidated Statement of Operations for the fiscal year ended October 3, 2008 included compensation expense for share-based payment awards granted on or before, but not yet vested as of, September 30, 2005, based on the grant date fair value of stock options atestimated in accordance with the date of grant is recognized in earnings over the vesting period of the options. In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirementspro forma provisions of SFAS No. 123,Accounting for Stock-Based Compensation (“SFAS 123”) and compensation expense for the share-based payment awards granted subsequent to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methodSeptember 30, 2005 based on reported results.
The Company granted 160,500 shares of restricted common stock during fiscal 2005. These shares were accounted for under the intrinsic value method as prescribed in APB Opinion No. 25. Stock-based compensation cost is determined as of the grant date based onfair value estimated in accordance with the market price of the underlying common stock and is recognized as expense over vesting periods of four years. The restricted stock grants were valued at approximately $843,000 of which approximately $79,000 was recognized as compensation expense in fiscal 2005. The remaining unrecognized balance will be recognized as compensation expense ratably over the life the vesting period of the restricted stock, which is four (4) years.
On September 2, 2005, the Company accelerated certain unvested and “out-of-the-money” stock options previously awarded to employees and officers that have exercise prices per share over $9.00 and were granted prior to November 10, 2004. As a result, options to purchase approximately 3.8 million shares of Skyworks stock became exercisable immediately upon the announcement. The decision to accelerate vesting of these options was made to avoid recognizing compensation cost associated with certain “out-of-the-money” options in the statement of operations in future financial statements upon the effectivenessprovisions of SFAS 123(R). The Company chose the price of $9.00 so as to balance the Company’s desire to manageAs share-based compensation expense with its need to motivate and retain employees. Based uponrecognized in the Company’s closing stock priceConsolidated Statement of $7.52 on September 2, 2005, none of these options had economic value on the date of acceleration, and no compensation expense resulted from the acceleration.
No stock-based employee compensation cost is reflected in net income for stock options, as all options granted under the Company’s stock-based employee compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
If the compensation costOperations for the Company’s stock-based compensation and stock purchase plans hadfiscal year ended October 3, 2008 is based on awards ultimately expected to vest, it has been determined based upon the fair value at the grant datereduced for awards under these plans consistent with the methodology prescribed underestimated forfeitures. SFAS No. 123, the Company’s net income (loss) would have been as follows:
| | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| (In thousands, except per share amounts) | | 2005 | | | 2004 | | | 2003 | |
| Reported net income (loss) | | $ | 25,611 | | | $ | 22,412 | | | $ | (451,416 | ) |
| Total stock-based employee compensation expense determined under fair value based method for all stock options, net of related tax effects(1) | | | (47,183 | ) | | | (17,992 | ) | | | (4,923 | ) |
| Restricted stock expense as calculated under APB 25 | | | 79 | | | | — | | | | — | |
| Restricted stock expense as calculated under FAS 123 | | | (70 | ) | | | — | | | | — | |
| | | | | | | | | | |
| Adjusted net income (loss) | | $ | (21,563 | ) | | $ | 4,420 | | | $ | (456,339 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Per share information, basic and diluted: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Reported net income (loss) | | $ | 0.16 | | | $ | 0.15 | | | $ | (3.24 | ) |
| Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (0.30 | ) | | | (0.12 | ) | | | (0.03 | ) |
| | | | | | | | | | |
| Adjusted net income (loss) | | $ | (0.14 | ) | | $ | 0.03 | | | $ | (3.27 | ) |
| | | | | | | | | | |
| | |
(1) | | Reflected in the 2005 pro forma stock-based compensation expense is the effect of the acceleration of the vesting of certain employee stock options in September 2005 in the amount of $21.0 million. |
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For purposes of pro forma disclosures under SFAS No. 123, the estimated fair value of the options is assumed123(R) requires forfeitures to be amortized to expense over the options’ vesting period. The fair value of the options granted has been estimated at the datetime of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Upon adoption of SFAS 123(R), the grantCompany elected to retain its method of valuation for share-based awards using the Black-Scholes option-pricing model with the following assumptions:
| | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| Expected volatility | | | 71 | % | | | 91 | % | | | 95 | % |
| Risk free interest rate | | | 3.9 | % | | | 1.9 | % | | | 2.5 | % |
| Dividend yield | | | — | | | | — | | | | — | |
| Expected option life (years) | | | 3.5 | | | | 5.0 | | | | 4.5 | |
| Weighted average fair value of options granted | | $ | 4.86 | | | $ | 3.80 | | | $ | 2.57 | |
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share includes the dilutive effect of stock options and a stock warrant through its expiration in January 2005, using the treasury stock method, and debt securities on an if-converted basis, if their effect is dilutive. For the year ended September 30, 2005, debt securities convertible into 25.4 million shares and stock options exercisable into 25.5 million shares were outstanding but were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive. For the year ended September 30, 2004, debt securities convertible into 25.4 million shares, stock options exercisable into 19.0 million shares and a warrant to purchase 1.0 million shares were outstanding but were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive. For the year ended September 30, 2003, debt securities convertible into 31.1 million shares, stock options exercisable into 25.8 million shares and a warrant to purchase 1.0 million shares were outstanding but were not included in the computation of diluted earnings per share as the net loss(“Black-Scholes model”) which was also previously used for this period would have made their effect anti-dilutive.
PENSIONS AND RETIREE MEDICAL BENEFITS
In connection with Conexant’s spin-off of its Washington/Mexicali business, Conexant transferred obligations to Washington/Mexicali for its pension plan and retiree benefits. The amounts that were transferred relate to approximately 20 Washington/Mexicali employees that had enrolled in Conexant’s Voluntary Early Retirement Plan (“VERP”) in 1998. The VERP also provides health care benefits to members of the plan. The Company currently does not offer pension plans or retiree benefits to its employees.
The costs and obligations of the Company’s pension and retiree medical plans are calculated using many assumptions, the amountpro forma information required under SFAS 123. The Company’s determination of which cannot be completely determined until the benefit payments cease. The most significant assumptions, as presented in Note 10 to the Consolidated Financial Statements, include discount rate, expected return on plan assets and future trends in health care costs. The selection of assumptions is based on historical trends and known economic and market conditions at the time of valuation. Actual results may differ substantially from these assumptions. These differences may significantly impact future pension or retiree medical expenses.
Annual pension and retiree medical expense is principally the sum of three components: 1) increase in liability from interest; less 2) expected return on plan assets; and 3) other gains and losses as described below. The expected return on plan assets is calculated by applying an assumed long-term rate of return to the fair value of plan assets. In any given year, actual returns can differ significantly fromshare-based payment awards on the date of grant using the Black-Scholes model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to; the Company’s expected return. Differences betweenstock price volatility over the term of the awards, and actual and expected return on plan assets are combinedprojected employee stock option exercise behaviors. For more complex awards with gains or losses resulting frommarket-based performance conditions, the revaluation of plan liabilities. Plan liabilities are revalued annually,Company employs a Monte Carlo simulation method which calculates many potential outcomes for an award and establishes fair value based on updated assumptions and information about the individuals covered by the plan. The combined gain or loss is generally expensed evenly over the remaining years that employees are expected to work.most likely outcome.
COMPREHENSIVE LOSSINCOME (LOSS)
The Company accounts for comprehensive lossincome (loss) in accordance with the provisions of SFAS No. 130, “ReportingReporting Comprehensive Income.”Income (“SFAS No. 130”). SFAS No. 130 is a financial statement presentation standard that requires the Company to disclose non-owner changes
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included in equity but not included in net income or loss. ComprehensiveAccumulated comprehensive loss presented in the financial statements consists of adjustments to the Company’s auction rate securities and minimum pension liability.
An analysis of accumulated other comprehensive lossliability as follows (in thousands):
| | | | | | | | | |
| | | | | | | Accumulated | |
| | | | | | | Other | |
| | | Pension | | | Comprehensive | |
| | | Adjustments | | | Loss | |
| Balance as of September 30, 2003 | | $ | (632 | ) | | $ | (632 | ) |
| Change in period | | | (154 | ) | | | (154 | ) |
| | | | | | | |
| Balance as of September 30, 2004 | | | (786 | ) | | | (786 | ) |
| Change in period | | | (351 | ) | | | (351 | ) |
| | | | | | | |
| Balance as of September 30, 2005 | | $ | (1,137 | ) | | $ | (1,137 | ) |
| | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | |
| | | | | | | Auction Rate | | | Other | |
| | | Pension | | | Securities | | | Comprehensive | |
| | | Adjustments | | | Adjustment | | | Loss | |
| Balance as of September 29, 2006 | | $ | (599 | ) | | $ | — | | | $ | (599 | ) |
| Pension adjustment | | | 159 | | | | — | | | | 159 | |
| Adjustment to initially apply SFAS 158 | | | 226 | | | | — | | | | 226 | |
| | | | | | | | | | |
| Balance as of September 28, 2007 | | $ | (214 | ) | | $ | — | | | $ | (214 | ) |
| Pension adjustment | | | (54 | ) | | | — | | | | (54 | ) |
| Impairment of auction rate security | | | — | | | | (912 | ) | | | (912 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance as of October 3, 2008 | | $ | (268 | ) | | $ | (912 | ) | | $ | (1,180 | ) |
| | | | | | | | | | |
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS 157
In November 2004,September 2006, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. The amendments made by 157,Fair Value Measurements(“SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidanceexpands disclosures about fair value measurements. SFAS 157 is effective for inventory costs incurred duringfinancial statements issued for fiscal years beginning after JuneNovember 15, 2005.2007 for financial assets carried at fair value, and years beginning after November 15, 2008 for non-financial assets not carried at fair value. The Company has not yet determined the impact that SFAS 157 will have on its results from operations or financial position.
SFAS 159
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”) including an amendment of SFAS No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair
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value. SFAS 159 is effective for the Company beginning in fiscal 2009. The adoption of SFAS 159 will not have a material impact on the Company’s results from operations or financial position.
SFAS 141(R)
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations(“SFAS 141(R)”).SFAS 141(R) applies to any transaction or other event that meets the definition of a business combination. Where applicable, SFAS No. 141(R) establishes principles and requirements for how the acquirer recognizes and measures identifiable assets acquired, liabilities assumed, noncontrolling interest in the acquiree and goodwill or gain from a bargain purchase. In addition, SFAS 141(R) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is to be applied prospectively for fiscal years beginning after December 15, 2008. The Company will evaluate the impact of SFAS No. 141(R) on its Consolidated Financial Statements in the event future business combinations are contemplated.
SFAS 160
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51(“SFAS 160”). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS 141(R). This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The statement shall be applied prospectively as of the beginning of the fiscal year in which the statement is initially adopted. The Company does not expect the adoption of SFAS No. 151 will160 to impact its results of operations or financial position because the Company does not have a material impact on its financial statements.any minority interests.
SFAS 161
In December 2004,March 2008, the FASB issued SFAS No. 123 (revised 2004)161, “Share-Based Payment”. SFAS No. 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights,Disclosures about Derivative Instruments and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) were initially required to apply SFAS No. 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. In April 2005, the SEC issued a rule amending the compliance date, which allows companies to implement SFAS No. 123(R) at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. As a result, we will implement SFAS No. 123(R) using the modified prospective method starting October 1, 2005. Under this method, the Company will begin recognizing compensation cost for equity-based compensation for all new and existing unvested share-based awards after the date of adoption. The Company will also be required to recognize compensation expense for the fair value of the discount and option features provided to employees on all shares issued through its Employee Stock Purchase Plan under the provisions of SFAS No. 123(R). Under the provisions of SFAS No. 123(R), the Company anticipates it will recognize $25.5 million as compensation expense in fiscal years 2006 thru 2011. This assumes the current Black-Scholes valuation assumptions at September 30, 2005 remain constant in future periods. It also does not take into account future adjustments to compensation expense due to actual cancellations or new awards granted.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—Hedging Activities—an amendment of APB OpinionFASB Statement No. 29”133(“SFAS 161”). The guidance in APB OpinionSFAS 161 amends FASB Statement No. 29, “Accounting133 to require enhanced disclosures about an entity’s derivative and hedging activities thereby improving the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for Nonmonetary Transactions”, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assetsunder Statement 133 and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for such exchange transactions occurring infinancial statements issued for fiscal years and interim periods beginning after JuneNovember 15, 2005.2008, with early application encouraged. The Company does not believecurrently hold any positions in derivative instruments or participate in hedging activities and thus does not expect the impactadoption of adopting SFAS No. 153 will161 to have a materialany impact on its results of operations or financial statements.position.
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FSP No. 142-3
In December 2004,April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3,Determination of the Useful Life of Intangible Assets (“FSP No. 109-1, “Application142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 109, Accounting142,Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for Income Taxes, to the Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”. The American Jobs Creation Act of 2004 (“AJCA”) introduces a special 9% tax deduction on qualified production activities. FSP No. 109-1 clarifies that this tax deduction should be accountedfinancial statements issued for as a special tax deduction in accordance with SFAS No. 109.fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption of FSP No. 109-1142-3 to have aany material impact on our consolidated financial position,its results of operations or cash flows because of its historical net operating loss carryforwards.financial position.
FSP No. APB 14-1
In December 2004,May 2008, the FASB issued FSP No. 109-2, “AccountingAPB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSB APB 14-1”). This FSP alters the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. FSP APB 14-1 is expected to impact the Company’s accounting for its 2007 Convertible Notes and previously held Junior Notes. This FSP requires registrants with specified convertible note features to recognize (non-cash) interest
58
expense based on the market rate for similar debt instruments without the conversion feature. Furthermore, pursuant to its retrospective accounting treatment, the FSP requires prior period interest expense recognition. FSP APB 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company is currently evaluating FSP APB 14-1 and the impact that it will have on its Consolidated Financial Statements. The Company is not required to adopt FSP APB 14-1 until the first quarter of fiscal 2010.
FSP No. 133-1 and FIN 45-4
In September 2008, the FASB issued FSP No. 133-1,Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 (“FSP 133-1”) and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP amends FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities,to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP also amends FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure GuidanceRequirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,to require an additional disclosure about the Foreign Earnings Repatriation Provision withincurrent status of the American Jobs Creation Actpayment/performance risk of 2004”a guarantee. Further, this FSP clarifies the Board’s intent about the effective date of FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities. The AJCA introducesprovisions of this FSP that amend Statement 133 and Interpretation 45 shall be effective for a limited time an 85% dividend deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP 109-2 provides accountingreporting periods (annual or interim) ending after November 15, 2008. The Company does not currently hold any positions in derivative instruments or participate in hedging activities and disclosure guidance for the repatriation provision. The Companythus does not expect the adoption of FSP No. 109-2133-1 and FIN 45-4 to have a materialany impact on our consolidated financial position,its results of operations or cash flows because of its historical net operating loss carryforwards.financial position.
FSP No. FAS 157-3
In March 2005,October 2008, the FASB issued FASB InterpretationFSP No. 47, “AccountingFAS 157-3,Determining the Fair Value of a Financial Asset When the Market for ConditionalThat Asset Retirement Obligations—Is Not Active(“FSP 157-3”) which clarifies the application of SFAS 157 in a market that is not active and provides an interpretation of FASB Statement No. 143”. This interpretation provides additional guidance asexample to when companies should recordillustrate key considerations in determining the fair value of a liability for a conditional asset retirement obligation when there is uncertainty about the timing and/or method of settlement of the obligation. The Company is currently evaluating the potential impact of this issue on its financial statements, but does not believe the impact of any change, if necessary, will be material. FASB Interpretation No. 47asset. SFAS 157 is effective for fiscal years ending after December 15, 2005.
In May 2005, the FASBfinancial statements issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3”. This Statement replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements—an amendment of APB Opinion No. 28”, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for accounting changes and error corrections occurring in fiscal years beginning after DecemberNovember 15, 2005.2007 for financial assets carried at fair value, and years beginning after November 15, 2008 fornon-financial assets not carried at fair value. The Company has not yet determined the impact that SFAS 157 will have on its results from operations or financial position.
NOTE 3. MARKETABLEBUSINESS COMBINATIONS
In October 2007, the Company paid $32.6 million in cash to acquire certain assets from two separate companies. The Company acquired raw materials, die bank, finished goods, proprietary GaAs PA/FEM designs and related intellectual property in a business combination from Freescale Semiconductor. We also acquired sixteen fundamental HBT and RF MEMs patents in an asset acquisition from another company. The purchase accounting on these acquisitions was finalized in March 2008.
The purchase prices as of October 23, 2007 were allocated based upon the fair value of the tangible and intangible assets acquired in accordance with Statement of Financial Accounting Standards (“SFAS”) 141,Business Combinations. Based upon those calculations, the Company has definitively concluded that customer relationships have a fair value of $8.5 million, order backlog has a fair value of $1.6 million, developed technology has a fair value of $1.3 million, the Master Foundry Services agreement has a fair value of $0.9 million, patents have a fair value of $0.9 million, inventories have a fair value of $5.6 million and the remaining purchase price of $13.8 million is allocated to goodwill. The intangible assets will be amortized over periods ranging from 0.5 years to 5 years.
The Company’s primary reasons for the above acquisitions were to expand its market share in power amplifiers and front end modules at certain existing customers, and increase the probability of future design wins with these customers. The significant factors that resulted in recognition of goodwill in one of the transactions were: (a) the purchase price was based on cash flow projections assuming the sale of the acquired inventory and the sale of the Company’s next generation product (a derivative of the acquired inventory); and (b) there were very few tangible and identifiable intangible assets that qualified for recognition.
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4. AVAILABLE FOR SALE SECURITIES
The Company accounts for its investment in debt and equity securities in accordance with SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, and classifies them as “available for sale”. At October 3, 2008, these securities consist of $3.2 million in amortized cost of auction rate securities (“ARS”), which are long-term debt instruments which provide liquidity through a Dutch auction process that resets interest rates each month. The recent uncertainties in the credit markets have disrupted the liquidity of this process resulting in failed auctions.
During the fiscal year ended October 3, 2008, the Company performed a comprehensive valuation and discounted cash flow analysis on the ARS. The Company concluded the value of the ARS was $2.3 million thus the carrying value of these securities was reduced by $0.9 million, reflecting this change in fair value. The Company assessed the decline in fair value to be temporary and recorded this reduction in shareholders’ equity in accumulated other comprehensive loss. The Company will continue to closely monitor the ARS and evaluate the appropriate accounting treatment in each reporting period. The Company holds no other auction rate securities.
ARS were classified in prior periods as current assets under “Short-term Investments”. Given the failed auctions, the Company’s ARS are considered to be illiquid until there is a successful auction. Accordingly, the remaining ARS balance has been reclassified to non-current other assets.
Marketable securities areas of September 28, 2007 were categorized as available for sale and are summarized as follows asconsisted solely of September 30, 2005 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Market | |
| Short term available for sale securities: | | Cost | | | Gains | | | Losses | | | Value | |
| Auction rate securities | | $ | 113.3 | | | $ | — | | | $ | — | | | $ | 113.3 | |
| | | | | | | | | | | | | |
| Total marketable securities | | $ | 113.3 | | | $ | — | | | $ | — | | | $ | 113.3 | |
| | | | | | | | | | | | | |
The amortized cost of available for saleauction rate securities approximated theirwith a fair value at September 30, 2004 and are summarized as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Market | |
| Short term available for sale securities: | | Cost | | | Gains | | | Losses | | | Value | |
| Auction rate securities | | $ | 85.0 | | | $ | — | | | $ | — | | | $ | 85.0 | |
| | | | | | | | | | | | | |
| Total marketable securities | | $ | 85.0 | | | $ | — | | | $ | — | | | $ | 85.0 | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
| | | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Market | |
| Long term available for sale securities: | | Cost | | | Gains | | | Losses | | | Value | |
| Corporate debt securities | | $ | 230.0 | | | $ | — | | | $ | — | | | $ | 230.0 | |
| | | | | | | | | | | | | |
| Total marketable securities | | $ | 230.0 | | | $ | — | | | $ | — | | | $ | 230.0 | |
| | | | | | | | | | | | | |
NOTE 4.5. INVENTORY
Inventories consist of the following (in thousands):
| | | | | | | | | | |
| | | | | | | | | | | As of | |
| | | September 30, | | | October 3, | | September 28, | |
| | | 2005 | | 2004 | | | 2008 | | 2007 | |
| Raw materials | | $ | 8,080 | | $ | 12,176 | | | $ | 8,005 | | $ | 6,624 | |
| Work-in-process | | 49,329 | | 50,717 | | | 64,305 | | 48,128 | |
| Finished goods | | 19,991 | | 16,679 | | | 31,481 | | 27,357 | |
| | | | | | | | | | | |
| | | $ | 77,400 | | $ | 79,572 | | | $ | 103,791 | | $ | 82,109 | |
| | | | | | | | | | | |
NOTE 5.6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
| | | | | | | | | | |
| | | | | | | | | | | As of | |
| | | September 30, | | | October 3, | | September 28, | |
| | | 2005 | | 2004 | | | 2008 | | 2007 | |
| Land | | $ | 9,423 | | $ | 9,423 | | | $ | 9,423 | | $ | 9,423 | |
| Land and leasehold improvements | | 4,284 | | 4,103 | | | 4,989 | | 4,394 | |
| Buildings | | 59,586 | | 50,305 | | | 39,708 | | 39,730 | |
| Furniture and Fixtures | | | 24,889 | | 24,485 | |
| Machinery and equipment | | 317,334 | | 335,572 | | | 382,582 | | 343,551 | |
| Construction in progress | | 14,312 | | 5,391 | | | 29,845 | | 12,671 | |
| | | | | | | | | | | |
| | | 404,939 | | 404,794 | | | 491,436 | | 434,254 | |
| Accumulated depreciation and amortization | | | (260,731 | ) | | | (261,260 | ) | | | (318,076 | ) | | | (280,738 | ) |
| | | | | | | | | | | |
| | | $ | 144,208 | | $ | 143,534 | | | $ | 173,360 | | $ | 153,516 | |
| | | | | | | | | | | |
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NOTE 6.7. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | As of | |
| | | Weighted | | | October 3, 2008 | | | September 28, 2007 | |
| | | Average | | | Gross | | | | | | | Net | | | Gross | | | | | | | Net | |
| | | Amortization | | | Carrying | | | Accumulated | | | Carrying | | | Carrying | | | Accumulated | | | Carrying | |
| | | Period (Years) | | | Amount | | | Amortization | | | Amount | | | Amount | | | Amortization | | | Amount | |
| Goodwill | | | | | | $ | 483,671 | | | $ | — | | | $ | 483,671 | | | $ | 480,890 | | | $ | — | | | $ | 480,890 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Developed technology | | | 5-10 | | | $ | 11,850 | | | $ | (7,533 | ) | | $ | 4,317 | | | $ | 10,550 | | | $ | (6,399 | ) | | $ | 4,151 | |
| Customer relationships | | | 5-10 | | | | 21,210 | | | | (9,650 | ) | | | 11,560 | | | | 12,700 | | | | (6,678 | ) | | | 6,022 | |
| Patents | | | 3 | | | | 900 | | | | (300 | ) | | | 600 | | | | — | | | | — | | | | — | |
| Other | | | .5-3 | | | | 2,649 | | | | (2,649 | ) | | | — | | | | 122 | | | | (122 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 36,609 | | | | (20,132 | ) | | | 16,477 | | | | 23,372 | | | | (13,199 | ) | | | 10,173 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unamortized intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trademarks | | | | | | | 3,269 | | | | — | | | | 3,269 | | | | 3,269 | | | | — | | | | 3,269 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets | | | | | | $ | 39,878 | | | $ | (20,132 | ) | | $ | 19,746 | | | $ | 26,641 | | | $ | (13,199 | ) | | $ | 13,442 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Annual amortization expense related to intangible assets is as follows (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | September 28, | | September 29, |
| | | 2008 | | 2007 | | 2006 |
| | | |
| Amortization expense | | $ | 6,933 | | | $ | 2,144 | | | $ | 2,144 | |
The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, on October 1, 2002, and performed a transitional impairment test for goodwill. As a result, management determined thatchanges in the gross carrying amount of its goodwill and intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Goodwill and Intangible Assets | |
| | | | | | | Developed | | | Customer | | | | | | | Patents and | | | | |
| | | Goodwill | | | Technology | | | Relationships | | | Trademarks | | | Other | | | Total | |
| Balance as of September 29, 2006 | | $ | 493,389 | | | $ | 10,550 | | | $ | 12,700 | | | $ | 3,269 | | | $ | 122 | | | $ | 520,030 | |
| Deductions during year | | | (12,499 | ) | | | — | | | | — | | | | — | | | | — | | | | (12,499 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance as of September 28, 2007 | | $ | 480,890 | | | $ | 10,550 | | | $ | 12,700 | | | $ | 3,269 | | | $ | 122 | | | $ | 507,531 | |
| Additions during period | | | 13,779 | | | | 1,300 | | | | 8,510 | | | | — | | | | 3,427 | | | | 27,016 | |
| Deductions during year | | | (10,998 | ) | | | — | | | | — | | | | — | | | | — | | | | (10,998 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance as of October 3, 2008 | | $ | 483,671 | | | $ | 11,850 | | | $ | 21,210 | | | $ | 3,269 | | | $ | 3,549 | | | $ | 523,549 | |
| | | | | | | | | | | | | | | | | | | |
In October 2007, the Company paid $32.6 million in cash to acquire certain assets from two separate companies resulting in the allocation of approximately $13.8 million to goodwill. For additional information regarding these acquisitions see Note 3, Business Combinations.
Goodwill was $397.1reduced by $11.0 million greater than its implied fair value. This transitional impairment charge was recordedin fiscal 2008 and $12.5 million in fiscal 2007 as a cumulative effectresult of the realization of deferred tax assets. The benefit from the recognition of a change in accounting principle and is reflected inportion of these deferred items reduces the Company’s results of operations for fiscal 2003. The significant impairment charge to goodwill shortly after the Merger resulted from a significant decline in the market price of our common stock. The first step of the goodwill impairment analysis compares the Company’s fair value to its net book value. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. The Company hired a third-party firm to perform the fair value calculation for the Merger and subsequent SFAS 142 valuation. The fair value calculation used to determine the purchase price for the Merger was performed in December 2001, the date at which both parties agreed upon the principal terms of the Merger. The calculation was based on the average market price of the Company’s common stock over a seven-day period. This same methodology was used to determine the faircarrying value of goodwill instead of reducing income tax expense. Accordingly, future realization of certain deferred tax assets will reduce the Company atcarrying value of goodwill. The remaining deferred tax assets that could reduce goodwill in future periods are $7.6 million as of October 1, 2002 for the required transitional impairment test upon the adoption of SFAS No. 142. Between the time of the Merger calculation in December 2001 and the SFAS No. 142 calculation in October 2002, the market price of the Company’s common stock declined as the wireless semiconductor industry experienced a downturn in demand amid concerns about inflation, decreased consumer confidence, reduced capital spending, adverse business conditions and liquidity concerns in the telecommunications and related industries. Since the Company’s fair value is directly linked to the market price of its common stock, a significant decline in the market price of its common stock could, and in this case did, result in an impairment charge to goodwill. 3, 2008.
The Company tests its goodwill for impairment annually as of the first day of its fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. The Company completed its annual goodwill impairment test for fiscal 20052008 and determined that as of July 5, 2005,1, 2008, its goodwill was not impaired.
5161
Goodwill and intangible assets consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted | | | September 30, 2005 | | | September 30, 2004 | |
| | | Average | | | Gross | | | | | | | Net | | | Gross | | | | | | | Net | |
| | | Amortization | | | Carrying | | | Accumulated | | | Carrying | | | Carrying | | | Accumulated | | | Carrying | |
| | | Period (Years) | | | Amount | | | Amortization | | | Amount | | | Amount | | | Amortization | | | Amount | |
| Goodwill | | | | | | $ | 493,389 | | | $ | — | | | $ | 493,389 | | | $ | 504,493 | | | $ | — | | | $ | 504,493 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Developed technology | | | 10 | | | $ | 10,550 | | | $ | (4,651 | ) | | $ | 5,899 | | | $ | 10,550 | | | $ | (3,777 | ) | | $ | 6,773 | |
| Customer relationships | | | 10 | | | | 12,700 | | | | (4,138 | ) | | | 8,562 | | | | 12,700 | | | | (2,868 | ) | | | 9,832 | |
| Other | | | 3 | | | | 122 | | | | (122 | ) | | | — | | | | 122 | | | | (101 | ) | | | 21 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 23,372 | | | | (8,911 | ) | | | 14,461 | | | | 23,372 | | | | (6,746 | ) | | | 16,626 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unamortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trademarks | | | | | | | 3,269 | | | | — | | | | 3,269 | | | | 3,269 | | | | — | | | | 3,269 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets | | | | | | $ | 26,641 | | | $ | (8,911 | ) | | $ | 17,730 | | | $ | 26,641 | | | $ | (6,746 | ) | | $ | 19,895 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Annual amortization expense related to intangible assets are as follows (in thousands):
| | | | | | | | | | | | | |
| | | Years Ended September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Amortization expense | | $ | 2,165 | | | $ | 2,286 | | | $ | 3,545 | |
The changes in the gross carrying amount of goodwill and intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Goodwill and Intangible Assets | |
| | | | | | | Developed | | | Customer | | | | | | | | | | |
| | | Goodwill | | | Technology | | | Relationships | | | Trademarks | | | Other | | | Total | |
| Balance as of September 30, 2003 | | $ | 505,514 | | | $ | 10,550 | | | $ | 12,700 | | | $ | 3,269 | | | $ | 122 | | | $ | 532,155 | |
| Deductions during year | | | (1,021 | ) | | | — | | | | — | | | | — | | | | — | | | | (1,021 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance as of September 30, 2004 | | $ | 504,493 | | | $ | 10,550 | | | $ | 12,700 | | | $ | 3,269 | | | $ | 122 | | | $ | 531,134 | |
| Deductions during year | | | (11,104 | ) | | | — | | | | — | | | | — | | | | — | | | | (11,104 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance as of September 30, 2005 | | $ | 493,389 | | | $ | 10,550 | | | $ | 12,700 | | | $ | 3,269 | | | $ | 122 | | | $ | 520,030 | |
| | | | | | | | | | | | | | | | | | | |
The reduction to goodwill in fiscal 2005 and fiscal 2004 results from the utilization of deferred tax assets for which no tax benefit was recognized as of the date of the Merger. The remaining pre-Merger deferred tax assets that could reduce goodwill in future periods are $31.9 million as of September 30, 2005.
Annual amortization expense related to intangible assets is expected to be as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | |
| Amortization expense | | $ | 2,144 | | | $ | 2,144 | | | $ | 2,144 | | | $ | 2,144 | | | $ | 2,144 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 |
| Amortization expense | | $ | 4,406 | | | $ | 4,406 | | | $ | 4,106 | | | $ | 3,559 | | | $ | — | |
52
NOTE 7.8. BORROWING ARRANGEMENTS
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | September 30, | | | Fiscal Years Ended | |
| | | 2005 | | 2004 | | | October 3, | | September 28, | |
| Junior notes | | $ | 230,000 | | $ | 230,000 | | |
| | | | 2008 | | 2007 | |
| | | | |
| Junior Notes | | | $ | — | | $ | 49,335 | |
| 2007 Convertible Notes | | | 137,616 | | 200,000 | |
| | | | | | | |
| Long-term debt | | | $ | 137,616 | | $ | 249,335 | |
| Less-current maturities | | — | | — | | | — | | 49,335 | |
| | | | | | | | | | | |
| | | $ | 230,000 | | $ | 230,000 | | | $ | 137,616 | | $ | 200,000 | |
| | | | | | | | | | | |
On March 2, 2007, the Company issued $200.0 million aggregate principal amount of convertible subordinated notes (“2007 Convertible Notes”). The offering contained two tranches. The first tranche consisted of $100.0 million of 1.25% convertible subordinated notes due March 2010. The second tranche consisted of $100.0 million of 1.50% convertible subordinated notes due March 2012. The conversion price of the 2007 Convertible Notes is 105.0696 shares per $1,000 principal amount of notes to be redeemed, which is the equivalent of a conversion price of approximately $9.52 per share, plus accrued and unpaid interest, if any, to the conversion date. Holders may require the Company to repurchase the 2007 Convertible Notes upon a change in control of the Company. The Company pays interest in cash semi-annually in arrears on March 1 and September 1 of each year. It has been the Company’s historical practice to cash settle the principal and interest components of convertible debt instruments, and it is our intention to continue to do so in the future, including settlement of the 2007 Convertible Notes. During the fiscal year ended October 3, 2008, the Company redeemed $50.0 million and $12.4 million in aggregate principal amount of the 1.25% and 1.50% convertible subordinated notes, respectively, at an average redemption price of $109.02. A premium of approximately $5.8 million, along with approximately $1.0 million in deferred financing costs was recorded as a charge against earnings in fiscal 2008.
Junior notesNotes represent the Company’s 4.75% convertible subordinated notes due November 2007. ThesePrior to repayment, these Junior notes can be convertedNotes were convertible into 110.4911 shares of common stock per $1,000 principal balance, which is the equivalent of a conversion price of approximately $9.05 per share. The Company may redeem the Junior notes at any time after November 20, 2005. The redemption price of the Junior notes between the period November 20, 2005 through November 14, 2006, will be $1,011.875 per $1,000 principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date. The redemption price of the notes beginning on November 15, 2006 and thereafter will be $1,000 per $1,000 principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date. Holders may require the Company to repurchase the Junior notes upon a change in control of the Company. The Company payspaid interest in cash semi-annually in arrears on May 15 and November 15 of each year. During the fiscal year ended September 28, 2007, the Company redeemed $130.0 million in aggregate principal amount of the Junior Notes at a redemption price of $1,000 per $1,000 principal amount of notes plus $2.3 million in accrued and unpaid interest. The fair value of the Company’s long-term debtJunior Notes approximated $231.2$50.2 million at September 30, 2005.28, 2007. The Company retired the remaining $49.3 million in aggregate principal amount of the Junior Notes, plus $1.2 million in accrued and unpaid interest, on the due date of November 15, 2007.
On December 21, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position Emerging Issues Task Force 00-19-2 (“FSP EITF 00-19-2”). FSP EITF 00-19-2 specifies that the contingent obligation to make future payments, or otherwise transfer consideration under a registration payment arrangement, should be separately recognized and measured in accordance with FASB Statement No. 5,Accounting for Contingencies(“FASB 5”). The Company adopted FSP EITF 00-19-2 on September 29, 2007. The Company agreed to file a shelf registration statement under the Securities Act of 1933 (the “Securities Act”) not later than 120 days after the first date of original issuance of the 2007 Convertible Notes. The Company agreed to utilize commercially reasonable efforts to have this shelf registration statement declared effective not later than 180 days after the first date of original issuance of the notes, and to keep it effective until the earliest of: 1) two years from the effective date of the shelf registration statement; 2) the date when all registrable securities have been registered under the Securities Act and disposed of; and 3) the date on which all registrable securities held by non-affiliates are eligible to be sold to the public pursuant to Rule 144(k) under the Securities Act. The Company filed the shelf registration statement within
62
120 days of the original issuance of the 2007 Convertible Notes and the shelf registration statement was declared effective within 180 days after the first date of original issuance of the notes. If the shelf registration statement ceases to be effective within two years from the effective date of the shelf registration statement the Company will be obligated to pay an additional 0.25% interest per annum for the first 90 days after the occurrence of the registration default and at the rate of 0.50% per annum thereafter. The Company has concluded that it is not probable that a contingent liability has been incurred at October 3, 2008 pursuant to the application of FASB 5 and thus has not recorded a liability.
Aggregate annual maturities of long-term debt are as follows (in thousands):
| | | | | |
| Fiscal Year | | | | |
| 2006 | | | — | |
| 2007 | | | — | |
| 2008 | | | 230,000 | |
| | | | |
| | | $ | 230,000 | |
| | | | |
| | | | | |
| Fiscal Year | | Maturity | |
| 2009 | | | — | |
| 2010 | | | 50,000 | |
| 2011 | | | — | |
| 2012 | | | 87,616 | |
| | | | |
| | | $ | 137,616 | |
| | | | |
SHORT-TERM DEBT
Short-term debt consists of the following (in thousands):
| | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | |
| | | 2008 | | | 2007 | |
| | | |
| Current maturities of long-term debt | | | — | | | | 49,335 | |
| Facility Agreement | | | 50,000 | | | | 50,000 | |
| | | | | | | |
| | | $ | 50,000 | | | $ | 99,335 | |
| | | | | | | |
On July 15, 2003, the Company entered into a receivables purchase agreement under which it has agreed to sell from time to time certain of its accounts receivable to Skyworks USA, Inc. (“Skyworks USA”), a wholly-owned special purpose entity that is fully consolidated for accounting purposes. Concurrently, Skyworks USA entered into an agreement with Wachovia Bank, N.A. providing for a $50$50.0 million credit facility (“Facility Agreement’’) secured by the purchased accounts receivable. As a part of the consolidation, any interest incurred by Skyworks USA related to monies it borrows under the Facility Agreement is recorded as interest expense in the Company’s results of operations. The Company performs collections and administrative functions on behalf of Skyworks USA. The Company renewed the Facility Agreement on July 11, 2008 for a one year term. Interest related to the Facility Agreement is at LIBOR plus 0.4%0.75%. As of September 30, 2005,October 3, 2008, Skyworks USA had borrowed $50.0 million under this agreement.
NOTE 8.9. INCOME TAXES
Income (loss) before income taxes and cumulative effect of change in accounting principle consists of the following components (in thousands):
| | | | | | | | | | | | | | |
| | | | Fiscal Years Ended | |
| | | | | | | | | | | | | | | October 3, | | September 28, | | September 29, | |
| | | Years Ended September 30, | | | 2008 | | 2007 | | 2006 | |
| | | 2005 | | 2004 | | 2003 | | | |
| United States | | $ | 23,885 | | $ | 15,029 | | $ | (59,379 | ) | | $ | 79,931 | | $ | 54,685 | | $ | (87,169 | ) |
| Foreign | | 17,104 | | 11,367 | | 5,754 | | | 2,257 | | 2,085 | | 14,395 | |
| | | | | | | | | | | | | | | |
| | | $ | 40,989 | | $ | 26,396 | | $ | (53,625 | ) | | $ | 82,188 | | $ | 56,770 | | $ | (72,774 | ) |
| | | | | | | | | | | | | | | |
The provision for income taxes from operations consists of the following (in thousands):
| | | | | | | | | | | | | | |
| | | | Fiscal Years Ended | |
| | | | | | | | | | | | | | | October 3, | | September 28, | | September 29, | |
| | | Years Ended September 30, | | | 2008 | | 2007 | | 2006 | |
| | | 2005 | | 2004 | | 2003 | | | |
| Current tax expense (benefit): | | |
| Federal | | $ | 367 | | $ | — | | $ | — | | | $ | 1,310 | | $ | — | | $ | (52 | ) |
| State | | | (1,032 | ) | | | (1,040 | ) | | — | | |
| Foreign | | 1,178 | | 837 | | 1,414 | | |
| | | | | | | | | |
| | | 513 | | | (203 | ) | | 1,414 | | |
5363
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | | | Fiscal Years Ended | |
| | | 2005 | | 2004 | | 2003 | | | October 3, | | September 28, | | September 29, | |
| Deferred tax expense (benefit): | | |
| | | | 2008 | | 2007 | | 2006 | |
| | | | | |
| State | | | | (72 | ) | | | (461 | ) | | — | |
| Foreign | | | | (94 | ) | | 1,149 | | 438 | |
| | | | | | | | | |
| | | | 1,144 | | 688 | | 386 | |
| | | |
Deferred tax expense(benefit): | | |
| Federal | | — | | — | | — | | | | (36,405 | ) | | | (1,672 | ) | | — | |
| State | | — | | — | | — | | | — | | — | | — | |
| Foreign | | 3,761 | | 3,165 | | | (762 | ) | | | (571 | ) | | 104 | | 14,992 | |
| | | | | | | | | | | | | | | |
| | | 3,761 | | 3,165 | | | (762 | ) | | | (36,976 | ) | | | (1,568 | ) | | 14,992 | |
| | | |
| Charge in lieu of tax expense | | 11,104 | | 1,022 | | — | | | | 7,014 | | | — | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Provision for income taxes | | $ | 15,378 | | $ | 3,984 | | $ | 652 | | | $ | (28,818 | ) | | $ | (880 | ) | | $ | 15,378 | |
| | | | | | | | | | | | | | | |
The actual income tax expense reported for operations is different than that which would have been computed by applying the federal statutory tax rate to income (loss) before income taxes and cumulative effect of change in accounting principle.taxes. A reconciliation of income tax expense as computed at the U.S.United States Federal statutory income tax rate to the provision for income tax expense follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30, | | | Fiscal Years Ended | |
| | | 2005 | | 2004 | | 2003 | | | October 3, | | September 28, | | September 29, | |
| Tax (benefit) expense at U.S. statutory rate | | $ | 14,346 | | $ | 9,239 | | $ | (18,769 | ) | |
| | | | 2008 | | 2007 | | 2006 | |
| | | | |
| Tax (benefit) expense at United States statutory rate | | | $ | 28,766 | | $ | 19,870 | | $ | (25,471 | ) |
| Foreign tax rate difference | | | (1,048 | ) | | 23 | | | (1,362 | ) | | | (436 | ) | | | (301 | ) | | 10,391 | |
| Deemed dividend from foreign subsidiary | | 8,956 | | — | | — | | | 102 | | — | | — | |
| Nondeductible interest expense | | — | | 1,162 | | 2,113 | | |
| Research and development credits | | | (5,000 | ) | | | (4,600 | ) | | | (5,369 | ) | | | (7,970 | ) | | | (7,495 | ) | | | (1,500 | ) |
| State income taxes | | | (1,032 | ) | | | (1,040 | ) | | — | | |
| Release of tax reserve | | | | (999 | ) | | | (461 | ) | | — | |
| Change in valuation allowance | | | (13,436 | ) | | | (2,466 | ) | | 25,168 | | | | (59,315 | ) | | | (14,306 | ) | | 31,261 | |
| Charge in lieu of tax expense | | 11,104 | | 1,022 | | — | | | | 7,014 | | | — | | — | |
| Foreign withholding tax | | | — | | 825 | | — | |
| Non deductible debt retirement premium | | | 1,741 | | — | | — | |
| Alternative minimum tax | | | 1,306 | | — | | — | |
| Other, net | | 1,488 | | 644 | | | (1,129 | ) | | 973 | | 988 | | 697 | |
| | | | | | | | | | | | | | | |
| Provision for income taxes | | $ | 15,378 | | $ | 3,984 | | $ | 652 | | | $ | (28,818 | ) | | $ | (880 | ) | | $ | 15,378 | |
| | | | | | | | | | | | | | | |
The charge in lieu of tax expense resultedDuring the fiscal years ended October 3, 2008 and September 28, 2007, the valuation allowance was reduced by $11.0 million and $12.5 million, respectively, resulting from the partial recognition of certain acquired tax benefits that were subject to a valuation allowance at the time of acquisition, the realization of which required a reduction of goodwill. Of this amount, $7.0 million and $0.0 million is included in the charge in lieu of tax expense in the table above for fiscal 2008 and fiscal 2007, respectively, and $4.0 million and $12.5 million is included in the change in the valuation allowance for fiscal 2008 and fiscal 2007, respectively. There were no comparable amounts in the fiscal year ended September 29, 2006.
Deferred income tax assets and liabilities consist of the tax effects of temporary differences related to the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | September 30, | | | Fiscal Years Ended | |
| | | 2005 | | 2004 | | | October 3, | | September 28, | |
| | | | 2008 | | 2007 | |
| | | | |
| Deferred Tax Assets: | | |
| Current: | | |
| Inventories | | $ | 4,920 | | $ | 5,680 | | | $ | 3,726 | | $ | 5,978 | |
| Bad debts | | 2,004 | | 704 | | | 329 | | 559 | |
| Accrued compensation and benefits | | 2,919 | | 2,464 | | | 3,460 | | 3,364 | |
| Product returns, allowances and warranty | | 1,247 | | 4,027 | | | 849 | | 1,037 | |
| Restructuring | | 393 | | 624 | | | 888 | | 1,904 | |
| Prepaid insurance | | | (818 | ) | | — | | |
| Other – net | | 1,085 | | 1,016 | | |
| | | | | | | | | | | |
| Current deferred tax assets | | 11,750 | | 14,515 | | | 9,252 | | 12,842 | |
| Less valuation allowance | | | (10,665 | ) | | | (13,499 | ) | | | (3,420 | ) | | | (10,213 | ) |
| | | | | | | | | | | |
| Net current deferred tax assets | | 1,085 | | 1,016 | | | 5,832 | | 2,629 | |
| | | | | | | | | | | |
| Long-term: | | |
| Property, plant and equipment | | 18,474 | | 29,919 | | | 9,726 | | 10,739 | |
| Intangible assets | | 7,406 | | 8,240 | | | 9,904 | | 11,018 | |
| Retirement benefits and deferred compensation | | 1,183 | | 1,098 | | | 13,817 | | 9,949 | |
| Net operating loss carryforwards | | 65,936 | | 72,656 | | | 44,903 | | 75,884 | |
| Federal tax credits | | 21,399 | | 15,076 | | | 37,170 | | 34,139 | |
| State investment credits | | 4,419 | | 5,711 | | | 19,106 | | 16,268 | |
| Restructuring | | 1,506 | | 1,683 | | |
| Other – net | | | 733 | | 1,482 | |
| | | | | | | |
| Long-term deferred tax assets | | | 135,359 | | 159,479 | |
| Less valuation allowance | | | | (79,429 | ) | | | (141,042 | ) |
| | | | | | | |
5464
| | | | | | | | | | | | | | | | | |
| | | September 30, | | | Fiscal Years Ended | |
| | | 2005 | | 2004 | | | October 3, | | September 28, | |
| Other – net | | 1,136 | | 1,000 | | |
| | | | | | | | 2008 | | 2007 | |
| Long-term deferred tax assets | | 121,459 | | 135,383 | | |
| Less valuation allowance | | | (105,408 | ) | | | (116,010 | ) | |
| | | | | | | | | |
| Net long-term deferred tax assets | | 16,051 | | 19,373 | | | 55,930 | | 18,437 | |
| | | | | | | | | | | |
| | | |
| Deferred tax assets | | | 144,611 | | 172,321 | |
| Less valuation allowance | | | | (82,849 | ) | | | (151,255 | ) |
| | | | | | | |
| Net deferred tax assets | | | 61,762 | | 21,066 | |
| | | | | | | |
| | | |
| Deferred Tax Liabilities: | | |
| Current: | | |
| Prepaid insurance | | | | (739 | ) | | | (716 | ) |
| Other – net | | | | (2,221 | ) | | | (1,549 | ) |
| | | | | | | |
| Current deferred tax liabilities | | | | (2,960 | ) | | | (2,265 | ) |
| | | | | | | |
| Long-term: | | |
| Intangible assets | | | | (2,738 | ) | | | (3,978 | ) |
| | | | | | | |
| Long-term deferred tax liabilities | | | | (2,738 | ) | | | (3,978 | ) |
| | | | | | | |
| | | |
| Net deferred tax liabilities | | | | (5,698 | ) | | | (6,243 | ) |
| | | | | | | |
| Total deferred tax assets | | $ | 17,136 | | $ | 20,389 | | | 56,064 | | 14,823 | |
| | | | | | | | | | | |
Based upon a history of significant operating losses,In accordance with SFAS 109, Accounting for Income Taxes, management has determined that it is more likely than not that a portion of our historic and current year income tax benefits will not be realized except for certain future deductions associated with the Mexicali Operations in the post-Merger period. Consequently, no U. S. income tax benefit has been recognized relating to the U.S. operating losses.realized. As of September 30, 2005,October 3, 2008, the Company has established a valuation allowance against all of its net U.S.for deferred tax assets.assets of $82.9 million. The net change in the valuation allowance of $13.4$68.4 million during fiscal 2008 is principally due to the utilizationrecognition of tax attributes, i.e. federalbenefits offset against current year taxable income of $83.4 million and state net operating loss and credit carryovers, and other deferred tax assets. As noted above,a reduction in the Company has aend of year valuation allowance of $116.1$40.0 million against its U.S.based on our assessment of the amount of deferred tax assets as of September 30, 2005.that are realizable on a more likely than not basis. When recognized, the tax benefits relating to any future reversal of the valuation allowance on deferred tax assets at September 30, 2005October 3, 2008 will be accounted for as follows: approximately $80.3$71.4 million will be recognized as an income tax benefit, $7.6 million will be recognized as a reduction of income tax expense, $31.9 million will be recognized as a reduction ofto goodwill and $3.9 million will be recognized as an increase to shareholders’ equity for certain tax deductions from employee stock options.
The provision for income taxes for fiscal 2005 and fiscal 2004 consists of approximately $11.1 million and $1.0 million, respectively, of U.S. income taxes recorded as a charge reducingBased on the carrying value of goodwill. No benefit has been recognized for utilizing certain pre-Merger deferred tax assets. The utilization of these deferred items reduces the carrying value of goodwill, i.e., charge in lieu of tax expense, instead of reducing income tax expense. We will evaluate the realizationCompany’s evaluation of the pre-Mergerrealizability of its United States net deferred tax assets periodically and adjustother future deductible items through the provision forgeneration of future taxable income, taxes accordingly based on whether$40.0 million of the Company believes it is more likely than not that the deferredCompany’s valuation allowance was reversed at October 3, 2008. The amount reversed consisted of $36.4 million recognized as income tax assets will be realized during the carryforward period.
benefit, and $3.6 million recognized as a reduction to goodwill. Deferred tax assets have been recognized for foreign operations when management believes they will more likely than not be recovered during the carryforward period. The Company does not expectWe will continue to recognize any income tax benefits relating toassess our valuation allowance in future operating losses generated in the United States until management determines that such benefits are more likely than not to be realized.periods.
In 2002,2006, the Company recordedreorganized its Mexico operations. As a result, the long term deferred tax benefit of approximately $23 million relatedasset relating to the impairment of its Mexicali assets. A valuation allowance has not been establishedMexico assets was written off because the Company believes that the related deferred tax asset will more likely than not be recovered during the carryforward period. During the first quarter of fiscal 2005, the Company reduced the carrying value of its deferred tax assets by $2.2 million. This charge resulted frommachinery and equipment was transferred to a reduction of the statutory income tax rate in Mexico. Accordingly, the deferred tax asset was remeasured using the enacted tax rates expected to apply to taxable income in the years in which the temporary difference is expected to be recovered.
Gains and losses resulting from the remeasurement of the Company’s long-term deferred tax assets denominated in foreign currencies are included in provision (benefit) for income taxes and reduced tax expense by $0.8 million in fiscal 2005, andUnited States company. The write-off increased tax expense by $1.2$14.6 million net of a deferred tax charge associated with this reorganization. The deferred tax asset allowable for United States tax purposes is included in fiscal 2004.the Company’s U.S. deferred tax assets subject to a valuation allowance as previously discussed.
As of September 30, 2005,October 3, 2008, the Company has U.S.United States federal net operating loss carryforwards of approximately $180.6$130.6 million, which will expire at various dates through 20252027 and aggregate state net operating loss carryforwards of approximately $43.4$1.4 million, which will expire at various dates through 2010.2017. The Company also has U.S.United States federal and state income tax credit carryforwards of approximately $25.8$56.3 million. The U.S.United States federal tax credits expire at various dates through 2025.2028. The use of the pre-Merger net operating loss andstate tax credit carryovers from Alpha willcredits relate primarily to California research tax credits which can be limited due to statutory tax restrictions resulting from the Merger and related change in ownership. The annual limit on the utilization of pre-Merger net operating losses is approximately $14 million. Utilization of pre-Merger credits would also be limited to the tax equivalent of the annual net operating loss limitation.carried forward indefinitely.
No provision has been made for United States federal, state, or additional foreign income taxes related to approximately $11.6$8.9 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested. It is not practicable to determine the U. S.United States federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested.
In fiscal 2005 our subsidiary in Mexico dividended approximately $25.6 million of earnings to the United States. Such earnings, which were not subject to Mexico withholding tax and could be applied against U.S. net operating loss carryforwards, resulted in no significant U.S. income tax expense. Earnings of our Mexico subsidiary are no longer considered permanently reinvested, and accordingly, U.S. income taxes are provided on current earnings attributable to our earnings in Mexico.
5565
OnThe Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 as of the beginning of fiscal year 2008. As of the date of adoption, the Company’s gross unrecognized tax benefits totaled $7.3 million. Included in this amount is $0.6 million which would impact the effective tax rate, if recognized. As of October 22, 2004,3, 2008, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law.Company’s gross unrecognized tax benefits totaled $7.9 million. Included in this amount is $0.6 million which would impact the effective tax rate, if recognized. The AJCA provides incentives for U.S. multinational corporations, subject to certain limitations. The incentives include an 85% dividends received deduction for certain dividends from controlled foreign corporations that repatriate accumulated income abroad. Dueremaining unrecognized tax benefits would not impact the effective tax rate, if recognized, due to the existenceCompany’s valuation allowance. There are no positions which we anticipate could change within the next twelve months.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
| | | | | |
| Balance at September 29, 2007 | | $ | 7,315 | |
| Increases based on positions related to prior years | | | 351 | |
| Increases based on positions related to current year | | | 813 | |
| Decreases relating to lapses of applicable statutes of limitations | | | (605 | ) |
| | | | |
| Balance at October 3, 2008 | | $ | 7,874 | |
| | | | |
The Company’s major tax jurisdictions as of October 3, 2008 for FIN 48 are the U.S., California, and Iowa. For the U.S., the Company has open tax years dating back to fiscal year 1998 due to the carryforward of tax attributes. For California, the Company has open tax years dating back to fiscal year 2002 due to the carryforward of tax attributes. For Iowa, the Company has open tax years dating back to fiscal year 2002 due to the carryforward of tax attributes.
During the year ended October 3, 2008, the statute of limitations period expired relating to an unrecognized tax benefit. The expiration of the statute of limitations period resulted in the recognition of $0.6 million of previously unrecognized tax benefit, which impacted the effective tax rate, and $0.5 million of accrued interest related to this tax position was reversed during the year. Including this reversal, total year-to-date accrued interest related to the Company’s net operating loss carryforwards, the Company will notunrecognized tax benefits was a benefit from this provision in the AJCA.of $0.4 million.
NOTE 9.10. STOCKHOLDERS’ EQUITY
COMMON STOCK
The Company is authorized to issue (1) 525,000,000 shares of common stock, par value $0.25 per share, and (2) 25,000,000 shares of preferred stock, without par value.
Holders of the Company’s common stock are entitled to such dividends as may be declared by the Company’s Board of Directors out of funds legally available for such purpose. Dividends may not be paid on common stock unless all accrued dividends on preferred stock, if any, have been paid or declared and set aside. In the event of the Company’s liquidation, dissolution or winding up, the holders of common stock will be entitled to share pro rata in the assets remaining after payment to creditors and after payment of the liquidation preference plus any unpaid dividends to holders of any outstanding preferred stock.
Each holder of the Company’s common stock is entitled to one vote for each such share outstanding in the holder’s name. No holder of common stock is entitled to cumulate votes in voting for directors. The Company’s second amended and restated certificate of incorporation provides that, unless otherwise determined by the Company’s Board of Directors, no holder of common stock has any preemptive right to purchase or subscribe for any stock of any class which the Company may issue or sell.
On August 11, 2003In March 2007, the Company filed a shelf registration statement on Form S-3 withrepurchased approximately 4.3 million of its common shares for $30.1 million as authorized by the SEC with respect to the issuanceCompany’s Board of up to $250 million aggregate principal amount of securities, including debt securities, common or preferred shares, warrants or any combination thereof. This registration statement, which the SEC declared effective on August 28, 2003, provides the Company with greater flexibility and access to capital. On September 9, 2003, the Company issued 9.2 million shares of common stock under its shelf registration statement.Directors. The Company may from time to time issue securities under the remaining balance of the shelf registration statement for general corporate purposes.has no publicly disclosed stock repurchase plans.
At September 30, 2005,October 3, 2008, the Company had 158,625,057170,322,804 shares of common stock issued and 165,591,830 shares outstanding.
66
PREFERRED STOCK
The Company’s second amended and restated certificate of incorporation permits the Company to issue up to 25,000,000 shares of preferred stock in one or more series and with rights and preferences that may be fixed or designated by the Company’s Board of Directors without any further action by the Company’s stockholders. The designation, powers, preferences, rights and qualifications, limitations and restrictions of the preferred stock of each series will be fixed by the certificate of designation relating to such series, which will specify the terms of the preferred stock. At September 30, 2005,October 3, 2008, the Company had no shares of preferred stock issued or outstanding.
EMPLOYEE STOCK OPTIONS
The Company has stock-based compensation plans under which employees and directors may be granted options to purchase common stock. Options are generally granted with exercise prices at not less than the fair market value on the grant date, generally vest over 4 years and expire 7 to 10 years after the grant date. As of September 30, 2005, a total of 36.5 million shares are authorized for grant under the Company’s stock-based compensation plans. The number of common shares reserved for granting of future awards to employees and directors under these plans was 8.4 million at September 30, 2005. In addition, options outstanding include 11.5 million options issued in connection with the Merger.
Pursuant to an exchange offer dated June 16, 2003 (the “Exchange Offer”), the Company offered a stock option exchange program to its employees, other than its executive officers under Section 16 of the Securities Exchange Act of 1934, as amended, giving them the right to tender outstanding stock options with an exercise price of $13.00 per share or more in
56
exchange for new options to be issued six months and one day after the close of the Exchange Offer. On July 3, 2003, the expiration date of the Company’s Exchange Offer, the Company accepted for exchange from eligible employees, options to purchase an aggregate of approximately 5.3 million shares of the Company’s common stock. These stock options were cancelled as of that date. Pursuant to the Exchange Offer, a ratio was applied to the options accepted for exchange from eligible employees and on January 5, 2004, the Company issued new options to purchase approximately 3.4 million shares of the Company’s common stock with an exercise price at fair market value ($9.60) in exchange for the options cancelled in connection with the offer. These new options vest ratably over the 18 month period from the date of grant. The Exchange Offer qualified for fixed accounting, and thus the Company did not recognize compensation expense in connection with the grant of the replacement options pursuant to the Exchange Offer.
A summary of stock option transactions follows (shares in thousands):
| | | | | | | | | |
| | | | | | | Weighted average |
| | | | | | | exercise price of |
| | | Shares | | shares under plan |
| Balance outstanding at September 30, 2002 | | | 31,332 | | | $ | 19.73 | |
| Granted | | | 6,372 | | | | 5.06 | |
| Exercised | | | (496 | ) | | | 6.37 | |
| Accepted for exchange | | | (5,328 | ) | | | 23.38 | |
| Cancelled | | | (6,117 | ) | | | 20.21 | |
| | | | | | | | | |
| Balance outstanding at September 30, 2003 | | | 25,763 | | | $ | 15.44 | |
| Granted | | | 7,351 | | | | 9.16 | |
| Granted for options accepted for exchange | | | 3,377 | | | | 9.60 | |
| Exercised | | | (685 | ) | | | 5.05 | |
| Cancelled | | | (4,043 | ) | | | 15.61 | |
| | | | | | | | | |
| Balance outstanding at September 30, 2004 | | | 31,763 | | | $ | 13.63 | |
| Granted | | | 4,668 | | | | 8.47 | |
| Exercised | | | (935 | ) | | | 5.57 | |
| Cancelled | | | (3,918 | ) | | | 13.66 | |
| | | | | | | | | |
| Balance outstanding at September 30, 2005 | | | 31,578 | | | $ | 12.99 | |
| | | | | | | | | |
Options exercisable at the end of each fiscal year (shares in thousands):
| | | | | | | | | |
| | | | | | | Weighted average |
| | | Shares | | exercise price |
| 2005 | | | 24,053 | | | $ | 14.68 | |
| 2004 | | | 17,671 | | | $ | 17.59 | |
| 2003 | | | 15,141 | | | $ | 19.03 | |
The following table summarizes information concerning currently outstanding and exercisable options as of September 30, 2005 (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Weighted | | | | | | | | | | | |
| | | | | | | average | | | Weighted | | | | | | | | |
| | | | | | | remaining | | | average | | | | | | | Weighted | |
| Range of exercise | | Number | | | contractual | | | outstanding | | | Options | | | average exercise | |
| prices | | outstanding | | | life (years) | | | option price | | | exercisable | | | price | |
| $0.45 - $5.75 | | | 4,620 | | | | 6.9 | | | $ | 4.64 | | | | 2,248 | | | $ | 4.50 | |
| $5.76 - $8.93 | | | 5,227 | | | | 8.7 | | | $ | 8.31 | | | | 767 | | | $ | 7.17 | |
| $8.96 - $9.18 | | | 4,680 | | | | 8.3 | | | $ | 9.17 | | | | 4,358 | | | $ | 9.18 | |
| $9.19 - $13.56 | | | 5,094 | | | | 7.3 | | | $ | 10.60 | | | | 4,817 | | | $ | 10.60 | |
| $13.67 - $17.12 | | | 5,687 | | | | 3.1 | | | $ | 16.36 | | | | 5,667 | | | $ | 16.37 | |
| $17.20 - $21.31 | | | 4,619 | | | | 5.2 | | | $ | 21.17 | | | | 4,574 | | | $ | 21.18 | |
| $21.56 - $170.44 | | | 1,651 | | | | 4.2 | | | $ | 34.87 | | | | 1,622 | | | $ | 35.05 | |
| | | | | | | | | | | | | | | | |
| | | | 31,578 | | | | 6.4 | | | $ | 12.99 | | | | 24,053 | | | $ | 14.68 | |
| | | | | | | | | | | | | | | | |
57
STOCK OPTION DISTRIBUTIONBENEFIT PLANS
The following table summarizes information concerning currently outstandingpre-tax share-based compensation expense related to employee stock options, as of September 30, 2005 (shares in thousands):
| | | | | | | | | |
| | | | | | | % of total |
| | | | | | | common |
| | | Number | | stock |
| | | outstanding | | outstanding |
| Stock options held by employees and directors | | | 22,975 | | | | 14.5 | % |
| Stock options held by non-employees (excluding directors) | | | 8,603 | | | | 5.4 | % |
| | | | | | | | | |
| | | | 31,578 | | | | 19.9 | % |
| | | | | | | | | |
As of September 30, 2005, the Company’s ratio of options outstanding as a percentage of total common stock outstanding (“overhang”) was 19.9%. The overhang attributable to options held by non-employees (other than its non-employee directors) was 5.4% and the overhang attributable to employees and directors was 14.5%.
In connection with the Merger, as of September 30, 2005 and September 30, 2004, non-employees, excluding directors, held 8,602,253 and 10,662,628 options at a weighted average price of $20.46 and $20.44, respectively. Effective June 25, 2002, in connection with the Merger, each Conexant option holder, other than holders of options granted to employees of Conexant’s former Mindspeed Technologies segment on March 30, 2001 and options held by persons in certain foreign locations, received an option to purchase an equal number of shares of common stock of the Washington subsidiary. In the Merger, each outstanding Washington option was converted into an option to purchase Skyworks common stock. The conversion of Washington options into Skyworks’ options was done in such a manner that (1) the aggregate intrinsic value of the options immediately before and after the conversion was the same, (2) the ratio of the exercise price per option to the market value per option was not reduced, and (3) the vesting provisions and options period of the Skyworks’ options were the same as the original vesting terms and option period of the corresponding Washington options. As a result, there are a large number of options held by persons other than Skyworks’ employees and directors.
RESTRICTED STOCK AWARDS
The Company’s stock-based compensation plans provide for awards of restricted shares of common stock and other stock-based incentive awards to officers and other employees and certain non-employees. Restricted stock awards are subject to forfeiture if employment terminates during the prescribed retention period (generally within four years of the date of award) or, in certain cases, if prescribed performance criteria are not met. The fair value of restricted stock awards at the date of grant is charged to expense over the vesting period. The Company granted 160,500 shares of restricted common stock during fiscal 2005. These shares were accounted for under the intrinsic value method as prescribed in APB Opinion No. 25. Stock-based compensation cost is measured at the grant date based on the market price of the underlying common stock and is being recognized as expense over the vesting periods of four years. The restricted stock grants, were valued at approximately $843,000 of which approximately $79,000 was recognized as compensation expense in fiscal 2005.
58
The remaining unrecognized balance will be recorded as compensation expense ratably over the vesting periods of the restricted stock of four (4) years. There were no restrictedperformance stock grants, awardedemployee stock purchases, and management incentive compensation under SFAS 123(R) for the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006, respectively.
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| (In thousands) | | 2008 | | | 2007 | | | 2006 | |
| | | |
| Stock Options | | $ | 11,283 | | | $ | 7,781 | | | $ | 11,229 | |
| Non-vested restricted stock with service and market conditions | | | 3,935 | | | | 2,501 | | | | 703 | |
| Non-vested restricted stock with service conditions | | | 1,111 | | | | 1,451 | | | | 272 | |
| Performance shares | | | 3,525 | | | | 655 | | | | 316 | |
| Employee Stock Purchase Plan | | | 1,595 | | | | 1,349 | | | | 1,699 | |
| Incremental Fiscal Year 2008 Management Short-Term Incentive | | | 1,663 | | | | — | | | | — | |
| Other | | | 100 | | | | — | | | | — | |
| | | | | | | | | | |
| | | $ | 23,212 | | | $ | 13,737 | | | $ | 14,219 | |
| | | | | | | | | | |
Share-based compensation for the fiscal year ended October 3, 2008 includes approximately $1.7 million related to the portion of fiscal 2008 short-term management incentive compensation that exceeded target metrics that was paid in fiscal 2004 or fiscal 2003.
STOCK-BASED COMPENSATION PLANS FOR DIRECTORS
unrestricted common stock after year end. The Company has three stock-based compensation plans for non-employee directors — the 1994 Non-Qualifiedanticipates an immaterial amount of share dilution as a result of this arrangement.
Employee Stock OptionPurchase Plan the 1997 Non-Qualified Stock Option Plan and the Directors’ 2001 Stock Option Plan. Under the three plans, a total of 1.2 million shares have been authorized for option grants. As of September 30, 2005, under the three plans, a total of 0.4 million shares are available for new grants. The three plans have substantially similar terms and conditions and are structured to provide options to non-employee directors as follows: a new director receives a total of 45,000 options upon becoming a member of the Board; and continuing directors receive 15,000 options after each Annual Meeting of Shareholders. Under these plans, the option price is the fair market value at the time the option is granted. Beginning in fiscal 2001, all options granted become exercisable 25% per year beginning one year from the date of grant. Options granted prior to fiscal 2001 become exercisable at a rate of 20% per year beginning one year from the date of grant. During fiscal 2005, 165,000 options were granted under these plans at a weighted average price of $5.80. At September 30, 2005, a total of 772,500 options at a weighted average price of $10.54 are outstanding under these three plans, and 416,250 shares were exercisable at a weighted average price of $12.94. During fiscal 2004, 15,000 options were exercised under these plans, and during fiscal 2005 and 2003, no options were exercised under these plans. Non-employee directors of the Company are also eligible to receive option grants under the Company’s 1996 Long-Term Incentive Plan. The above-mentioned activity for the stock-based compensation plans for directors is included in the option tables above.
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains a domestic and an international employee stock purchase plan. Under these plans, eligible employees may purchase common stock through payroll deductions of up to 10% of compensation. The price per share is the lower of 85% of the market price at the beginning or end of each six-month offering period.period (generally six months). The plans provide for purchases by employees of up to an aggregate of 3,000,0008.1 million shares through December 31, 2012. Shares of common stock purchased under these plans in fiscal 2005, 20042008, 2007, and 20032006 were 824,211, 616,760,790,556, 830,103, and 704,921,835,621, respectively. At September 30, 2005,October 3, 2008, there are 84,6132.7 million shares available for purchase. The Company didrecognized compensation expense of $1.6 million, $1.3 million, and $1.7 million for the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006, respectively.
Employee and Director Stock Option Plans
The Company has share-based compensation plans under which employees and directors may be granted options to purchase common stock. Options are generally granted with exercise prices at not recognizeless than the fair market value on the grant date, generally vest over 4 years and expire 7 or 10 years after the grant date. As of October 3, 2008, a total of 70.6 million shares are authorized for grant under the Company’s share-based compensation expenseplans, with 24.7 million options outstanding. The number of common shares reserved for granting of future awards to employees and directors under these plans was 9.3 million at October 3, 2008. The remaining unrecognized compensation expense on stock options at October 3, 2008 was $17.0 million, and the weighted average period over which the cost is expected to be recognized is approximately 2.2 years.
As of October 3, 2008, the Company had 10 equity compensation plans under which our equity securities are authorized for issuance to our employees and/or directors:
67
| | |
| - | | the 1994 Non-Qualified Stock Option Plan |
| | |
| - | | the 1996 Long-Term Incentive Plan |
| | |
| - | | the Directors’ 1997 Non-Qualified Stock Option Plan |
| | |
| - | | the 1999 Employee Long-Term Incentive Plan |
| | |
| - | | the Directors’ 2001 Stock Option Plan |
| | |
| - | | the Non-Qualified Employee Stock Purchase Plan |
| | |
| - | | the 2002 Employee Stock Purchase Plan |
| | |
| - | | the Washington Sub, Inc. 2002 Stock Option Plan and |
| | |
| - | | the 2005 Long-Term Incentive Plan |
| | |
| - | | the 2008 Director Long-Term Incentive Plan |
Except for the 1999 Employee Long-Term Incentive Plan, the Washington Sub, Inc. 2002 Stock Option Plan and the Non-Qualified Employee Stock Purchase Plan, each of the foregoing equity compensation plans was approved by our stockholders.
Restricted Stock Awards with Service Conditions
The Company’s share-based compensation plans provide for awards of restricted shares of common stock and other stock-based incentive awards to officers, other employees and certain non-employees. Restricted stock awards are subject to forfeiture if employment terminates during the prescribed retention period (generally within four years of the date of award).
The Company granted 50,000, 38,000, and 106,000 restricted shares in the fiscal 2005, 2004 or 2003.years ended October 3, 2008, September 28, 2007, and September 29, 2006, respectively, with a four year graded vesting. The remaining unrecognized compensation expense on restricted stock with service conditions outstanding at October 3, 2008 was $0.7 million, and the weighted average period over which the cost is expected to be recognized is 3.0 years.
STOCK WARRANTSThe Company also granted 20,000 and 446,000 shares of restricted common stock during the fiscal years ended September 28, 2007, and September 29, 2006, respectively, that will vest over a three-year period (50% at the end of year 1, and 25% at the end of both year 2 and year 3). As of October 3, 2008, 75% of these grants have vested. The remaining unrecognized compensation expense on restricted stock with service conditions outstanding at October 3, 2008 was $0.5 million. The weighted average period over which the cost is expected to be recognized is approximately 1.0 years.
In connection withaddition, during the Merger,fiscal year ended October 3, 2008, under the new 2008 Director Long-Term Incentive Plan, the Company issued a total of 100,000 restricted stock awards to Jazz Semiconductor, Inc. (“Jazz Semiconductor”)Directors with a warrantthree-year graded vesting. The remaining unrecognized compensation expense on restricted stock with service conditions outstanding at October 3, 2008 was $0.5 million. The weighted average period over which the cost is expected to purchase 1,017,900be recognized is approximately 1.9 years.
Restricted Stock Awards with Market Conditions and Service Conditions
The Company granted 576,688 and 606,488 shares of Skyworksrestricted common stock during the fiscal years ended October 3, 2008, and September 28, 2007, respectively, with service and market conditions on vesting. If the restricted stock recipient meets the service condition but not the market condition in years 1, 2, 3 and 4, then the restricted stock vests 0% at the end of year 1, 33.3% at the end of year 2, 33.3% at the end of year 3 and 33.3% at the end of year 4. The market condition allows for accelerated vesting of the award as of the first, second and if not previously accelerated, the third anniversaries of the grant date. Specifically, if the Company’s stock performance meets or exceeds the 60th percentile of its selected peer group for the years ended on each of the first three anniversaries of the grant date, then 33.3% of the award vests upon each anniversary (up to 100%). The Company calculated a derived service period of approximately 3.0 years using a Monte-Carlo simulation to simulate a range of possible future stock prices for the Company and the members of the Company’s selected peer group.
The Company granted 493,128 shares of restricted common stock with service and market conditions on vesting during the fiscal year ended September 29, 2006. The market condition allows for accelerated vesting of the award as of the first, second, and, if not previously accelerated, the third anniversary of the grant date. Specifically, if the
68
Company’s stock performance meets or exceeds the 60th percentile of its selected peer group for the years ended on each of the first three anniversaries of the grant date, then 50% of the award vests upon each anniversary (up to 100%). If the restricted stock recipient meets the service condition but not the market condition in years 1, 2 and 3, then the restricted stock vests 50% at the end of year 3 and 50% at the end of year 4. The Company calculated a derived service period of approximately 2.5 years using a Monte-Carlo simulation to simulate a range of possible future stock prices for the Company and the members of the Company’s selected peer group. As of November 8, 2006, and November 8, 2007, the Company’s stock performance had exceeded the 60th percentile of its selected peer group resulting in the vesting of 100% of the aforementioned shares.
The remaining unrecognized compensation expense on restricted stock with market and service conditions outstanding at October 3, 2008 was $3.8 million. The weighted average period over which the cost is expected to be recognized is approximately 1.6 years.
Performance Units with Milestone-Based Performance Conditions
The Company granted 160,500, 223,200 and 222,000 performance units with milestone-based performance conditions to non-executives during the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006, respectively. The performance units will convert to common stock at such time that the performance conditions are deemed to be achieved. The performance units will be expensed over implicit performance periods ranging from 11-23 months. The Company will utilize both quantitative and qualitative criteria to judge whether the milestones are probable of achievement. If the milestones are deemed to be not probable of achievement, no expense will be recognized until such time as they become probable of achievement. If a milestone is initially deemed probable of achievement and subsequent to that date it is deemed to be not probable of achievement, the Company will discontinue recording expense on the units. If the milestone is deemed to be improbable of achievement, any expense recorded on those performance units will be reversed. As of the fiscal year ended October 3, 2008, September 28, 2007, and September 29, 2006, the fair value of the performance units at the date of grant were $1.4 million, $1.5 million, and $1.2 million, respectively. We issued 100,466 shares, 103,688 shares, and 49,000 shares in fiscal 2008, fiscal 2007, and fiscal 2006, respectively as a result of milestone achievement. In addition, certain other milestones were deemed to be probable of achievement thus, we recorded total compensation expense of $1.2 million, $0.7 million and $0.3 million in the fiscal years ended October 3, 2008, September 28, 2007 and September 29, 2006, respectively.
The Company awarded 725,000 performance shares based on future stock price appreciation to executives during the fiscal year ended October 3, 2008. Each executive has the ability to earn Nominal (50% of Target), Target, Stretch (150% of Target), or no shares depending on performance within a three year period. On November 6, 2007, a base price was set (based on the trailing 60 day average stock price) and stock price hurdles were set (based on appreciation of 20%, 40% and 60% of the base price). Actual performance is measured using a rolling 60 day average and shares are locked in when Skyworks meets or exceeds a stock price hurdle. Shares are not cumulative and each targeted stock price is a “hurdle” (there is no interpolation for performance between hurdles). Locked in shares will be delivered to the executive at the end of the three year period as long as the executive is actively employed. If the Nominal stock price hurdle (1st Hurdle) is not met or exceeded by the end of the three year period then the shares expire. If a change of control occurs within the three year performance period then the executive will receive the higher of the actual amount earned (locked in) or Target (the last day of the 60 day average will include the closing price on the date of the transaction).As of the fiscal year ended October 3, 2008, the fair value of the performance units at the date of grant was $7.5 million. At October 3, 2008, the Company had recorded total compensation expense of $2.3 million.
Share-Based Compensation Plans for Directors
The Company has four share-based compensation plans under which options and restricted stock have been granted for non-employee directors — the 1994 Non-Qualified Stock Option Plan, the 1997 Directors’ Non-Qualified Stock Option Plan, the Directors’ 2001 Stock Option Plan, and the 2008 Directors’ Long-Term Incentive Plan. Under the four plans, a total of 2.2 million shares have been authorized for option grants. Under the current 2008 Directors’ Long-Term Incentive Plan, a total of 0.6 million shares are available for new grants as of October 3, 2008. The 2008 Directors’ Long-Term Incentive Plan is structured to provide options and restricted common stock to non-employee directors as follows: a new director receives a total of 25,000 options and 12,500 shares of restricted common stock upon becoming a member of the Board; and continuing directors receive 12,500 shares of restricted common stock after
69
each Annual Meeting of Stockholders. Under this plan, the option price is the fair market value at the time the option is granted. All options granted are exercisable at 25% per year beginning one year from the date of grant. The maximum contractual term of the director plans is 10 years. At October 3, 2008, a total of 0.9 million options at a weighted average exercise price of $24.02$9.75 per share are outstanding under these four plans, and 0.7 million shares were exercisable at a weighted average exercise price of $10.74 per share. This warrant becameThe remaining unrecognized compensation expense on director stock options at October 3, 2008 was $0.4 million and the weighted average period over which the cost is expected to be recognized is approximately 1.8 years. There were 60,000 options exercised under these plans for both the fiscal years ended October 3, 2008 and September 28, 2007. There were no options exercised during the fiscal year ended September 29, 2006. The above-mentioned activity for the share-based compensation plans for directors is included in the option tables below.
Distribution and Dilutive Effect of Options
The following table illustrates the grant dilution and exercise dilution:
| | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | September 28, | | September 29, |
| (In thousands) | | 2008 | | 2007 | | 2006 |
| | | |
| Shares of common stock outstanding | | | 165,592 | | | | 161,101 | | | | 161,659 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Granted | | | 3,002 | | | | 3,192 | | | | 3,869 | |
| Cancelled/forfeited | | | (3,628 | ) | | | (4,495 | ) | | | (4,176 | ) |
| Expired | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Net options granted | | | (626 | ) | | | (1,303 | ) | | | (307 | ) |
| | | | | | | | | | | | | |
| Grant dilution (1) | | | (0.4 | %) | | | (0.8 | %) | | | (0.2 | %) |
| | | | | | | | | | | | | |
| Exercised | | | 2,582 | | | | 1,707 | | | | 393 | |
| | | | | | | | | | | | | |
| Exercise dilution (2) | | | 1.6 | % | | | 1.1 | % | | | 0.2 | % |
| | |
| (1) | | The percentage for grant dilution is computed based on net options granted as a percentage of shares of common stock outstanding. |
|
| (2) | | The percentage for exercise dilution is computed based on options exercised as a percentage of shares of common stock outstanding. |
General Option Information
A summary of stock option transactions follows (shares in thousands):
| | | | | | | | | | | | | |
| | | | | | | Options Outstanding |
| | | Shares Available | | | | | | Weighted average |
| | | For | | | | | | exercise price of |
| | | Grant | | Shares | | shares under plan |
| | | |
| Balance outstanding at September 30, 2005 | | | 8,415 | | | | 31,578 | | | $ | 12.99 | |
| Granted (1) | | | (5,770 | ) | | | 3,869 | | | | 5.19 | |
| Exercised | | | — | | | | (393 | ) | | | 4.44 | |
| Cancelled/forfeited (2) | | | 2,386 | | | | (4,176 | ) | | | 12.65 | |
| Additional shares reserved | | | 10,000 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Balance outstanding at September 29, 2006 | | | 15,031 | | | | 30,878 | | | $ | 12.17 | |
| Granted (1) | | | (4,524 | ) | | | 3,192 | | | | 6.78 | |
| Exercised | | | — | | | | (1,707 | ) | | | 4.84 | |
| Cancelled/forfeited (2) | | | 3,247 | | | | (4,495 | ) | | | 12.47 | |
| Additional shares reserved | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Balance outstanding at September 28, 2007 | | | 13,754 | | | | 27,868 | | | $ | 11.96 | |
| Granted (1) | | | (5,965 | ) | | | 3,002 | | | | 9.25 | |
| Exercised | | | — | | | | (2,582 | ) | | | 6.99 | |
| Cancelled/forfeited (2) | | | 826 | | | | (3,628 | ) | | | 17.52 | |
| Additional shares reserved | | | 720 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Balance outstanding at October 3, 2008 | | | 9,335 | | | | 24,660 | | | $ | 11.38 | |
| | | | | | | | | | | | | |
70
| | |
| (1) | | “Granted” under “Shares Available for Grant” includes restricted and performance stock awards for the years ended October 3, 2008, September 28, 2007, and September 29, 2006 of 2.0 million, 0.9 million, and 1.2 million shares, respectively. Pursuant to the plan under which they were awarded, these restricted and performance stock grants are deemed equivalent to the issue of 3.0 million, 1.3 million, and 1.9 million stock options, respectively. |
|
| (2) | | “Cancelled” under “Shares Available for Grant” do not include any cancellations under terminated plans. For the years ended October 3, 2008, September 28, 2007, and September 29, 2006, cancellations under terminated plans were 2.5 million, 1.6 million, and 1.8 million shares, respectively. “Cancelled” under “Shares Available for Grant” also include restricted and performance grants cancellations of 0.2 million and 0.2 million for the fiscal years ended October 3, 2008 and September 28, 2007, respectively. Pursuant to the plan under which they were awarded, these cancellations are deemed equivalent to the cancellation of 0.3 million and 0.3 million stock options for the fiscal years ended October 3, 2008 and September 28, 2007, respectively. |
Options exercisable at the end of each fiscal year (shares in increments of 25%thousands):
| | | | | | | | | |
| | | | | | | Weighted average |
| | | Shares | | exercise price |
| | | |
| 2008 | | | 17,687 | | | $ | 12.86 | |
| 2007 | | | 20,909 | | | $ | 13.72 | |
| 2006 | | | 23,136 | | | $ | 14.05 | |
The following table summarizes information concerning currently outstanding and exercisable options as of October 3, 2008 (shares and aggregate intrinsic value in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
| | | | | | | Weighted | | | | | | | | | | | | | | | Weighted | | | Weighted | | | | |
| | | | | | | average | | | Weighted | | | | | | | | | | | average | | | average | | | | |
| | | | | | | remaining | | | average | | | Aggregate | | | | | | | remaining | | | exercise | | | Aggregate | |
| Range of exercise | | Number | | | contractual | | | exercise price | | | Intrinsic | | | Options | | | contractual | | | price per | | | Intrinsic | |
| prices | | outstanding | | | life (years) | | | per share | | | Value | | | exercisable | | | life (years) | | | share | | | Value | |
| | | |
| $1.82 - $5.80 | | | 4,251 | | | | 5.4 | | | $ | 4.95 | | | $ | 10,718 | | | | 2,843 | | | | 4.9 | | | $ | 4.88 | | | $ | 7,361 | |
| $5.89 - $8.93 | | | 5,682 | | | | 6.5 | | | $ | 7.61 | | | | 2,213 | | | | 2,779 | | | | 5.9 | | | $ | 7.99 | | | | 761 | |
| $8.94 - $9.33 | | | 5,243 | | | | 6.7 | | | $ | 9.25 | | | | — | | | | 2,663 | | | | 5.0 | | | $ | 9.17 | | | | — | |
| $9.40 - $17.12 | | | 5,746 | | | | 2.8 | | | $ | 13.36 | | | | — | | | | 5,664 | | | | 2.7 | | | $ | 13.41 | | | | — | |
| $17.20 - $69.48 | | | 3,738 | | | | 2.1 | | | $ | 24.35 | | | | — | | | | 3,738 | | | | 2.1 | | | $ | 24.35 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 24,660 | | | | 4.9 | | | $ | 11.38 | | | $ | 12,931 | | | | 17,687 | | | | 3.8 | | | $ | 12.86 | | | $ | 8,122 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $7.47 as of October 3, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. The aggregate intrinsic value of options exercised for the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006 were $7.5 million, $4.4 million, and $0.7 million, respectively. The fair value of stock options vested at October 3, 2008, September 28, 2007, and September 29, 2006 were $54.7 million, $58.8 million, and $63.2 million, respectively. The total number of in-the-money options exercisable as of October 3, 2008 was 3.9 million.
Restricted Shares and Performance Unit Information
A summary of the share transactions follows (shares in thousands):
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| | | | | | | | | |
| | | | | | | Weighted average | |
| | | | | | | Grant-date | |
| | | Shares | | | fair value | |
| | | |
| Balance Outstanding at September 30, 2005 | | | 161 | | | $ | 5.20 | |
| Granted | | | 1,094 | | | | 5.14 | |
| Vested(1) | | | (89 | ) | | | 4.94 | |
| Forfeited | | | (12 | ) | | | 5.14 | |
| | | | | | | |
| Balance Outstanding at September 29, 2006 | | | 1,154 | | | $ | 5.17 | |
| Granted | | | 768 | | | | 6.86 | |
| Vested(1) | | | (616 | ) | | | 5.51 | |
| Forfeited | | | (86 | ) | | | 5.41 | |
| | | | | | | |
| Balance Outstanding at September 28, 2007 | | | 1,220 | | | $ | 6.04 | |
| Granted | | | 827 | | | | 8.82 | |
| Vested(1) | | | (691 | ) | | | 6.08 | |
| Forfeited | | | (47 | ) | | | 6.76 | |
| | | | | | | |
| Balance Outstanding at October 3, 2008 | | | 1,309 | | | $ | 7.75 | |
| | | | | | | |
| | |
| (1) | | Restricted stock vested during the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006 were 590,092 shares, 512,256 shares, and 40,127 shares, respectively. Performance units vested during the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006 were 100,466 shares, 103,688 shares, and 49,000 shares, respectively. |
Valuation and Expense Information under SFAS 123(R)
The following table summarizes pre-tax share-based compensation expense related to employee stock options, employee stock purchases, and restricted stock grants under SFAS 123(R) for the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006 which was allocated as follows:
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| (In thousands) | | 2008 | | | 2007 | | | 2006 | |
| | | |
| Cost of sales | | | 2,974 | | | | 1,274 | | | | 2,174 | |
| Research and development | | | 8,700 | | | | 5,590 | | | | 6,311 | |
| Selling, general and administrative | | | 11,538 | | | | 6,873 | | | | 5,734 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Share-based compensation expense included in operating expenses | | $ | 23,212 | | | $ | 13,737 | | | $ | 14,219 | |
| | | | | | | | | | |
During both the fiscal years ended September 28, 2007 and September 29, 2006, the Company had capitalized share-based compensation expense of $0.3 million in inventory. For the fiscal year ended October 3, 2008, the Company recorded $(0.1) million capitalized share-based compensation expense in inventory.
The weighted-average estimated grant date fair value of employee stock options granted during the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006 were $4.78 per share, $3.82 per share, and $3.19 per share, respectively, using the Black Scholes option-pricing model with the following weighted-average assumptions:
| | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | September 28, | | September 29, |
| | | 2008 | | 2007 | | 2006 |
| | | |
| Expected volatility | | | 53.87 | % | | | 57.32 | % | | | 59.27 | % |
| Risk free interest rate (7 year contractual life options) | | | 3.08 | % | | | 4.18 | % | | | 4.55 | % |
| Risk free interest rate (10 year contractual life options) | | | 3.54 | % | | | 4.30 | % | | | 4.55 | % |
| Dividend yield | | | 0.00 | | | | 0.00 | | | | 0.00 | |
| Expected option life (7 year contractual life options) | | | 4.42 | | | | 4.57 | | | | 4.42 | |
| Expected option life (10 year contractual life options) | | | 5.80 | | | | 5.86 | | | | 5.84 | |
The Company used an arithmetic average of historical volatility and implied volatility to calculate its expected volatility during the year ended October 3, 2008. Historical volatility was determined by calculating the mean reversion of the weekly-adjusted closing stock price over the 6.23 years between June 25, 2002 March 11, 2003,and September 11, 200319,
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2008. The implied volatility was calculated by analyzing the 52-week minimum and March 11, 2004.maximum prices of publicly traded call options on the Company’s common stock. The Company appliedconcluded that an arithmetic average of these two calculations provided for the Black-Scholes modelmost reasonable estimate of expected volatility under the guidance of SFAS 123(R).
The risk-free interest rate assumption is based upon observed Treasury bill interest rates (risk free) appropriate for the term of the Company’s employee stock options.
The expected life of employee stock options represents a calculation based upon the historical exercise, cancellation and forfeiture experience for the Company over the 5.25 years between June 25, 2002 and September 28, 2007. The Company deemed that exercise, cancellation and forfeiture experience in 2007 was consistent with historical norms thus expected life was not recalculated at October 3, 2008. The Company determined that it had two populations with unique exercise behavior. These populations included stock options with a contractual life of 7 years and 10 years, respectively.
As share-based compensation expense recognized in the Consolidated Statement of Operations for the fiscal years ended October 3, 2008, September 28, 2007, and September 29, 2006 is actually based on awards ultimately expected to determinevest, it has been reduced for annualized estimated forfeitures of 11.79%, 12.85%, and 8.59%, respectively. SFAS 123(R) requires forfeitures to be estimated at the fair value estimatetime of grant and approximately $0.2revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.
STOCK OPTION DISTRIBUTION
The following table summarizes information concerning currently outstanding options as of October 3, 2008 (shares in thousands):
| | | | | | | | | |
| | | | | | | % of total |
| | | | | | | common |
| | | Number | | stock |
| | | outstanding | | outstanding |
| | | |
| Stock options held by employees and directors | | | 20,566 | | | | 12.42 | % |
| Stock options held by non-employees (excluding directors)(1) | | | 4,094 | | | | 2.47 | % |
| | | | | | | | | |
| | | | 24,660 | | | | 14.89 | % |
| | | | | | | | | |
(1) Due to a previous business combination, certain non-employees hold Skyworks stock options.
As of October 3, 2008, September 28, 2007, and September 29, 2006, non-employees, excluding directors, held 4.1 million, $0.86.4 million, and $0.87.5 million was included in amortizationoptions at a weighted average exercise price per share of intangible assets related to this item in fiscal 2005, 2004$20.69, $20.62, and 2003,$20.44, respectively. The warrant expired without being exercised on January 20, 2005.
NOTE 10.11. EMPLOYEE BENEFIT PLAN, PENSIONS AND OTHER RETIREE BENEFITS
The Company maintains a 401(k) plan covering substantially all of its employees. All of the Company’s employees who are at least 21 years old are eligible to receive adiscretionary Company contribution.contributions under the 401(k) plan. Discretionary Company contributions are determined by the Board of Directors and may be in the form of cash or the Company’s stock. The Company has generally contributescontributed a match of up to 4.0% of an employee’s annual eligible compensation. For those employees employed by Alpha for five (5) years or more prior to the Merger, the Company contributes an additional match of up to 0.75% of the employee’s annual eligible compensation. For fiscal years 2005, 20042008, 2007, and 2003,2006, the Company contributed and recognized expense for 681,883, 392,744,0.6 million, 0.7 million, and 560,5160.8 million shares, respectively, of the Company’s common stock valued at $5.1$5.0 million, $3.6$4.8 million, and $4.2$4.1 million, respectively, to fund the Company’s obligation under the 401(k) plan.
In connection with Conexant’s spin-offfiscal 2008, the Company began phasing out its funding of its Washington/Mexicali business, Conexant transferred obligationsretiree medical benefits. On September 18, 2007, a letter was mailed to Washington/Mexicali for its pension plan and retiree benefits. The amounts that were transferred relate to approximately 20 Washington/Mexicali employees that had enrolled in Conexant’s Voluntary Early Retirement Plan (“VERP”) in 1998. The VERP also provides health care benefits to membersthe participants of the plan. The Company currently does not offer pension plans or retiree benefitsRetiree Health Plan informing them of the Company’s plan to its employees. phase out
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the Plan over a three year period effective January 2008. Skyworks contributions will be phased out on the following basis:
| | |
| Calendar | | |
| Year | | Skyworks |
| 2008 | | Employer portion of contribution will be reduced by 20% |
| 2009 | | Employer portion of contribution will be reduced by 40% |
| 2010 | | Employer portion of contribution will be reduced by 80% |
| 2011 | | Employer portion of contribution will be reduced by 100% |
The Company incurred net periodic benefit costs of $113,000, $108,000 and $119,000$0.1 million for pension benefits in fiscal years 2005, 2004 and 2003, respectively. The Company incurred net periodic benefit costs of $118,000, $125,000 and $120,000$0.1 million for retiree medical benefits in each of the fiscal years 2005, 2004ending October 3, 2008, September 28, 2007, and 2003, respectively.September 29, 2006.
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As discussed in Note 2, we adopted SFAS 158 on September 28, 2007, on the required prospective basis. In accordance with SFAS 158, the funded status as of September 28, 2007, is recorded as a liability in the accompanying consolidated balance sheet. The funded status of the Company’s principal defined benefit and retiree medical benefit plans and the amounts recognized in the balance sheet are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | Retiree Medical Benefits | |
| | | 2005 | | | 2004 | | | 2003 | | | 2005 | | | 2004 | | | 2003 | |
| Benefit obligations in excess of plan assets | | $ | 1,137 | | | $ | 969 | | | $ | 1,075 | | | $ | 1,238 | | | $ | 1,210 | | | $ | 1,046 | |
| Unrecognized net actuarial loss | | | (1,301 | ) | | | (786 | ) | | | (632 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Net accrued benefit cost | | $ | (164 | ) | | $ | 183 | | | $ | 443 | | | $ | 1,238 | | | $ | 1,210 | | | $ | 1,046 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | | Retiree Medical Benefits | |
| | | Fiscal Years Ended | | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | October 3, | | | September 28, | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | |
| Benefit obligation at end of fiscal year | | $ | 3,229 | | | $ | 3,320 | | | $ | 843 | | | $ | 1,234 | |
| Fair value of plan assets at end of fiscal year | | | 2,961 | | | | 3,105 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Funded status | | $ | (268 | ) | | $ | (215 | ) | | $ | (843 | ) | | $ | (1,234 | ) |
| | | | | | | | | | | | | |
NOTE 11.12. COMMITMENTS
The Company has various operating leases primarily for computer equipment and buildings. Rent expense amounted to $9.8$8.6 million, in both fiscal 2005$8.5 million, and fiscal 2004, and $10.4$9.3 million in fiscal 2003.years ended October 3, 2008, September 28, 2007, and September 29, 2006, respectively. Purchase options may be exercised, at fair market value, at various times for some of these leases. Future minimum payments under these non-cancelable leases are as follows (in thousands):
| | | | | | | | | |
| Fiscal Year | | |
| 2006 | | $ | 6,980 | | |
| 2007 | | 6,031 | | |
| 2008 | | 5,354 | | |
| 2009 | | 5,305 | | | 7,045 | |
| 2010 | | 4,862 | | | 5,715 | |
| 2011 | | | 2,205 | |
| 2012 | | | 542 | |
| 2013 | | | 13 | |
| Thereafter | | 2,306 | | | — | |
| | | | | | | |
| | | $ | 30,838 | | | $ | 15,520 | |
| | | | | | | |
The Company is attempting to sublet certain properties that were vacated upon the exit of the baseband product area and, if successful, future operating lease commitments will be partially offset by proceeds received from the subleases.
In addition, the Company has entered into licensing agreements for intellectual property rights and maintenance and support services during fiscal 2004.services. Pursuant to the terms of these agreements, the Company is committed to making aggregate payments of $4.3$3.9 million, $3.4$2.3 million, $2.1 million, and $1.6$0.4 million in fiscal years 2006, 20072009, 2010, 2011, and 2008,2012, respectively.
NOTE 12.13. CONTINGENCIES
From time to time, various lawsuits, claims and proceedings have been, and may in the future be, instituted or asserted against the Company, including those pertaining to patent infringement, intellectual property, environmental, product liability, safety and health, employment and contractual matters. In addition, in connection with the Merger, the Company has assumed responsibility for all then current and future litigation (including environmental and intellectual property proceedings) against Conexant or its subsidiaries in respect of the operations of Conexant’s wireless business.
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Additionally, the semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their technology. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company. Intellectual property disputes often have a risk of injunctive relief, which, if imposed against the Company, could materially and adversely affect the Company’s financial condition, or results of operations.
From time to time we are involved in legal proceedings in the ordinary course of business. We believe that there is no such ordinary course litigation pending that couldwill have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations or cash flows.business.
NOTE 13.14. GUARANTEES AND INDEMNITIES
The Company does not currently have anyhas no guarantees. The Company generally indemnifies its customers from third-party intellectual property infringement litigation claims related to its products.products, and, on occasion, also provides other indemnities related to product sales. In connection with certain facility leases, the Company has indemnified its lessors for certain claims arising from the facility or the lease.
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The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the state of Delaware. The duration of the indemnities varies, and in many cases is indefinite. The indemnities to customers in connection with product sales generally are subject to limits based upon the amount of the related product sales and in many cases are subject to geographic and other restrictions. In certain instances, the Company’s indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities in the accompanying consolidated balance sheets.
NOTE 14.15. RESTRUCTURING AND SPECIAL CHARGES
SpecialRestructuring and special charges consists of the following (in thousands):
| | | | | | | | | | | | | | |
| | | | Fiscal Years Ended | |
| | | | | | | | | | | | | | | October 3, | | September 28, | | September 29, | |
| | | Years Ended September 30, | | | 2008 | | 2007 | | 2006 | |
| | | 2005 | | 2004 | | 2003 | | | |
| Asset impairments | | $ | — | | $ | 13,183 | | $ | 28,269 | | | $ | — | | $ | — | | $ | 4,197 | |
| Restructuring | | — | | 4,183 | | 6,224 | | |
| Restructuring and special charges | | | 567 | | 5,730 | | 22,758 | |
| | | | | | | | | | | | | | | |
| | | $ | — | | $ | 17,366 | | $ | 34,493 | | | $ | 567 | | $ | 5,730 | | $ | 26,955 | |
| | | | | | | | | | | | | | | |
Special charges consist of charges for asset impairments and restructuring activities, as follows:
ASSET IMPAIRMENTS2006 RESTRUCTURING CHARGES AND OTHER
DuringOn September 29, 2006, the second quarter of fiscal 2004,Company exited its baseband product area in order to focus on its core business encompassing linear products, power amplifiers, front-end modules and radio solutions. The Company recorded various charges associated with this action. In total, the Company recorded a $13.2charges of $90.4 million charge primarilywhich included the following:
The Company recorded $13.1 million related to severance and benefits, $7.4 million related to the write-down of technology licenses and design software, $4.2 million related to the impairment of certain long-lived assets and $2.3 million related to other charges. These charges total $27.0 million and are recorded in restructuring and special charges.
The Company also recorded charges of $35.1 million in bad debt expense principally for two baseband product area customers, $23.3 million of excess and obsolete baseband technology licenses thatand other inventory charges and reserves and $5.0 million related to baseband product area revenue adjustments. These charges were established priorrecorded against selling, general and administrative expenses, cost of goods sold and revenues, respectively.
The Company recorded additional restructuring charges of $4.9 million related to the Merger. This charge included approximately $1.8 million of contractual payment obligations, which have been paid in full as of September 30, 2005. The impairment charge was based on a recoverability analysis prepared by management based on the decision to discontinue certain products and the related impact on its current and projected outlook. Management believed these factors indicated that the carrying valueexit of the related assets (intangible assets, machinery and equipment) was impaired and that an impairment analysis should be performed. In performingbaseband product area during the analysis for recoverability, management estimatedfiscal year ended September 28, 2007. These charges consist of $4.5 million relating to the future cash flows expectedexit of certain operating leases, $0.5 million relating to result from these products (salvage value). Since the estimated undiscounted cash flows were less than the carrying value of the related assets, it was concluded that an impairment loss should be recognized. In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, the impairment charge was determined by comparing the estimated fair value of the related assets to their carrying value. The write down established a new cost basis for the impaired assets.
During the fourth quarter of fiscal 2003, the Company recorded a $26.0additional severance, $1.4 million charge for the impairment of assets related to certain infrastructure products manufactured in its Woburn, Massachusetts and Adamstown, Maryland facilities. The Woburn facility primarily manufactures semiconductor products based on both silicon wafer technology and gallium arsenide technology. The Company’s Adamstown, Maryland facility primarily manufactures ceramics components. The Company experienced a significant decline in factory utilization resulting from a downturn in the market for products manufactured at these two facilities and a decision to discontinue certain products. The impairment charge was based on a recoverability analysis prepared by management based on these factors and the related impact on its current and projected outlook. The Company projected lower revenues and new order volume for these products and management believed these factors indicated that the carrying valuewrite-off of the related assets (machinery, equipment and intangible assets) may have been impaired and that an impairment analysis should be performed. In performing the analysis for recoverability, management estimated the future cash flows expected to result from these products over a five-year period. Since the estimated undiscounted cash flows were less than the carrying value of the related assets, it was concluded that an impairment loss should be recognized. In accordance with SFAS No. 144, the impairment charge was determined by comparing the estimated fair value of the related assets to their carrying value. The fair value of the assets was determined by computing the present value of the estimated future cash flows using a discount rate of 16%, which management believed was commensurate with the underlying risks associated with the projected future cash flows. Management believes the assumptions used in the discounted cash flow model represented a reasonable estimate of the fair value of the assets. The write-down established a new cost basis for the impaired assets.
6175
In addition, duringtechnology licenses and design software, offset by a $1.5 million benefit related to the fourth quarterreversal of fiscal 2003 wea reserve originally recorded a $2.3 million chargeto account for the impairment of our Haverhill, Massachusetts property. In fiscal 2003, we relocated our operations from this facility to our Woburn, Massachusetts and Mexicali, Mexico facilities.
RESTRUCTURING CHARGES
2004 Corporate Restructuring Planan engineering vendor charge.
During the fiscal 2004,year ended October 3, 2008, the Company consolidated cellular systems software design centers in an effort to improve the Company’s overall time to market for next-generation multimedia systems development. These actions aligned the Company’s structure with its current business environment. The Company implemented reductions in force at three remote facilities and recorded additional restructuring charges of approximately $4.2$0.6 million for costs relatedrelating to severance benefits for affected employees and lease obligations. Substantially all amounts accrued for have been paid asobligations due to the closure of September 30, 2005.certain locations associated with the baseband product area.
Activity and liability balances related to the fiscal 20042006 restructuring actions are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | | | License and | | | | | | | |
| | | | | | | | | | | | | | | Facility | | Software | | Workforce | | Asset | | | |
| | | Workforce | | Facility | | | | | Closings | | Write-offs | | Reductions | | Impairments | | Total | |
| | | Reductions | | Closings | | Total | | | |
| Charged to costs and expenses | | $ | 3,685 | | $ | 498 | | $ | 4,183 | | | $ | 105 | | $ | 9,583 | | $ | 13,070 | | $ | 4,197 | | $ | 26,955 | |
| Non-cash items | | | — | | | (6,426 | ) | | — | | | (4,197 | ) | | | (10,623 | ) |
| | | | | | | | | | | | | |
| Restructuring balance, September 29, 2006 | | | $ | 105 | | $ | 3,157 | | $ | 13,070 | | $ | — | | $ | 16,332 | |
| Charged to costs and expenses | | | 4,483 | | | (83 | ) | | 530 | | — | | 4,930 | |
| Reclassification of reserves | | | | (128 | ) | | | (508 | ) | | 636 | | — | | — | |
| Non-cash items | | | — | | | (419 | ) | | — | | — | | | (419 | ) |
| Cash payments | | | (3,530 | ) | | | (287 | ) | | | (3,817 | ) | | | (1,690 | ) | | | (1,847 | ) | | | (13,242 | ) | | — | | | (16,779 | ) |
| | | | | | | | | | | | | | | | | | | |
| Restructuring balance, September 30, 2004 | | $ | 155 | | $ | 211 | | $ | 366 | | |
| | | | | | | | | |
| Restructuring balance, September 28, 2007 | | | $ | 2,770 | | $ | 300 | | $ | 994 | | $ | — | | $ | 4,064 | |
| Charged to costs and expenses | | | 567 | | — | | — | | — | | 567 | |
| Reclassification of reserves | | | 547 | | | (75 | ) | | 48 | | — | | 520 | |
| Cash payments | | | (155 | ) | | | (198 | ) | | | (353 | ) | | | (1,667 | ) | | | (225 | ) | | | (806 | ) | | — | | | (2,698 | ) |
| | | | | | | | | | | | | | | | | | | |
| Restructuring balance, September 30, 2005 | | $ | — | | $ | 13 | | $ | 13 | | |
| Restructuring balance, October 3, 2008 | | | $ | 2,217 | | $ | — | | $ | 236 | | $ | — | | $ | 2,453 | |
| | | | | | | | | | | | | | | | | | | |
2003 Corporate Restructuring PlansThe Company anticipates that most of the remaining payments associated with the exit of the baseband product area will be remitted during fiscal year 2009.
During16. EARNINGS PER SHARE
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| (In thousands, except per share amounts) | | 2008 | | | 2007 | | | 2006 | |
| | | |
| Net income (loss) | | $ | 111,006 | | | $ | 57,650 | | | $ | (88,152 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding – basic | | | 161,878 | | | | 159,993 | | | | 159,408 | |
| Effect of dilutive stock options and restricted stock | | | 2,172 | | | | 1,071 | | | | — | |
| Dilutive effect of Junior Notes | | | 705 | | | | — | | | | — | |
| | | | | | | | | | |
| Weighted average shares outstanding – diluted | | | 164,755 | | | | 161,064 | | | | 159,408 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net income (loss) per share – basic | | $ | 0.69 | | | $ | 0.36 | | | $ | (0.55 | ) |
| Effect of dilutive stock options | | | 0.01 | | | | — | | | | — | |
| | | | | | | | | | |
| Net income (loss) per share – diluted | | $ | 0.68 | | | $ | 0.36 | | | $ | (0.55 | ) |
| | | | | | | | | | |
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share includes the dilutive effect of equity based awards using the treasury stock method, the Junior Notes on an if-converted basis and the 2007 Convertible Notes using the treasury stock method, if their effect is dilutive.
Equity based awards exercisable for approximately 23.0 million shares were outstanding but not included in the computation of earnings per share for the fiscal 2003,year ended October 3, 2008 as their effect would have been anti-dilutive.
Junior Notes convertible into approximately 5.5 million shares and equity based awards exercisable for approximately 19.3 million shares were outstanding but not included in the computation of earnings per share for the fiscal year ended September 28, 2007 as their effect would have been anti-dilutive. If the Company recorded $6.2had earned at least $78.8 million in restructuring charges to providenet income for workforce reductions and the consolidation of facilities. The charges were based upon estimates offiscal year ended September 28, 2007 the cost of severance benefits for affected employees and lease cancellation, facility sales, and other costs related to the consolidation of facilities. As of September 30, 2005, all amounts accrued for these actionsJunior Notes would have been paid.
Activity and liability balances relateddilutive to the fiscal 2003 restructuring actions are as follows (in thousands):
| | | | | | | | | | | | | |
| | | 2003 | |
| | | Workforce | | | Facility Closings | | | | |
| | | Reductions | | | and Other | | | Total | |
| Charged to costs and expenses | | | 4,819 | | | $ | 1,405 | | | $ | 6,224 | |
| Cash payments | | | (3,510 | ) | | | (1,236 | ) | | | (4,746 | ) |
| | | | | | | | | | |
| Restructuring balance, September 30, 2003 | | $ | 1,309 | | | $ | 169 | | | $ | 1,478 | |
| Charged to costs and expenses | | | 475 | | | | — | | | | 475 | |
| Cash payments | | | (1,777 | ) | | | (116 | ) | | | (1,893 | ) |
| | | | | | | | | | |
| Restructuring balance, September 30, 2004 | | $ | 7 | | | $ | 53 | | | $ | 60 | |
| | | | | | | | | | |
| Cash payments | | | (7 | ) | | | (53 | ) | | | (60 | ) |
| | | | | | | | | | |
| Restructuring balance, September 30, 2005 | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
Pre-Merger Alpha Restructuring Plan
In addition, the Company assumed approximately $7.8 million of restructuring reserves from Alpha in connection with the Merger. During fiscal 2005 and the fiscal years ended September 30, 2004 and 2003, payments related to the restructuring reserves assumed from Alpha were $0.2 million, $0.2 million, and $4.7 million, respectively. In addition, the Company reduced this restructuring reserve by approximately $0.5 million in fiscal 2004 primarily related to a reduction in facility closure costs. This reduction of expenses is reflected in the special charges line of the Company’s results of operations. As of September 30, 2005, the restructuring reserve balance related to Alpha was $1.0 million and primarily relates to estimated future payments on a lease that expires in 2008.earnings per share.
6276
In addition, the Company issued $200.0 million aggregate principal amount of convertible subordinated notes (“2007 Convertible Notes”) in March 2007. These 2007 Convertible Notes contain cash settlement provisions, which permit the application of the treasury stock method in determining potential share dilution of the conversion spread should the share price of the Company’s common stock exceed $9.52. It has been the Company’s historical practice to cash settle the principal and interest components of convertible debt instruments, and it is our intention to continue to do so in the future, including settlement of the 2007 Convertible Notes issued in March 2007. These shares have not been included in the computation of earnings per share for the fiscal year ended September 28, 2007 or October 3, 2008 as their effect would have been anti-dilutive. The maximum potential dilution from the settlement of the 2007 Convertible Notes would be approximately 14.5 million shares at October 3, 2008.
Junior Notes convertible into approximately 19.8 million shares and equity based awards exercisable for approximately 23.7 million shares were outstanding but not included in the computation of earnings per share for the fiscal year ended September 29, 2006 as their effect would have been anti-dilutive. If the Company had earned at least $93.9 million in net income for the fiscal year ended September 29, 2006 the Junior Notes would have been dilutive to earnings per share.
NOTE 15.17. SEGMENT INFORMATION AND CONCENTRATIONS
The Company followsIn accordance with SFAS No. 131, “Disclosures AboutDisclosures about Segments of an Enterprise and Related Information.” Information(“SFAS No.131”), the Company has one reportable operating segment which designs, develops, manufactures and markets proprietary semiconductor products, including intellectual property, for manufacturers of wireless communication products. SFAS 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and in interim reports to shareholders. The method for determining what information to report is based on the way that management organizes themanagement’s organization of segments within the Company for making operating decisions and assessing financial performance. In evaluating financial performance, management uses sales and operating profit as the measure of the segments’ profit or loss. Based onAll of the guidance in SFAS No. 131,Company’s operating segments share similar economic characteristics as they have a similar long term business model, and have similar research and development expenses and similar selling, general and administrative expenses, thus, the Company has concluded at October 3, 2008 that it has only one reportable operating segment for financial reporting purposes.
segment. The Company operates in one business segment, which designs, develops, manufactures and markets proprietary semiconductor products and system solutions for manufacturers of wireless communication products.will re-assess its conclusions at least annually.
GEOGRAPHIC INFORMATION
Net revenues by geographic area are presented based upon the country of destination. Net revenues by geographic area are as follows (in thousands):
| | | | | | | | | | | | | | |
| | | | Fiscal Years Ended | |
| | | | | | | | | | | | | | | October 3, | | September 28, | | September 29, | |
| | | Years Ended September 30, | | | 2008 | | 2007 | | 2006 | |
| | | 2005 | | 2004 | | 2003 | | | |
| United States | | $ | 66,429 | | $ | 74,105 | | $ | 87,691 | | | $ | 79,952 | | $ | 66,868 | | $ | 43,180 | |
| Other Americas | | 39,541 | | 51,537 | | 69,559 | | | 10,636 | | 11,230 | | 18,925 | |
| | | | | | | | | | | | | | | |
| Total Americas | | 105,970 | | 125,642 | | 157,250 | | | 90,588 | | 78,098 | | 62,105 | |
| | | |
| China | | 215,082 | | 206,364 | | 119,385 | | | 410,645 | | 293,035 | | 224,539 | |
| | | |
| South Korea | | 107,225 | | 188,090 | | 157,772 | | | 184,208 | | 128,253 | | 114,926 | |
| | | |
| Taiwan | | 92,171 | | 69,126 | | 60,449 | | | 86,544 | | 101,107 | | 116,073 | |
| Other Asia-Pacific | | 144,940 | | 64,570 | | 38,983 | | | 36,005 | | 98,200 | | 173,523 | |
| | | | | | | | | | | | | | | |
| Total Asia-Pacific | | 559,418 | | 528,150 | | 376,589 | | | 717,402 | | 620,595 | | 629,061 | |
| | | |
| Europe, Middle East and Africa | | 126,983 | | 130,231 | | 83,950 | | | 52,027 | | 43,051 | | 82,584 | |
| | | | | | | | | | | | | | | |
| | | |
| | | $ | 792,371 | | $ | 784,023 | | $ | 617,789 | | | $ | 860,017 | | $ | 741,744 | | $ | 773,750 | |
| | | | | | | | | | | | | | | |
The Company’s revenues by geography do not necessarily correlate to end handset demand by region. For example, if the Company sells a power amplifier module to a customer in South Korea, the sale is recorded within the South Korea account although that customer, in turn, may integrate that module into a product sold to a service provider (its customer) in Africa, China, Europe, the Middle East, the Americas or within South Korea.
77
The increase in net revenues derived from China in fiscal 2008 as compared to fiscal 2007 and fiscal 2006 is principally due to increased sales to distributors who sell directly to Chinese end users (namely AIT, Holystone China and Comtech) and the implementation of a global Sony Ericsson Mobile Comm. AB hub in Hong Kong in 2007 (one of our top OEM customers).
The decrease in net revenues derived from Other Asia-Pacific in fiscal 20052008 as compared to fiscal 20042007 and fiscal 2006 is due to continued weakness at one of our OEM customers and the consolidationtransitioning of the purchasing function of one of the Company’s significant customers to Singapore in fiscal 2005 from other non-Asia Pacific locations.
The significant growth in netaforementioned Sony Ericsson Mobile Comm. AB revenues derived from China in fiscal 2004 when compared to the previous fiscal year reflects the Company’s market share gains across a number of domestic cellular handset suppliers in the region and primarily represents sales of complete cellular systems, DCR transceivers and front-end modules.Hong Kong hub from Other Asia-Pacific locations.
Geographic property, plant and equipment balances, including property held for sale, are based on the physical locations within the indicated geographic areas and are as follows (in thousands):
| | | | | | | | | | |
| | | | As of | |
| | | | | | | | | | | October 3, | | September 28, | |
| | | September 30, | | | 2008 | | 2007 | |
| | | 2005 | | 2004 | | | |
| United States | | $ | 85,072 | | $ | 81,356 | | | $ | 114,794 | | $ | 97,097 | |
| Mexico | | 60,594 | | 61,702 | | | 56,378 | | 54,324 | |
| Other | | 5,172 | | 6,951 | | | 2,188 | | 2,095 | |
| | | | | | | | | | | |
| | | $ | 150,838 | | $ | 150,009 | | | $ | 173,360 | | $ | 153,516 | |
| | | | | | | | | | | |
63
CONCENTRATIONS
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade accounts receivable. Trade receivables are primarily derived from sales to manufacturers of communications and consumer products. Ongoing credit evaluations of customers’ financial condition are performed and collateral, such as letters of credit and bank guarantees, are required whenever deemed necessary. As of September 30, 2005,October 3, 2008, Motorola, Inc., Samsung Electronics Co., and RTI InternationalSony Ericsson Mobile Comm. AB accounted for approximately 16%14%, 12% and 15%10%, respectively, of the Company’s gross accounts receivable.
As of September 30, 200428, 2007, Motorola, Inc. represented approximately 12% and Samsung Electronics Co. and RTI International eachSony Ericcson Mobile Comm. AB accounted for approximately 10%21% and 14%, respectively, of the Company’s gross accounts receivable. Samsung Electronics Co. accounted for 18% of the Company’s gross accounts receivable balance at September 30, 2003.
The following customers accounted for 10% or more of net revenues:
| | | | | | | | | | | | | |
| | | Years Ended September 30, |
| | | 2005 | | 2004 | | 2003 |
| Motorola, Inc. | | | 21 | % | | | 14 | % | | | 11 | % |
| Sony Ericsson Mobile Communications AB | | | 10 | % | | | 8 | % | | | 7 | % |
| Samsung Electronics Co. | | | 7 | % | | | 12 | % | | | 15 | % |
| | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | September 28, | | | September 29, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Sony Ericsson Mobile Communications AB | | | 18 | % | | | 22 | % | | | 16 | % |
| Samsung Electronics Co | | | 14 | % | | | 11 | % | | | * | |
| Asian Information Technology, Inc | | | 11 | % | | | 11 | % | | | 11 | % |
| Motorola, Inc | | | * | | | | 16 | % | | | 23 | % |
| | |
| * | | Customers accounted for less than 10% of net revenues. |
NOTE 16.18. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)| | | | | | | | | | | | | | | | | | | | | |
| | | First | | Second | | Third | | Fourth | | |
| (In thousands, except per share data) | | Quarter | | Quarter | | Quarter | | Quarter | | Year |
Fiscal 2008 | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 210,533 | | | $ | 201,708 | | | $ | 215,210 | | | $ | 232,566 | | | $ | 860,017 | |
| Gross profit | | | 82,338 | | | | 80,367 | | | | 86,434 | | | | 93,824 | | | | 342,963 | |
| Net income | | | 19,078 | | | | 16,673 | | | | 20,466 | | | | 54,789 | | | | 111,006 | |
| Per share data (1) | | | | | | | | | | | | | | | | | | | | |
| Net income, basic | | | 0.12 | | | | 0.10 | | | | 0.13 | | | | 0.33 | | | | 0.69 | |
| Net income, diluted | | | 0.12 | | | | 0.10 | | | | 0.12 | | | | 0.33 | | | | 0.68 | |
| | | | | | | | | | | | | | | | | | | | | |
Fiscal 2007(2) | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 196,030 | | | $ | 180,210 | | | $ | 175,050 | | | $ | 190,454 | | | $ | 741,744 | |
| Gross profit | | | 75,316 | | | | 68,702 | | | | 68,632 | | | | 74,735 | | | | 287,385 | |
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| | | | | | | | | | | | | | | | | | | | | |
| | | First | | Second | | Third | | Fourth | | |
| | | Quarter (3) | | Quarter | | Quarter | | Quarter (2) | | Year |
Fiscal 2005 | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 220,160 | | | $ | 190,505 | | | $ | 191,532 | | | $ | 190,174 | | | $ | 792,371 | |
| Gross profit | | | 88,019 | | | | 72,599 | | | | 77,874 | | | | 69,280 | | | | 307,772 | |
| Net income | | | 13,917 | | | | 1,244 | | | | 7,389 | | | | 3,061 | | | | 25,611 | |
| Per share data (1) | | | | | | | | | | | | | | | | | | | | |
| Net income, basic | | | 0.09 | | | | 0.01 | | | | 0.05 | | | | 0.02 | | | | 0.16 | |
| Net income, diluted | | | 0.09 | | | | 0.01 | | | | 0.05 | | | | 0.02 | | | | 0.16 | |
| | | | | | | | | | | | | | | | | | | | | |
Fiscal 2004 | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 175,108 | | | $ | 183,471 | | | $ | 207,377 | | | $ | 218,067 | | | $ | 784,023 | |
| Gross profit | | | 69,568 | | | | 72,204 | | | | 83,784 | | | | 87,660 | | | | 313,216 | |
| Net income (loss) | | | 4,172 | | | | (9,421 | ) | | | 13,030 | | | | 14,631 | | | | 22,412 | |
| Per share data (1) | | | | | | | | | | | | | | | | | | | | |
| Net income (loss), basic | | | 0.03 | | | | (0.06 | ) | | | 0.09 | | | | 0.09 | | | | 0.15 | |
| Net income (loss), diluted | | | 0.03 | | | | (0.06 | ) | | | 0.08 | | | | 0.09 | | | | 0.15 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | First | | Second | | Third | | Fourth | | |
| | | Quarter | | Quarter | | Quarter | | Quarter | | Year |
| Net income | | | 12,037 | | | | 12,197 | | | | 11,423 | | | | 21,993 | | | | 57,650 | |
| Per share data (1) | | | | | | | | | | | | | | | | | | | | |
| Net income, basic | | | 0.07 | | | | 0.08 | | | | 0.07 | | | | 0.14 | | | | 0.36 | |
| Net income, diluted | | | 0.07 | | | | 0.08 | | | | 0.07 | | | | 0.14 | | | | 0.36 | |
| | |
| (1) | | Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding and included common stock equivalents in each period. Therefore, the sums of the quarters do not necessarily equal the full year earnings per share. |
| |
| (2) | | During the fourth quarter of fiscal 2004,year ended September 28, 2007, the Company reducedrecorded charges of $5.7 million which included $4.5 million relating to the carrying valueexit of its deferred tax assetscertain operating leases, $0.5 million relating to additional severance, $1.4 million related to the write-off of technology licenses and design software, offset by $3.5 million. Thisa $1.5 million credit related to the reversal of a reserve originally recorded to account for an engineering vendor charge primarily originated from foreign exchange translation errors after establishingassociated with the $23.1 million tax benefit recorded in fiscal 2002 for the impairmentexit of the Company’s assemblybaseband product area, and test machinery and equipmentan additional $0.8 million charge for a single lease obligation that expires in Mexicali, Mexico immediately following completion of the Merger. The cumulative effect of these errors was reported2008 relating to our 2002 restructuring. |
19. SUBSEQUENT EVENTS
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inAfter the provision for income taxes line of the statement of operations in the fourth quarterclose of fiscal 2004, as it did not have a material impact2008, we retired an additional $40.5 million of our 2007 Convertible Notes (due in prior periods. The aggregate $3.5 million charge and2012) at an average discounted price of $92.58 per $100.00 of par value. These retirements reduced the effectremaining principal balance on earnings per share, if any, are listed in the following table.our 2007 Convertible Notes to $97.1 million.
| | | | | | | | | | | | | | | | | | | | | |
| | | First | | | Second | | | Third | | | Fourth | | | | |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Year | |
| Fiscal 2004 | | | | | | | | | | | | | | | | | | | | |
| Reduction to Mexicali deferred tax asset | | $ | (280 | ) | | $ | (62 | ) | | $ | (742 | ) | | $ | (72 | ) | | $ | (1,156 | ) |
| Effect on diluted earnings per share, if any | | | — | | | | — | | | | — | | | | — | | | | (0.01 | ) |
| Fiscal 2003 | | | | | | | | | | | | | | | | | | | | |
| Reduction to Mexicali deferred tax asset | | $ | 62 | | | $ | (1,153 | ) | | $ | 453 | | | $ | (1,414 | ) | | $ | (2,052 | ) |
| Effect on diluted earnings per share, if any | | | — | | | | (0.01 | ) | | | — | | | | (0.01 | ) | | | (0.01 | ) |
| Fiscal 2002 | | | | | | | | | | | | | | | | | | | | |
| Reduction to Mexicali deferred tax asset | | $ | — | | | $ | — | | | $ | — | | | $ | (256 | ) | | $ | (256 | ) |
| Effect on diluted earnings per share, if any | | | — | | | | — | | | | — | | | | — | | | | — | |
| | |
(1) | | During the first quarter of fiscal 2005, the Company reduced the carrying value of its deferred tax assets by $2.2 million. This charge resulted from a reduction of the statutory income tax rate in Mexico. This reduction is being reported in the provision for income taxes line of the statement of operations in the first quarter of fiscal 2005. |
| | |
ITEM 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.None.
| | |
ITEM 9A. | | ITEM 9A. CONTROLS AND PROCEDURES. |
Disclosure Controls and Procedures
Skyworks’(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of itsour chief executive officer and chief financial officer, evaluated the effectiveness of Skyworks’our disclosure controls and procedures as of September 30, 2005.October 3, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of Skyworks’our disclosure controls and procedures as of September 30, 2005, Skyworks’October 3, 2008, our chief executive officer and chief financial officer concluded that, as of such date, Skyworks’our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s report on Skyworks’(b) Changes in internal controls over financial reporting.
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) underof the Exchange Act) andoccurred during the independent registered public accounting firm’s related audit report are included below in this Item 9A. of this Form 10-K and are incorporated herein by reference.fiscal quarter ended October 3, 2008 that has materially affected, or is reasonably likely to materially affect, Skyworks’ internal control over financial reporting.
79
Management Report on Internal Control over Financial Reporting
The management of Skyworks Solutions, Inc.,the Company is responsible for establishing and maintaining adequate internal control over financial reporting asfor the Company. Internal control over financial reporting is defined in RulesRule 13a-15(f) or 15d-15(f) promulgated under the U.S. Securities Exchange Act of 1934. Our management,1934 as a process designed by, or under the supervision of, the Company’s principal executive officer and the principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting using the framework in Internal Control — Integrated Framework issuedofficers and effected by the CommitteeCompany’s board of Sponsoring Organizations of the Treadway Commission (COSO). Based upon the evaluation performed under the COSO framework as of September 30, 2005,directors, management concluded that our internal control over financial reporting is effective.
65
KPMG LLP, our independent registered public accounting firm, has audited management’s assessment and independently assessed the effectiveness of our internal control over financial reporting as of September 30, 2005, as stated in their report which is included below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Skyworks Solutions, Inc.:
We have audited management’s assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that Skyworks Solutions, Inc. maintained effective internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Skyworks Solutions, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designedpersonnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reportingprinciples and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sthat:
| • | | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
|
| • | | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
|
| • | | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsProjections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Skyworks Solutions, Inc. maintained effectiveThe Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects, based onOctober 3, 2008. In making this assessment, the Company’s management used the criteria establishedset forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework issued by COSO. Also, in our opinion, Skyworks Solutions, Inc. maintained, in all material respects, effectiveControl-Integrated Framework.
Based on their assessment, management concluded that, as of October 3, 2008, the Company’s internal control over financial reporting as of September 30, 2005,is effective based on criteria established in Internal Control — Integrated Frameworkthose criteria.
The Company’s independent registered public accounting firm has issued by COSO.
We also have audited, in accordance withan audit report on the standardseffectiveness of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Skyworks Solutions, Inc. and subsidiaries as of September 30, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended September 30, 2005, and ourCompany’s internal control over financial reporting. This report dated December 14, 2005 expressed an unqualified opinionappears on those consolidated financial statements.page 48.
/s/ KPMG LLP
Boston, Massachusetts
December 14, 2005
66
|
ITEM 9B.ITEM 9B. OTHER INFORMATION. |
None.
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PART III
|
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. |
The following table sets forth for each director ofinformation under the Companycaptions “Directors and the current executive officers of the Company, their ages and present positions with the Company:
| | | | | | |
Name | | Age | | Title |
Dwight W. Decker | | | 55 | | | Chairman of the Board |
|
David J. Aldrich | | | 48 | | | President, Chief Executive |
| | | | | | Officer and Director |
|
Allan M. Kline | | | 60 | | | Vice President and Chief |
| | | | | | Financial Officer |
|
Kevin D. Barber | | | 45 | | | Senior Vice President and |
| | | | | | General Manager, Mobile |
| | | | | | Platforms |
|
Liam K. Griffin | | | 39 | | | Senior Vice President, Sales |
| | | | | | and Marketing |
|
George M. LeVan | | | 60 | | | Vice President, Human |
| | | | | | Resources |
|
Stanley A. Swearingen, Jr. | | | 45 | | | Vice President and General |
| | | | | | Manager, Linear Products |
|
Mark V.B. Tremallo | | | 49 | | | Vice President, General |
| | | | | | Counsel and Secretary |
|
Gregory L. Waters | | | 45 | | | Executive Vice President |
|
Kevin L. Beebe | | | 46 | | | Director |
|
Moiz M. Beguwala | | | 59 | | | Director |
|
Timothy R. Furey | | | 47 | | | Director |
|
Balakrishnan S. Iyer | | | 49 | | | Director |
|
Thomas C. Leonard | | | 71 | | | Director |
|
David P. McGlade | | | 44 | | | Director |
|
David J. McLachlan | | | 67 | | | Director |
Dwight W. DeckerExecutive Officers”, age 55, has been Chairman of the Board since June 2002. Dr. Decker has also served as Chairman“Corporate Governance-Committees of the Board of Conexant Systems, Inc. (a broadband communication semiconductor company) since December 1998Directors” and has served as a director of Conexant since 1996. Since November 2004, Dr. Decker has also served as Conexant’s Chief Executive Officer, a position he previously held from December 1998 until March 2004. He served as Senior Vice President of Rockwell International Corporation (now, Rockwell Automation, Inc.) (electronic controls and communications) and President, Rockwell Semiconductor Systems (now Conexant) from July 1998 to December 1998; Senior Vice President of Rockwell; and President, Rockwell Semiconductor Systems and Electronic Commerce prior thereto. Dr. Decker is also a director of Mindspeed
67
Technologies, Inc. (networking infrastructure semiconductors), Pacific Mutual Holding Company (life insurance) and Jazz Semiconductor, Inc. (semiconductor wafer foundry). He is also a director or member of numerous professional and civic organizations.
David J. Aldrich, age 48, has served as President, Chief Executive Officer, and Director of the Company since April 2000. From September 1999 to April 2000, Mr. Aldrich served as President and Chief Operating Officer. From May 1996 to May 1999, when he was appointed Executive Vice President, Mr. Aldrich served as Vice President and General Manager of the semiconductor products business unit. Mr. Aldrich joined the Company“Other Matters-Section 16(a) Beneficial Ownership Reporting Compliance” in 1995 as Vice President, Chief Financial Officer and Treasurer. From 1989 to 1995, Mr. Aldrich held senior management positions at M/A-COM, Inc. (developer and manufacturer of radio frequency and microwave semiconductors, components and IP networking solutions), including Manager Integrated Circuits Active Products, Corporate Vice President Strategic Planning, Director of Finance and Administration and Director of Strategic Initiatives with the Microelectronics Division.
Allan M. Kline, age 60, has been Vice President and Chief Financial Officer since January 2004. From May 2003 until January 2004, Mr. Kline served as Chief Financial Officer of Fibermark, Inc., a producer of specialty fiber-based materials that filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“U.S.B.C.”) on November 15, 2004. Prior to this, from June 1996 to February 2002, Mr. Kline served as Chief Financial Officer for Acterna Corporation, a global communications test and management company that filed a voluntary petition for reorganization under Chapter 11 of the U.S.B.C. on May 6, 2003. He has also served as Chief Financial Officer for CrossComm Corp., a provider of internetworking systems from 1995 to 1996 and for Cabot Safety Corporation, a subsidiary of Cabot Corporation, a basic materials manufacturer from 1990 to 1994. Mr. Kline was also a Vice President at O’Connor, Wright Wyman, Inc., a merger and acquisition advisory firm from August 2002 to May 2003, and served on the Board of Directors of Acterna and CrossComm. Mr. Kline also serves as a director of the Massachusetts Telecommunications Council. He began his career at Arthur Young & Co. in 1969, where he was a partner for six years.
Kevin D. Barber, age 45, has served as Senior Vice President and General Manager, Mobile Platforms since November 2005 and Senior Vice President and General Manager, RF Solutions since September 2003. Previously, Mr. Barber served as Senior Vice President, Operations from June 2002 to September 2003; Senior Vice President, Operations of Conexant Systems, Inc. (broadband communication semiconductors) from February 2001 to June 2002; Vice President, Internal Manufacturing from August 2000 to February 2001; Vice President, Device Manufacturing from March 1999 to August 2000; Vice President, Strategic Sourcing from November 1998 to March 1999; and Director, Material Sourcing of Rockwell Semiconductor Systems (now Conexant) from May 1997 to November 1998. Prior to this, Mr. Barber held various engineering and operational roles at Rockwell Semiconductor Systems since April 1984.
Liam K. Griffin, age 39, joined the Company in August 2001 and serves as Senior Vice President, Sales and Marketing. Previously, Mr. Griffin was employed by Vectron International, a division of Dover Corp., as Vice President of Worldwide Sales from 1997 to 2001, and as Vice President of North American Sales from 1995 to 1997. His prior experience included positions as a Marketing Manager at AT&T Microelectronics, Inc. and Product and Process Engineer at AT&T Network Systems.
George M. LeVan, age 60, has served as Vice President, Human Resources since June 2002. Previously, Mr. LeVan served as Director, Human Resources, from 1991 to 2002 and has managed the human resource department since joining the Company in 1982. Prior to 1982, he held human resources positions at Data Terminal Systems, Inc., W.R. Grace & Co., Compo Industries, Inc. and RCA.
Stanley A. Swearingen, Jr.,age 45, joined the Company in August 2004 and serves as Vice President and General Manager, Linear Products. Prior to joining Skyworks, from November 2000 to August 2004, Mr. Swearingen was Vice President and General Manager of Agere Systems’ Computing Connectivity division, where he was responsibleour definitive proxy statement for the design and manufacturing2009 Annual Meeting of wired and wireless connectivity solutions. Prior to this, from July 1999 to November 2000, he served as President and Chief Operating Officer of Quantex Microsystems,Stockholders is incorporated herein by reference.
We have adopted a direct provider of personal computers, servers and Internet infrastructure products. He has also held senior management positions at National Semiconductor, Cyrix and Digital Equipment Corp.
Mark V.B. Tremallo, age 49, joined the Company in April 2004 and serves as Vice President, General Counsel and Secretary. Previously, from January 2003 to April 2004, Mr. Tremallo was Senior Vice President and General Counsel at TAC Worldwide Companies, a technical workforce solutions provider. Prior to TAC, from May 1997 to May 2002, he was Vice President, General Counsel and Secretary at Acterna Corp., a global communications test equipment and solutions provider, which filed a voluntary petition for reorganization under Chapter 11 of the U.S.B.C. on May 6, 2003. Earlier, Mr. Tremallo served as Vice President, General Counsel and Secretary at Cabot Safety Corporation.
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Gregory L. Waters, age 45, joined the Company in April 2003, and has served as Executive Vice President since November 2005, and Vice President and General Manager, Cellular Systems since May 2004. Previously, from February 2001 until April 2003, Mr. Waters served as Senior Vice President of Strategy and Business Development at Agere Systems and, beginning in 1998, held positions there as Vice President of the Wireless Communications business and Vice President of the Broadband Communications business. Prior to working at Agere, Mr. Waters held a variety of senior management positions within Texas Instruments, including Director of Network Access Products and Director of North American Sales.
Kevin L. Beebe, age 46, has been a director since January 2004. He has been Group President of Operations at ALLTEL Corporation, a telecommunications services company, since 1998. From 1996 to 1998, Mr. Beebe served as Executive Vice President of Operations for 360º Corporation, a wireless communication company. He has held a variety of executive and senior management positions at several divisions of Sprint, including Vice President of Operations and Vice President of Marketing and Administration for Sprint Cellular, Director of Marketing for Sprint North Central Division, Director of Engineering and Operations Staff and Director of Product Management and Business Development for Sprint Southeast Division, as well as Staff Director of Product Services at Sprint Corporation. Mr. Beebe began his career at AT&T/Southwestern Bell as a Manager.
Moiz M. Beguwala, age 59, has been a director since June 2002. He is an executive employee of Conexant Systems, Inc., and served as Senior Vice President and General Manager of the Wireless Communications business unit of Conexant from January 1999 to June 2002. Prior to Conexant’s spin-off from Rockwell International Corporation, Mr. Beguwala served as Vice President and General Manager, Wireless Communications Division, Rockwell Semiconductor Systems, Inc. from October 1998 to December 1998; Vice President and General Manager Personal Computing Division, Rockwell Semiconductor Systems, Inc. from January 1998 to October 1998; and Vice President, Worldwide Sales, Rockwell Semiconductor Systems, Inc. from October 1995 to January 1998. Mr. Beguwala serves on the Board of Directors of SIRF Technology.
Timothy R. Furey, age 47, has been a director since 1998. He has been Chief Executive Officer of MarketBridge, a privately owned sales and marketing strategy and technology professional services firm, since 1991. His company’s clients include organizations such as IBM, British Telecom and other global Fortune 500 companies selling complex technology products and services into both OEM and end-user markets. Prior to 1991, Mr. Furey held a variety of consulting positions with Boston Consulting Group, Strategic Planning Associates, Kaiser Associates and the Marketing Science Institute.
Balakrishnan S. Iyer, age 49, has been a director since June 2002. He served as Senior Vice President and Chief Financial Officer of Conexant Systems, Inc. from December 1998 to June 2003, and has been a director of Conexant since February 2002. Prior to joining Conexant, Mr. Iyer served as Senior Vice President and Chief Financial Officer of VLSI Technology Inc. Prior to that, he was corporate controller for Cypress Semiconductor Corp. and Director of Finance for Advanced Micro Devices, Inc. Mr. Iyer serves on the Board of Directors of Conexant, Invitrogen Corporation, Power Integrations, QLogic Corporation, and IHS, Inc.
Thomas C. Leonard, age 71, has been a director since August 1996. From April 2000 until June 2002 he served as Chairman of the Board of the Company, and from September 1999 to April 2000, he served the Company as Chief Executive Officer. From July 1996 to September 1999, he served as President and Chief Executive Officer. Mr. Leonard joined the Company in 1992 as a Division General Manager and was elected a Vice President in 1994. Mr. Leonard has over 30 years’ experience in the microwave industry, having held a variety of executive and senior level management and marketing positions at M/A-COM, Inc., Varian Associates, Inc. and Sylvania.
David P. McGlade, age 44, has been a director since February 2005. Since April 2005, he has served as the Chief Executive Officer of Intelsat, a worldwide provider of satellite communications services. Previously, Mr. McGlade served as an Executive Director of mmO2 PLC and as the Chief Executive Officer of O2 UK, a subsidiary of mmO2, a position he held from October 2000 until March 2005. Before joining O2 UK, Mr. McGlade was President of the Western Region for Sprint PCS; Chief Executive Officer and co-founder of Pure Matrix, a U.S. software company that enables the creation of services on mobile phones; Chief Executive Officer of CatchTV, an Internet/TV convergence company; and Vice President, Operations at TCI.
David J. McLachlan, age 67, has been a director since 2000. Mr. McLachlan served as a senior advisor to the Chairman and Chief Executive Officer of Genzyme Corporation, a biotechnology company, from 1999 to 2004. He also was the Executive Vice President and Chief Financial Officer of Genzyme Corporation from 1989 to 1999. Prior to joining Genzyme, Mr. McLachlan served as Vice President, Chief Financial Officer of Adams-Russell Company, an electronic component supplier and cable television franchise owner. Mr. McLachlan also serves on the Boards of Directors of Dyax Corporation, a biotechnology company, and HearUSA, Ltd., a hearing care services company.
As part of the terms of the Merger of the wireless communications divisions of Conexant Systems, Inc. with and into the Company, four designees of Conexant — Donald R. Beall (who retired as a director in April 2005), Moiz M. Beguwala, Dwight W. Decker and Balakrishnan S. Iyer — were appointed to our Board of Directors. Each of the remaining three Conexant designees to the Board continues to have a business relationship with Conexant. Mr. Decker currently serves as the chief
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executive officer, as well as the chairman of the board, of Conexant. Mr. Iyer currently serves as a non-employee director of Conexant. Mr. Beguwala is a current employee, as well as a former executive officer, of Conexant.
Audit Committee— The Company has established an Audit Committee in accordance with section 3(a)(58)(A) of the Exchange Act comprised of the following individuals, each of which is independent within the meaning of applicable listing standards of the NASDAQ Stock Market: David J. McLachlan (Chairman), Kevin L. Beebe and David P. McGlade.
Audit Committee Financial Expert— The Board of Directors has determined that David J. McLachlan, Chairman of the Audit Committee, is an “audit committee financial expert” and “independent” as defined under applicable SEC and NASDAQ National Market rules. The board’s affirmative determination was based, among other things, upon his extensive experience as chief financial officer of Genzyme Corporation.
Code of Business Conduct and Ethics— The Company has adopted its “Code of Business Conduct and Ethics,” awritten code of business conduct and ethics that applies to allour directors, officers and employees, including itsour principal executive officers. A copyofficer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We make available our code of business conduct and ethics free of charge through our website, which is located at www.skyworksinc.com. We intend to disclose any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the Code of Business ConductSEC and Ethics is posted on the Company’s Internet website at http://www.skyworksinc.com. Additionally, the Company has adopted its “Code of Ethics for Principal Financial Officers”, which is applicable to the Company’s Principal Financial Officers and is also available on our Internet site. In the event that the Company makesNASDAQ Global Select Market by posting any amendment to, or grants any waivers of, a provision of the codes that requires disclosure under applicable rules, the Company intends to disclose such amendment or waiverwaivers on our website and the reasons therefor on its Internet website.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors, executive officers and beneficial owners of greater than 10% of our equity securities to file reports of holdings and transactions of securities of Skyworksdisclosing any such waivers in a Form 8-K filed with the SEC. Based solely on a review of Forms 3, 4 and 5 and any amendments thereto furnished to us, and other information provided to us, with respect to our fiscal year ended September 30, 2005, we believe that all Section 16(a) filing requirements applicable to our directors and executive officers with respect to our fiscal year ended September 30, 2005, were timely made.
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents information to be included under the caption “Information about total compensation during the last three completed fiscal yearsExecutive and Director Compensation” in our definitive proxy statement for the Chief Executive Officer and the four next most highly compensated persons serving as executive officers during the year (the “Named Executives”).
SUMMARY COMPENSATION TABLE
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Long-Term | | | | |
| | | | | | | | | | | | | | | Compensation Awards | | | | |
| | | Annual Compensation | | | Restricted | | | Securities | | | | |
| Name and Principal | | Fiscal | | | | | | | | | | | Stock | | | Underlying | | | All Other | |
| Position | | Year | | | Salary | | | Bonus | | | Awards($)(1) | | | Options(#) | | | Compensation(2) | |
| David J. Aldrich | | | 2005 | | | $ | 549,800 | | | $ | — | | | $ | 391,940 | | | | 274,254 | | | $ | 10,804 | |
| President and | | | 2004 | | | $ | 527,539 | | | $ | 1,060,000 | | | | — | | | | 500,000 | | | $ | 12,608 | |
| Chief Executive Officer | | | 2003 | | | $ | 480,000 | | | $ | — | | | | — | | | | — | | | $ | 9,548 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Kevin D. Barber | | | 2005 | | | $ | 342,700 | | | $ | — | | | $ | 92,222 | | | | 64,530 | | | $ | 9,464 | |
| Senior Vice President | | | 2004 | | | $ | 329,646 | | | $ | 397,000 | | | | — | | | | 210,000 | (3) | | $ | 13,397 | |
| and General Manager, | | | 2003 | | | $ | 307,615 | | | $ | — | | | | — | | | | — | | | $ | 6,890 | |
| Mobile Platforms | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Liam K. Griffin | | | 2005 | | | $ | 298,000 | | | $ | — | | | $ | 92,222 | | | | 64,530 | | | $ | 9,445 | |
| Senior Vice President, | | | 2004 | | | $ | 278,769 | | | $ | 336,000 | | | | — | | | | 110,000 | | | $ | 8,298 | |
| Sales and Marketing | | | 2003 | | | $ | 259,423 | | | $ | 115,000 | (4) | | | — | | | | — | | | $ | 7,315 | |
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SUMMARY COMPENSATION TABLE
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Long-Term | | |
| | | | | | | | | | | | | | | Compensation Awards | | |
| | | Annual Compensation | | Restricted | | Securities | | |
| Name and Principal | | Fiscal | | | | | | | | | | Stock | | Underlying | | All Other |
| Position | | Year | | Salary | | Bonus | | Awards($)(1) | | Options(#) | | Compensation(2) |
| Allan M. Kline(5) | | | 2005 | | | $ | 336,700 | | | $ | — | | | $ | 92,222 | | | | 64,530 | | | $ | 11,716 | |
| Vice President, Chief | | | 2004 | | | $ | 237,500 | | | $ | 390,000 | | | | — | | | | 280,000 | (6) | | $ | 6,413 | |
| Financial Officer | | | 2003 | | | $ | — | | | $ | — | | | | — | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gregory L. Waters | | | 2005 | | | $ | 318,900 | | | $ | — | | | $ | 92,222 | | | | 64,530 | | | $ | 46,590 | (7) |
| Executive Vice President | | | 2004 | | | $ | 295,385 | | | $ | 360,000 | | | | — | | | | 100,000 | | | $ | 22,039 | (7) |
| | | | 2003 | | | $ | 117,288 | | | $ | 60,000 | (7) | | | — | | | | 225,000 | (6) | | $ | 4,165 | |
| | |
(1) | | Amounts shown represent the dollar value of the restricted stock awards based on the value of the Company’s common stock on the date of grant. All grants of restricted stock vest 25% per year on each of the first four anniversaries of the grant date and were made under the Company’s 2005 Long-Term Incentive Plan. On May 10, 2005, Mr. Aldrich received a grant of 75,373 shares of restricted stock and Messrs. Barber, Griffin, Kline, and Waters each received a grant of 17,735 shares of restricted stock. The dollar value shown above with respect to each of the Named Executives is based upon the closing price of the Company’s common stock ($5.20) on May 10, 2005. As of September 30, 2005, the aggregate number of shares of restricted stock held by each of the Named Executives, and the dollar value of such shares, was as follows: Mr. Aldrich, 75,373 shares ($529,118); Mr. Barber, 17,735 shares ($124,500); Mr. Griffin, 17,735 shares ($124,500); Mr. Kline, 17,735 shares ($124,500); and Mr. Waters, 17,735 shares ($124,500). The dollar values are based upon the closing price of the Company’s common stock ($7.02) on September 30, 2005. |
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(2) | | “All Other Compensation” includes the Company’s contributions to each Named Executive’s 401(k) plan account, the cost of group term life insurance premiums, and de minimis service awards. |
|
(3) | | Mr. Barber received an annual stock option grant to purchase 110,000 shares in January 2004, and a one-time stock option grant to purchase 100,000 shares in connection with his promotion to Senior Vice President and General Manager, RF Solutions in November 2003. |
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(4) | | As an incentive for joining the Company in August 2001, Mr. Griffin was guaranteed a one-time bonus of $115,000, which was paid during fiscal 2003. |
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(5) | | Mr. Kline joined the Company as an executive officer on January 5, 2004. |
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(6) | | As an incentive for joining the Company, Messrs. Kline and Waters received one-time new hire stock option grants to purchase 280,000 shares and 225,000 shares, respectively. |
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(7) | | Mr. Waters joined the Company on April 17, 2003, and was appointed an executive officer on February 6, 2004. As an incentive for joining the Company, Mr. Waters received a sign on bonus of $60,000. Mr. Waters also received $37,413 and $9,591 in relocation reimbursements in fiscal years 2005 and 2004, respectively, which is included in “All Other Compensation.” |
The following tables provide information about stock options granted to and exercised2009 Annual Meeting of Stockholders is incorporated herein by each of the Named Executives in fiscal year 2005, if any, and the value of options held by each at September 30, 2005.reference.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Percent of | | | | | | | | | | |
| | | | | Total | | | | | | | | | | |
| | | Number | | Options | | | | | | | | | | |
| | | of Securities | | Granted to | | | | | | | | | | |
| | | Underlying | | Employees | | | | | | Potential Realizable Value at |
| | | Options | | in Fiscal | | Exercise or Base | | | | Assumed Annual Rates of Stock |
| | | Granted | | Year | | Price | | | | Price Appreciation for Option Term |
| Name | | (#) | | (%) | | ($ / Share) | | Expiration Date | | 5% | | 10% |
| David J. Aldrich | | | 274,254 | | | | 5.9 | | | $ | 8.93 | | | | 11/10/2014 | | | $ | 1,540,218 | | | $ | 3,903,216 | |
| Kevin D. Barber | | | 64,530 | | | | 1.4 | | | $ | 8.93 | | | | 11/10/2014 | | | $ | 362,402 | | | $ | 918,399 | |
| Liam K. Griffin | | | 64,530 | | | | 1.4 | | | $ | 8.93 | | | | 11/10/2014 | | | $ | 362,402 | | | $ | 918,399 | |
| Allan M. Kline | | | 64,530 | | | | 1.4 | | | $ | 8.93 | | | | 11/10/2014 | | | $ | 362,402 | | | $ | 918,399 | |
| Gregory L. Waters | | | 64,530 | | | | 1.4 | | | $ | 8.93 | | | | 11/10/2014 | | | $ | 362,402 | | | $ | 918,399 | |
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The options vest at a rate of 25% per year commencing one year after the date of grant, provided the holder of the option remains employed by the Company. Options may not be exercised beyond three months after the holder ceases to be employed by the Company, except in the event of termination by reason of death or permanent disability, in which event the option may be exercised for specific periods not exceeding one year following termination. The assumed annual rates of stock price appreciation stated in the table are dictated by regulations of the Securities and Exchange Commission, and are compounded annually for the full term of the options. These assumptions do not reflect our estimates of future stock price growth and actual outcomes may differ.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR END OPTION VALUES
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Number of Securities | | Value of Unexercised |
| | | Shares | | | | | | Underlying | | In-The-Money |
| | | Acquired On | | Value | | Unexercised Options at | | Options at |
| | | Exercise | | Realized | | September 30, 2005 (#) | | September 30, 2005 ($) |
| Name | | (#) | | ($) | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable |
| David J. Aldrich | | | 50,000 | | | $ | 385,410 | | | | 1,364,000 | | | | 349,254 | | | $ | 569,170 | | | $ | 152,250 | |
| Kevin D. Barber | | | — | | | $ | — | | | | 287,564 | | | | 158,280 | | | $ | 114,188 | | | $ | 38,063 | |
| Liam K. Griffin | | | — | | | $ | — | | | | 297,500 | | | | 77,030 | | | $ | 76,125 | | | $ | 25,375 | |
| Allan M. Kline | | | — | | | $ | — | | | | 70,000 | | | | 274,530 | | | $ | — | | | $ | — | |
| Gregory L. Waters | | | — | | | $ | — | | | | 212,500 | | | | 177,030 | | | $ | 191,250 | | | $ | 191,250 | |
The values of unexercised options in the foregoing table are based on the difference between the $7.02 closing price of Skyworks’ common stock on September 30, 2005, the end of the 2005 fiscal year, on the NASDAQ National Market, and the respective option exercise price.
STOCK-BASED COMPENSATION AWARDS
There were no stock-based compensation awards granted to any of the Named Executives for fiscal 2005.
EXECUTIVE COMPENSATION
Our executives are eligible for awards of nonqualified stock options, incentive stock options and restricted stock awards under our applicable stock-based compensation plans. These stock-based compensation plans are administered by the Compensation Committee of the Board of Directors. Generally, the exercise price at which an executive may purchase Skyworks’ common stock pursuant to a stock option is the fair market value of Skyworks’ common stock on the date of grant. Stock options are granted subject to restrictions on vesting, with equal portions of the total grant generally vesting over a period of four years. Our stock options are subject to forfeiture (after certain grace periods) upon termination of employment disability or death. Restricted stock awards involve the issuance of shares of common stock that may not be transferred or otherwise encumbered, subject to certain exceptions, for varying amounts of time, and which will be forfeited, in whole or in part, if the executive terminates his or her employment with Skyworks.
The Named Executives were also eligible to receive target incentive compensation under which a percentage of each executive’s total cash compensation is tied to the accomplishment of specific financial objectives during fiscal year 2005. The Company did not achieve the annual performance targets set by the Board of Directors, and therefore no incentive bonuses were paid to the Named Executives with respect to fiscal year 2005. Certain Named Executives also may participate in the Company’s Executive Compensation Plan (the “Executive Compensation Plan”), an unfunded, non-qualified deferred compensation plan, under which participants may defer a portion of their compensation. Deferred amounts are held in a trust. Participants defer recognizing taxable income on the amount held for their benefit until the amounts are paid. Although the Company, in its sole discretion, may make additional contributions to the accounts of participants, it presently has no plans to do so and has never done so in the past. Participants normally receive the deferred amounts upon retirement.
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COMPENSATION OF DIRECTORS
Directors who are not employees of Skyworks are paid, in quarterly installments, an annual retainer of $30,000, plus an additional $1,000 for each Board of Directors meeting attended in person or $500 for each Board of Directors meeting attended by telephone. Effective beginning fiscal year 2005, the Chairman of the Board of Directors is paid an annual retainer of $45,000. Additional annual retainers are paid to the Chairman of the Audit Committee ($9,000); the Chairman of the Compensation Committee ($6,000); and the Chairman of the Nominating and Governance Committee ($2,500). In addition, Directors who serve on Committees in roles other than as Chairman are annually paid $3,000 (Audit Committee); $2,000 (Compensation Committee); and $1,250 (Nominating and Corporate Governance Committee). Each new non-employee director receives an option to purchase 45,000 shares of common stock immediately following the earlier of Skyworks’ annual meeting of stockholders at which the director is first elected by the stockholders or following his initial appointment by the Board of Directors. Additionally, following each annual meeting of stockholders each non-employee director who is continuing in office or re-elected receives an option to purchase 15,000 shares of common stock. The exercise price of stock options granted to directors is equal to the fair market value of the common stock on the date of grant. Stock option grants to directors for fiscal years 2002, 2003 and 2004 were made under the 2001 Directors’ Stock Option Plan.
In connection with his appointment to the Board of Directors, Mr. McGlade was granted an option to purchase 45,000 shares of common stock on February 1, 2005, at an exercise price equal to the fair market value of the common stock on the date of grant under our Directors’ 2001 Stock Option Plan. In connection with their continued service on the Board of Directors, each of Messrs. Beebe, Beguwala, Decker, Furey, Iyer, Leonard and McLachlan was granted an option to purchase 15,000 shares of common stock on April 28, 2005, at an exercise price equal to the fair market value of the common stock on the date of grant.
On June 27, 2005, the Company’s Board of Directors modified the terms of certain options to purchase the Company’s common stock held by Mr. Donald R. Beall, a former director of the Company who retired on April 28, 2005. Specifically, the vesting of 36,750 of Mr. Beall’s outstanding stock options was accelerated such that they are now exercisable. In addition, the exercise period for 73,500 of Mr. Beall’s stock options (including the 36,750 accelerated options discussed above) was extended so that, instead of expiring on July 28, 2005, such options would continue to be exercisable until April 28, 2007. The options affected have exercise prices ranging from $6.24 to $11.75. These modifications did not affect 258,514 of Mr. Beall’s other outstanding options, which were fully vested pursuant to their original terms at the time of his retirement and expire at various times beginning July 28, 2005, and ending April 28, 2010. In accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, the modification of 13,500 of the above-referenced stock options will not affect the Company’s financial statements because the exercise price for such options was higher than the market price of the Company’s stock at the modification date. Therefore, the intrinsic value of such stock options was zero at the date of the modification, and no additional compensation cost will result. The modification of the other 60,000 above-referenced options will result in the Company incurring a non-cash charge of $57,450 since the exercise price for such options was lower than the market price of the Company’s stock at the modification date. In addition, fixed stock option accounting continues to apply to all of the modified stock options because neither the number of stock options nor the exercise price of such stock options was changed as a result of the modification. None of the Company’s stock-based compensation plans was affected by the aforementioned modifications.
No director who is also an employee receives separate compensation for services rendered as a director. David J. Aldrich is currently the only director who is also an employee of Skyworks. Mr. Aldrich’s compensation as President and Chief Executive Officer of Skyworks is discussed separately in this Part III.
SEVERANCE AGREEMENTS
Change of Control / Severance Agreement with Mr. Aldrich
In fiscal 2005, the Company entered into a Change of Control / Severance Agreement with Mr. David J. Aldrich (the “Aldrich Agreement”), the Company’s Chief Executive Officer. The Aldrich Agreement sets out severance benefits that become payable if, within twenty-four (24) months of a change of control, Mr. Aldrich either (i) is involuntarily terminated without cause or (ii) voluntarily terminates his employment. The severance benefits provided to Mr. Aldrich in such circumstances will consist of the following: (i) a severance payment equal to two and one-half (21/ 2 ) times his total annual compensation for the previous twelve (12) months, including salary and bonus (with the bonus to be the greater of (x) the average bonus received for the three years prior to the year in which the change of control occurs or (y) the target bonus for the year in which the change of control occurs); (ii) vesting of all outstanding stock options and any restricted stock, with such stock options remaining exercisable for a period of thirty (30) months after the termination date (but not beyond the expiration of their respective maximum terms); and (iii) if applicable, a gross-up payment for any excise taxes incurred under Section 4999 of the Internal Revenue Code of 1986 (“IRC”). The Aldrich Agreement also sets out severance benefits that become payable if, while employed by the Company, but not following a change of control, Mr. Aldrich either (i) is involuntarily terminated without cause or (ii) terminates his employment for good reason. The severance benefits provided to Mr. Aldrich under such circumstances will consist of the
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following: (i) a severance payment equal to two (2) times his total annual compensation for the previous twelve (12) months, including salary and bonus (with the bonus to be the greater of (x) the average bonus received for the three years prior to the year in which the change of control occurs or (y) the target bonus for the year in which the change of control occurs); and (ii) vesting of all outstanding stock options and any restricted stock, with such stock options remaining exercisable for a period of two (2) years after the termination date (but not beyond the expiration of their respective maximum terms). In the event of Mr. Aldrich’s death or disability, all outstanding stock options will vest in full and remain exercisable for a period of twelve (12) months following the termination of employment (but not beyond the expiration of their respective maximum terms). The Aldrich Agreement also contains non-compete and non-solicitation provisions applicable to Mr. Aldrich while he is employed by the Company, and for a period of twenty-four (24) months following the termination of his employment.
Change of Control / Severance Agreements with Messrs. Griffin, Kline, and Waters
In fiscal 2005, the Company entered into a Change of Control / Severance Agreement with each of Mr. Liam K. Griffin, Mr. Allan M. Kline, and Mr. Gregory L. Waters (the “COC Agreements”). Each COC Agreement sets out severance benefits that become payable if, within twelve (12) months of a change of control, the executive either (i) is involuntarily terminated without cause or (ii) terminates his employment for good reason. The severance benefits provided to the executive in such circumstances will consist of the following: (i) a severance payment equal to two (2) times his total annual compensation for the previous twelve (12) months, including salary and bonus (with the bonus to be the greater of (x) the average bonus received for the three years prior to the year in which the change of control occurs or (y) the target bonus for the year in which the change of control occurs); (ii) vesting of all outstanding stock options and any restricted stock, with such stock options remaining exercisable for a period of twenty-four (24) months after the termination date (but not beyond the expiration of their respective maximum terms); and (iii) if applicable, a gross-up payment for any excise taxes incurred under Section 4999 of the IRC. Each COC Agreement also sets out severance benefits that become payable if, while employed by the Company, but not following a change of control, the executive is involuntarily terminated without cause. The severance benefits provided to the executive under such circumstance will consist of the following: (i) a severance payment equal to the sum of (x) one and one-half (11/2) times his annual base salary and (y) any bonus then due; and (ii) all outstanding stock options will remain exercisable for a period of eighteen (18) months after the termination date (but not beyond the expiration of their respective maximum terms). In the event the executive’s death or disability, all outstanding stock options will vest and remain exercisable for a period of twelve (12) months following the termination of employment (but not beyond the expiration of their respective maximum terms). Each COC Agreement also contains non-compete and non-solicitation provisions applicable to the executive while he is employed by the Company, and for a period of twenty-four (24) months following the termination of his employment.
Change of Control / Severance Agreement with Mr. Barber
In fiscal 2005, the Company also entered into a Change of Control / Severance Agreement with Mr. Kevin D. Barber (the “Barber Agreement”). The Barber Agreement sets out severance benefits that become payable if, within twelve (12) months of a change of control, the Mr. Barber either (i) is involuntarily terminated without cause or (ii) terminates his employment for good reason. The severance benefits provided to Mr. Barber in such circumstances will consist of the following: (i) severance pay equal to two (2) times his total annual compensation for the previous twelve (12) months, including salary and bonus (with the bonus to be the greater of (x) the average bonus received for the three years prior to the year in which the change of control occurs or (y) the target bonus for the year in which the change of control occurs), with such severance to be paid, at the Company’s election, in a lump sum payment at the time of termination or pro-rata over a period of twelve (12) months following termination; (ii) vesting of all outstanding stock options and any restricted stock, with such stock options remaining exercisable for a period of twenty-four (24) months after the termination date (but not beyond the expiration of their respective maximum terms); and (iii) if applicable, gross-up payments for any excise (or other) taxes incurred under Sections 4999 and 409A of the IRC. The Barber Agreement also sets out severance benefits that become payable if, while employed by the Company, but not following a change of control, Mr. Barber is involuntarily terminated without cause. The severance benefits provided to Mr. Barber under such circumstance will consist of the following: (i) severance pay equal to the sum of (x) one and one-half (11/ 2 ) times his annual base salary and (y) any bonus then due, with such severance to be paid pro-rata over a period of twelve (12) months following his termination; and (ii) all outstanding stock options will remain exercisable for a period of eighteen (18) months after the termination date (but not beyond the expiration of their respective maximum terms). In the event of Mr. Barber’s death or disability, all outstanding stock options will vest and remain exercisable for a period of twelve (12) months following the termination of employment (but not beyond the expiration of their respective maximum terms). The Barber Agreement also contains a non-solicitation provision applicable to Mr. Barber while he is employed by the Company, and for a period of twelve (12) months following the termination of his employment.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors comprises Messrs. Beebe, Furey and McGlade. No member of this committee was at any time during the past fiscal year an officer or employee of the Company, was formerly an officer of the Company or any of its subsidiaries, or had any employment relationship with the Company or any of its subsidiaries. No such member of the Compensation Committee had any relationship with us requiring disclosure under Item 404 of Regulation S-K under the Exchange Act. No executive officer of Skyworks has served as a director or member of the compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a director of or member of the Compensation Committee of Skyworks.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
To the Company’s knowledge, the following table sets forth the beneficial ownership of the Company’s common stock as of November 15, 2005, by the following individuals or entities: (i) each person who beneficially owns 5% or more of the outstanding shares of the Company’s common stock as of November 15, 2005; (ii) the Named Executives (as defined hereinThe information to be included under the heading “Compensationcaptions “Security Ownership of Executive Officers”); (iii) each directorCertain Beneficial Owners and nominee for director;Management” and (iv) all current executive officers and directors of the Company, as a group.
Beneficial ownership is determined“Equity Compensation Plan Information” in accordance with the rules of the SEC, is not necessarily indicative of beneficial ownership for any other purpose, and does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. As of November 15, 2005, there were 159,118,403 shares of Skyworks common stock issued and outstanding.
In computing the number of shares of Company common stock beneficially owned by a person and the percentage ownership of that person, shares of Company common stock that are subject to stock options or other rights held by that person that are currently exercisable or that will become exercisable within 60 days of November 15, 2005, are deemed outstanding. These shares are not, however, deemed outstandingour definitive proxy statement for the purpose2009 Annual Meeting of computing the percentage ownership of any other person.
| | | | | | | | | |
| | | Number of Shares | | |
| Names and Addresses of Beneficial Owners(1) | | Beneficially Owned(2) | | Percent of Class |
| Delaware Management Holdings(3) | | | 10,659,803 | | | | 6.70 | % |
| David J. Aldrich | | | 1,717,935 | (4) | | | 1.10 | % |
| Kevin D. Barber | | | 381,766 | (4) | | | (* | ) |
| Kevin L. Beebe | | | 15,000 | | | | (* | ) |
| Moiz M. Beguwala | | | 391,043 | (5) | | | (* | ) |
| Dwight W. Decker | | | 1,504,290 | (5) | | | 1.00 | % |
| Timothy R. Furey | | | 150,000 | | | | (* | ) |
| Liam K. Griffin | | | 383,545 | (4) | | | (* | ) |
| Balakrishnan S. Iyer | | | 423,287 | | | | (* | ) |
| Allan M. Kline | | | 210,615 | (4)(6) | | | (* | ) |
| Thomas C. Leonard | | | 122,736 | | | | (* | ) |
| David P. McGlade | | | 0 | | | | (* | ) |
| David J. McLachlan | | | 107,600 | | | | (* | ) |
| Gregory L. Waters | | | 313,151 | (4) | | | (* | ) |
| All directors and executive officers as a group (16 persons) | | | 6,203,295 | (4)(5)(6) | | | 3.90 | % |
| | |
* | | Less than 1% |
|
(1) | | Unless otherwise noted, each person’s address is the address of the Company’s principal executive offices at Skyworks Solutions, Inc., 20 Sylvan Road, Woburn, MA 01801 and stockholders have sole voting and investment power with respect to shares, except to the extent such power may be shared by a spouse or otherwise subject to applicable community property laws. The address of Delaware Management Holdings, as set forth on Schedule 13G filed by Delaware Management Holdings with the SEC on February 9, 2005, is 2005 Market Street, Philadelphia, Pennsylvania 19103. |
|
(2) | | Includes the number of shares of Company common stock subject to stock options held by that person that are currently exercisable or will become exercisable within sixty (60) days of November 15, 2005 (the “Current Options”), as follows: Aldrich — 1,432,564 shares under Current Options; Barber — 328,697 shares under Current Options; Beebe — 15,000 shares under Current Options; Beguwala — 379,010 shares under Current Options; Decker — 1,452,960 shares under Current Options; Furey — 150,000 shares under Current Options; Griffin — 313,633 shares under Current Options; Iyer — 417,205 shares under Current Options; Kline — 156,133 shares under Current Options; Leonard — 75,000 shares under Current Options; McLachlan — 105,000 shares under Current Options; Waters — 228,633 shares under Current Options; directors and executive officers as a group (16 persons) — 5,431,209 shares under Current Options. |
|
(3) | | Consists of shares beneficially owned by Delaware Management Holdings, Inc., a registered investment advisor wholly-owned by Delaware Management Business Trust. Delaware Management Business Trust is a wholly-owned subsidiary of Lincoln National Corp. Delaware Management Holdings, Inc. may be deemed to share beneficial ownership with the various Delaware Investments Family of Funds. Of the shares beneficially owned, Delaware Management Holdings, Inc. and Delaware Management Business Trust (through its ownership Delaware Management Holdings, Inc.) have sole voting power with respect to 10,610,883 shares, sole disposition power with respect to 10,653,903 shares, and shared disposition |
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power with respect to 5,900 shares. With respect to the information relating to the affiliated Delaware Management Holdings entities, the Company has relied on information suppliedStockholders is incorporated by such entities on a Schedule 13G filed with the SEC on February 9, 2005.
(4) | | Includes shares held in the Company’s 401(k) savings plan. |
(5) | | Includes shares held in savings plan(s) of Conexant Systems, Inc., and/or Rockwell Automation, Inc., resulting from the distribution of Skyworks’ shares for shares of Conexant Systems, Inc. held in those plans in connection with the merger of the wireless communications business of Conexant Systems, Inc. with Alpha Industries, Inc. on June 25, 2002. |
(6) | | Includes 250 shares of Company common stock held in trust for the benefit of other persons, as to all of which Mr. Kline disclaims beneficial ownership. |
EQUITY COMPENSATION PLAN INFORMATION
The Company maintains 10 equity compensation plans under which our equity securities are authorized for issuance to our employees and/or directors:
- | | the 1986 Long-Term Incentive Plan, |
|
- | | the 1994 Non-Qualified Stock Option Plan |
|
- | | the 1996 Long-Term Incentive Plan |
|
- | | the Directors’ 1997 Non-Qualified Stock Option Plan |
|
- | | the 1999 Employee Long-Term Incentive Plan |
|
- | | the Directors’ 2001 Stock Option Plan |
|
- | | the Non-Qualified Employee Stock Purchase Plan |
|
- | | the 2002 Employee Stock Purchase Plan |
|
- | | the Washington Sub, Inc. 2002 Stock Option Plan and |
|
- | | the 2005 Long-Term Incentive Plan. |
Except for the 1999 Employee Long-Term Incentive Plan, the Washington Sub, Inc. 2002 Stock Option Plan and the Non-Qualified Employee Stock Purchase Plan, each of the foregoing equity compensation plans was approved by our stockholders.
A description of the material features of each such plan is provided below under the headings “1999 Employee Long-Term Incentive Plan”, “Washington Sub, Inc. 2002 Stock Option Plan” and “Non-Qualified Employee Stock Purchase Plan”.
The following table presents information about these plans as of September 30, 2005.
| | | | | | | | | | | | | |
| | | | | | | | | | | Number of Securities |
| | | | | | | | | | | Remaining Available for |
| | | Number of Securities | | Weighted-Average | | Future Issuance Under |
| | | to be Issued Upon | | Exercise Price of | | Equity Compensation |
| | | Exercise of Outstanding | | Outstanding | | Plans (Excluding |
| | | Options, Warrants, | | Options, Warrants | | Securities Reflected |
| Plan Category | | and Rights | | and Rights | | in Column (a)) |
| | | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders | | | 9,119,911 | | | $ | 15.16 | | | | 5,172,699 | (1) |
| Equity compensation plans not approved by security holders | | | 22,457,595 | | | $ | 12.11 | | | | 3,242,660 | (2) |
| Total | | | 31,577,506 | (3) | | $ | 12.99 | | | | 8,415,359 | |
| | |
(1) | | No further grants will be made under the 1986 Long-Term Incentive Plan, the 1994 Non-Qualified Stock Option Plan and the Directors’ 1997 Non-Qualified Stock Option Plan. |
|
(2) | | No further grants may be made under the Washington Sub Inc. 2002 Stock Option Plan. |
|
(3) | | Includes 8,602,253 options held by non-employees (excluding directors). |
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1999 EMPLOYEE LONG-TERM INCENTIVE PLAN
The Company’s 1999 Employee Long-term Incentive Plan (the “1999 Employee Plan”) provides for the grant of non-qualified stock options to purchase shares of the Company’s common stock to employees, other than officers and non-employee directors. The term of these options may not exceed 10 years. The 1999 Employee Plan contains provisions, which permit restrictions on vesting or transferability, as well as continued exercisability upon a participant’s termination of employment with the Company, of options granted thereunder. The 1999 Employee Plan provides for full acceleration of the vesting of options granted thereunder upon a “change in control” of the Company, as defined in the 1999 Employee Plan. The Board of Directors generally may amend, suspend or terminate the 1999 Employee Plan in whole or in part at any time; provided that any amendment which affects outstanding options be consented to by the holder of the options.
WASHINGTON SUB, INC. 2002 STOCK OPTION PLAN
The Washington Sub, Inc. 2002 Stock Option Plan (the “Washington Sub Plan”) became effective on June 25, 2002, in connection with the Merger. At the time of the spin-off of Conexant’s wireless business, outstanding Conexant options granted pursuant to certain Conexant stock incentive plans were converted so that following the spin-off and Merger each holder of those certain Conexant options held (i) options to purchase shares of Conexant common stock and (ii) options to purchase shares of Skyworks common stock. The purpose of the Washington Sub Plan is to provide a means for the Company to perform its obligations with respect to these converted stock options. The only participants in the Washington Sub Plan are those persons who, at the time of the Merger, held outstanding options granted pursuant to certain Conexant stock option plans. No further options to purchase shares of Skyworks common stock will be granted under the Washington Sub Plan. The Washington Sub Plan contains a number of sub-plans, which contain terms and conditions that are applicable to certain portions of the options subject to the Washington Sub Plan, depending upon the Conexant stock option plan from which the Skyworks options granted under the Washington Sub Plan were derived. The outstanding options under the Washington Sub Plan generally have the same terms and conditions as the original Conexant options from which they are derived. Most of the sub-plans of the Washington Sub Plan contain provisions related to the effect of a participant’s termination of employment with the Company, if any, and/or with Conexant on options granted pursuant to such sub-plan. Several of the sub-plans under the Washington Sub Plan contain specific provisions related to a change in control of the Company.
NON-QUALIFIED ESPP
The Company also maintains a Non-Qualified Employee Stock Purchase Plan to provide employees of the Company and participating subsidiaries with an opportunity to acquire a proprietary interest in the Company through the purchase, by means of payroll deductions, of shares of the Company’s common stock at a discount from the market price of the common stock at the time of purchase. The Non-Qualified Employee Stock Purchase Plan is intended for use primarily by employees of the Company located outside the United States. Under the plan, eligible employees may purchase common stock through payroll deductions of up to 10% of compensation. The price per share is the lower of 85% of the market price at the beginning or end of each six-month offering period.reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
None.The information to be included under the captions “Certain Relationships and Related Transactions” and “Corporate Governance-Director Independence” in our definitive proxy statement for the 2009 Annual Meeting of Stockholders is incorporated herein by reference.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
AUDIT FEES
KPMG LLP provided audit services to the Company consisting of the annual audit of the Company’s 2005 consolidated financial statements contained in the Company’s Annual Report on Form 10-K and reviews of the financial statements contained in the Company’s Quarterly Reports on Form 10-Q for fiscal year 2005.
| | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | | | | Fiscal Year | | | | |
| Fee Category | | 2005 | | | % of Total | | | 2004 | | | % of Total | |
| Audit Fees-Financial Statement Audit | | $ | 615,900 | | | | 47 | % | | $ | 579,000 | | | | 87 | % |
| Audit Fees-Section 404 of Sarbanes-Oxley | | | 684,500 | | | | 52 | % | | | — | | | | 0 | % |
| | | | | | | | | | | | | |
| Total Audit Fees (1) | | $ | 1,300,400 | | | | 99 | % | | $ | 579,000 | | | | 87 | % |
| Audit-Related Fees(2) | | | 15,250 | | | | 1 | % | | | 21,220 | | | | 3 | % |
| Tax Fees(3) | | | — | | | | 0 | % | | | 65,000 | | | | 10 | % |
| All Other Fees (4) | | | 3,000 | | | | 0 | % | | | 1,350 | | | | 0 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total Fees | | $ | 1,318,650 | | | | 100 | % | | $ | 666,570 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
In 2003, the Audit Committee adopted a formal policy concerning approval of audit and non-audit servicesThe information to be provided toincluded under the Companycaption “Ratification of Independent Registered Public Accounting Firm-Audit Fees” in our definitive proxy statement for the 2009 Annual Meeting of Stockholders is incorporated herein by its independent auditor, KPMG LLP. The policy requires that all services to be provided by KPMG LLP, including audit services and permitted audit-related and non-audit services, must be pre-approved by the Audit Committee. The Audit Committee pre-approved all audit and non-audit services provided by KPMG LLP during fiscal 2005 and fiscal 2004.reference.
| | |
(1) | | Audit fees consist of fees for the audit of our financial statements, the review of the interim financial statements included in our quarterly reports on Form 10-Q, and other professional services provided in connection with statutory and regulatory filings or engagements. In 2005 audit fees also included fees for services incurred in connection with rendering an opinion under Section 404 of the Sarbanes Oxley Act. |
|
(2) | | Audit related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit and the review of our financial statements and which are not reported under “Audit Fees”. These services relate to the employee benefit audit, registration statement filings for financing activities and consultations concerning financial accounting and reporting standards. |
|
(3) | | Tax fees consist of fees for tax compliance, tax advice and tax planning services. Tax compliance services, which relate to preparation or review of original and amended tax returns, claims for refunds and tax payment-planning services, accounted for $0 and $65,000 of the total tax fees for fiscal year 2005 and 2004, respectively. Tax advice and tax planning services relate to assistance with tax audits. |
|
(4) | | All other fees for fiscal year 2005 and 2004 consist of licenses for accounting research software. |
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following are filed as part of this Annual Report on Form 10-K:
| | | | | |
1. | | Index to Financial Statements | | Page number in this report |
| 1. Index to Financial Statements | | |
| Report of Independent Registered Public Accounting Firm | | Page 38 |
Consolidated Balance Sheets at September 30, 2005 and 2004 | | Page 3948 |
Consolidated Statements of Operations for the Years Ended October 3, 2008, September 30, 2005, 200428, 2007, and 2003September 29, 2006 | | Page 4049 |
Consolidated Statements of Stockholders’ EquityBalance Sheets at October 3, 2008 and Comprehensive Loss For the Years Ended September 30, 2005, 2004 and 200328, 2007 | | Page 4150 |
Consolidated Statements of Cash Flows for the Years Ended October 3, 2008, September 30, 2005, 200428, 2007, and 2003September 29, 2006 | | Page 4251 |
| Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Years Ended October 3, 2008, September 28, 2007, and September 29, 2006 | | Page 52 |
| Notes to Consolidated Financial Statements | | Pages 4353 through 6579 |
|
| | | | | Page number in this report |
| 2. | | The schedule listed below is filed as part of this Annual Report on Form 10-K: | | Page number in this report |
| | | | |
| | Schedule II-Valuation and Qualifying Accounts | | Page 8385 |
All other required schedule information is included in the Notes to Consolidated Financial Statements or is omitted because it is either not required or not applicable.
| 3. | | The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as a part of this Annual Report on Form 10-K. |
| (b) | | Exhibits |
|
| | The exhibits required by Item 601 of Regulation S-K are filed herewith and incorporated by reference herein. The response to this portion of Item 15 is submitted under Item 15 (a) (3). |
The exhibits required by Item 601 of Regulation S-K are filed herewith and incorporated by reference herein. The response to this portion of Item 15 is submitted under Item 15 (a) (3).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:December 14, 20052, 2008
SKYWORKS SOLUTIONS, INC.
Registrant
| | | | | | |
| | By: | | /s/ DAVID J. ALDRICH | | |
| | | | | |
| | SKYWORKS SOLUTIONS, INC.
Registrant | |
|
| | DavidBy: | /s/ DAVID J. Aldrich | ALDRICH | |
| | | | | Chief Executive Officer | David J. Aldrich | |
| | | Chief Executive Officer
President
Director | | President | | |
83
81
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 14, 2005.
| | | | |
| Signature and Title |
| |
/s/ DWIGHT W. DECKERDwight W. Decker |
Chairman of the Board |
| |
/s/ DAVID J. ALDRICHDavid J. Aldrich |
Chief Executive Officer
President and Director (principal
executive officer) |
| |
/s/ ALLAN M. KLINEAllan M. Kline |
Chief Financial Officer Director
Vice President (principal accounting and
financial officer) |
| |
Signature and Title |
|
/s/ KEVIN L. BEEBEKevin L. Beebe |
Director |
|
/s/ MOIZ M. BEGUWALAMoiz M. Beguwala |
Director |
|
/s/ TIMOTHY R. FUREYTimothy R. Furey |
Director |
|
/s/ BALAKRISHNAN S. IYERBalakrishnan S. Iyer |
Director |
|
/s/ THOMAS C. LEONARDThomas C. Leonard |
Director |
|
/s/ DAVID P. MCGLADEDavid P. McGlade |
Director |
| |
/s/ DAVID J. MCLACHLAN David J. McLachlan | | | | |
| Chairman of the Board | | | | |
| | | | |
/s/ DAVID J. ALDRICHDavid J. Aldrich | | | | |
| Chief Executive Officer | | | | |
| President and Director (principal | | | | |
| executive officer) | | | | |
| | | | |
/s/ DONALD W. PALETTEDonald W. Palette | | | | |
| Chief Financial Officer | | | | |
| Vice President (principal accounting and | | | | |
| financial officer) | | | | |
| | | | |
/s/ KEVIN L. BEEBEKevin L. Beebe | | | | |
| Director | | | | |
| | | | |
/s/ MOIZ M. BEGUWALAMoiz M. Beguwala | | | | |
| Director | | | | |
| | | | |
/s/ TIMOTHY R. FUREYTimothy R. Furey | | | | |
| Director | | | | |
| | | | |
/s/ BALAKRISHNAN S. IYERBalakrishnan S. Iyer | | | | |
| Director | | | | |
| | | | |
/s/ THOMAS C. LEONARDThomas C. Leonard | | | | |
| Director | | | | |
| | | | |
/s/ DAVID P. MCGLADEDavid P. McGlade | | | | |
| Director | | | | |
| | | | |
/s/ ROBERT A. SCHRIESHEIMRobert A. Schriesheim | | | | |
| Director | | | | |
84
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Changed to | | | | | Charged to | | |
| | | Cost and | | Ending | | | Beginning | | Cost and | | Ending |
| Description | | Beginning Balance | | Expenses | | Deductions | | Misc. | | Balance | | | Balance | | Expenses | | Deductions | | Misc. | | Balance |
| Year Ended September 30, 2003 | | |
| Year Ended September 29, 2006 | | |
| Allowance for doubtful accounts | | $ | 1,324 | | $ | 1,156 | | $ | (501 | ) | | $ | — | | $ | 1,979 | | | $ | 5,815 | | $ | 35,959 | | $ | (4,752 | ) | | $ | — | | $ | 37,022 | |
| Reserve for sales returns | | $ | 8,516 | | $ | 3,624 | | $ | (7,131 | ) | | $ | — | | $ | 5,009 | | | $ | 3,059 | | $ | 4,867 | | $ | (3,803 | ) | | $ | (19 | ) | | $ | 4,104 | |
| Allowance for excess and obsolete inventories | | $ | 20,618 | | $ | 9,577 | | $ | (4,890 | ) | | $ | — | | $ | 25,305 | | | $ | 11,979 | | $ | 23,154 | | $ | (7,428 | ) | | $ | — | | $ | 27,705 | |
| | | |
| Year Ended September 30, 2004 | | |
| Year Ended September 28, 2007 | | |
| Allowance for doubtful accounts | | $ | 1,979 | | $ | 377 | | $ | (369 | ) | | $ | — | | $ | 1,987 | | | $ | 37,022 | | $ | 2,623 | | $ | (37,983 | ) | | $ | — | | $ | 1,662 | |
| Reserve for sales returns | | $ | 5,009 | | $ | 9,200 | | $ | (9,300 | ) | | $ | — | | $ | 4,909 | | | $ | 4,104 | | $ | 2,271 | | $ | (3,893 | ) | | $ | — | | $ | 2,482 | |
| Allowance for excess and obsolete inventories | | $ | 25,305 | | $ | 535 | | $ | (12,105 | ) | | $ | — | | $ | 13,735 | | | $ | 27,705 | | $ | 8,641 | | $ | (20,189 | ) | | $ | — | | $ | 16,157 | |
| | | |
| Year Ended September 30, 2005 | | |
| Year Ended October 3, 2008 | | |
| Allowance for doubtful accounts | | $ | 1,987 | | $ | 5,127 | | $ | (1,299 | ) | | $ | — | | $ | 5,815 | | | $ | 1,662 | | $ | 2,258 | | $ | (2,872 | ) | | $ | — | | $ | 1,048 | |
| Reserve for sales returns | | $ | 4,909 | | $ | 4,986 | | $ | (6,884 | ) | | $ | 48 | | $ | 3,059 | | | $ | 2,482 | | $ | 1,926 | | $ | (2,273 | ) | | $ | — | | $ | 2,135 | |
| Allowance for excess and obsolete inventories | | $ | 13,735 | | $ | 11,482 | | $ | (13,238 | ) | | $ | — | | $ | 11,979 | | | $ | 16,157 | | $ | 4,515 | | $ | (12,843 | ) | | $ | — | | $ | 7,829 | |
8385
EXHIBIT INDEX
| | | | | | | | | | | | | | | |
| | | | | | | | | |
| Exhibit | | | | | | Incorporated by Reference | | Filed |
| Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Herewith |
2.A | | Agreement and Plan of Reorganization, dated as of December 16, 2001, as amended as of April 12, 2002, by and among the Company, Washington Sub, Inc. and Conexant Systems, Inc. | | S-4 | | 333-83768 | | | 2.1 | | | 5/10/2002 | | |
| | | | | | | | | | | | | | |
2.B | | Contribution and Distribution Agreement, dated as of December 16, 2001, as amended as of June 25, 2002, by and between Washington Sub, Inc. the Company and Conexant Systems, Inc. | | 8-K | | 001-5560 | | | 2.2 | | | 6/28/2002 | | |
| | | | | | | | | | | | | | |
2.C | | Mexican Stock Purchase Agreement, dated as of June 25, 2002, by and between the Company and Conexant Systems, Inc. | | 8-K | | 001-5560 | | | 2.3 | | | 6/28/2002 | | |
| | | | | | | | | | | | | | |
2.D | | Amended and Restated Mexican Asset Purchase Agreement, dated as of June 25, 2002, by and between the Company and Conexant Systems, Inc. | | 8-K | | 001-5560 | | | 2.4 | | | 6/28/2002 | | |
| | | | | | | | | | | | | | |
2.E | | U.S. Asset Purchase Agreement, dated as of December 16, 2001 by and between the Company and Conexant Systems, Inc. | | 8-K | | 001-5560 | | | 2.5 | | | 6/28/2002 | | |
| | | | | | | | | | | | | | |
| 3.A | | Amended and Restated Certificate of Incorporation | | 10-K | | 001-5560 | | | 3.A | | | 12/23/2002 | | |
| | | | | | | | | | | | | | | |
| 3.B | | Second Amended and Restated By-laws | | 10-K | | 001-5560 | | | 10.23.B | | | 12/23/2002 | | |
| | | | | | | | | | | | | | | |
| 4.A | | Specimen Certificate of Common Stock | | S-3 | | 333-92394 | | | 4 | | | 7/15/2002 | | |
| | | | | | | | | | | | | | | |
| 4.B | | FormIndenture dated as of 4.75% Convertible Subordinated Note ofMarch 2, 2007 between the CompanyRegistrant and U.S. Bank National Association, as Trustee | | 10-K8-K | | 001-5560 | | | 4.D4.1 | | | 12/23/2002 | | |
| | | | | | | | | | | | | | |
4.C | | Indenture, dated as of November 20, 2002, by and between the Company and Wachovia Bank, N.A. (as Trustee) | | 10-K | | 001-5560 | | | 4.E | | | 12/23/2002 | | |
| | | | | | | | | | | | | | |
4.D | | First Supplemental Indenture dated as of January 15, 2003 between Skyworks Solutions, Inc. and Wachovia Bank, N.A. (as Trustee) | | S-3 | | 001-5560 | | | 4.03 | | | 1/16/20033/5/2007 | | |
| | | | | | | | | | | | | | | |
| 10.A* | | Skyworks Solutions, Inc., 1986 Long-Term IncentiveCompensation Plan dated September 24, 1990; amended March 28, 1991; and as further amended October 27, 1994 | | 10-K | | 001-5560 | | | 10.B | | | 12/14/2005 | | | | | | X |
| | | | | | | | | | | | | | | |
| 10.B* | | Skyworks Solutions, Inc., Long-Term Compensation Plan dated September 24, 1990; amended March 28, 1991; and as further amended October 27, 1994 | | | | | | | | | | | | X |
| | | | | | | | | | | | | | |
10.C* | | Skyworks Solutions, Inc. 1994 Non-Qualified Stock Option Plan for Non-Employee Directors | | 10-K | | 001-5560 | | | 10.C | | | | | | | X |
| | | | | | | | | | | | | | |
10.D* | | Skyworks Solutions, Inc. Executive Compensation Plan dated January 1, 1995 and Trust for the Skyworks Solutions, Inc. Executive Compensation Plan dated January 3, 1995 | | | | | | | | | | | | X |
| | | | | | | | | | | | 12/14/2005 | | |
8486
| | | | | | | | | | | | | | | |
| | | | | | | | | |
| Exhibit | | | | | | Incorporated by Reference | | Filed |
| Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Herewith |
10.E* | | Skyworks Solutions, Inc. 1997 Non-Qualified Stock Option Plan for Non-Employee Directors | | | | | | | | | | | | X |
| | | | | | | | | | | | | | | |
10.F*10.C* | | Skyworks Solutions, Inc. 1996 Long-Term IncentiveExecutive Compensation Plan dated January 1, 1995 and Trust for the Skyworks Solutions, Inc. Executive Compensation Plan dated January 3, 1995 | | 10-K | | 001-5560 | | | 10.M10.D | | | 6/29/200112/14/2005 | | |
| | | | | | | | | | | | | | | |
10.G*10.D* | | Skyworks Solutions, Inc. Directors’ 20011997 Non-Qualified Stock Option Plan for Non-Employee Directors | | 10-Q10-K | | 001-5560 | | | 10.N10.E | | | 11/12/14/20012005 | | |
| | | | | | | | | | | | | | | |
10.H*10.E* | | Skyworks Solutions, Inc. 1996 Long-Term Incentive Plan | | 10-K | | 001-5560 | | | 10.F | | | 12/13/2006 | | |
| | | | | | | | | | | | | | |
| 10.F* | | Skyworks Solutions, Inc. 1999 Employee Long-Term Incentive Plan | | 10-K | | 001-5560 | | | 10.L | | | 12/23/2002 | | |
| | | | | | | | | | | | | | | |
10.I*10.G* | | Washington Sub Inc., 2002 Stock Option Plan | | S-3 | | 333-92394 | | | 99.A | | | 7/15/2002 | | |
| | | | | | | | | | | | | | | |
10.J*10.H* | | Skyworks Solutions, Inc. Non-Qualified Employee Stock Purchase Plan | | 10-K10-Q | | 001-5560 | | | 10.N10.H | | | 12/23/20025/7/2008 | | |
| | | | | | | | | | | | | | | |
10.K10.I* | | Form of Shareholders Agreement, dated as of December 16, 2001, entered into between each of the directors and certain executive officers of the Company as of the date thereof and Conexant Systems,Skyworks Solutions Inc. 2002 Qualified Employee Stock Purchase Plan (as amended 1/31/2006) | | S-410-Q | | 333-83768001-5560 | | | 1010.L | | | 5/3/20022/07/2007 | | |
| | | | | | | | | | | | | | | |
10.L | | Registration Rights Agreement, dated as of November 12, 2002, by and among the Company and Credit Suisse First Boston (as representative for the several purchasers) | | 10-K | | 001-5560 | | 10.AA | | 12/23/2002 | | |
| | | | | | | | | | | | | | |
10.M* | | 2002 Skyworks Solutions, Inc. Employee Stock Purchase Plan | | 10-K | | 001-5560 | | 10.CC | | 12/23/2002 | | |
| | | | | | | | | | | | | | |
10.N10.J | | Credit and Security Agreement, dated as of July 15, 2003, by and between Skyworks USA, Inc. and Wachovia Bank, N.A. | | 10-Q | | 001-5560 | | | 10.A | | | 8/11/2003 | | |
| | | | | | | | | | | | | | | |
10.O10.K | | Servicing Agreement, dated as of July 15, 2003, by and between the Company and Skyworks USA, Inc. | | 10-Q | | 001-5560 | | | 10.B | | | 8/11/2003 | | |
| | | | | | | | | | | | | | | |
10.P10.L | | Receivables Purchase Agreement, dated as of July 15, 2003, by and between Skyworks USA, Inc. and the Company.Company | | 10-Q | | 001-5560 | | | 10.C | | | 8/11/2003 | | |
| | | | | | | | | | | | | | | |
10.Q | | Terms Agreement, dated as of September 9, 2003, by and among the Company and Credit Suisse First Boston. | | 8-K | | 001-5560 | | | 1.1 | | | 9/10/2003 | | |
| | | | | | | | | | | | | | |
10.R*10.M* | | Form of Notice of Grant of Stock Option forunder the Company’s 1996 Long-Term Incentive Plan | | 8-K | | 001-5560 | | | 10.1 | | | 11/17/2004 | | |
| | | | | | | | | | | | | | | |
10.S* | | Fiscal 2006 Executive Incentive Compensation Plan | | | | | | | | | | | | X |
| | | | | | | | | | | | | | |
10.T*10.N* | | Skyworks Solutions, Inc. 2005 Long-Term Incentive Plan (as amended 1/31/2006) | | 8-K10-Q | | 001-556001-5560 | | | 10.110.S | | | 5/04/20052/07/2007 | | |
| | | | | | | | | | | | | | | |
10.U*10.O* | | Skyworks Solutions, Inc. Directors’ 2001 Stock Option Plan | | 8-K | | 001-556001-5560 | | | 10.2 | | | 5/04/2005 | | |
| | | | | | | | | | | | | | |
10.V* | | Form of Notice of Grant of Stock Option for the Company’s 2001 Directors Plan | | 8-K | | 001-556 | | | 10.3 | | | 5/04/2005 | | |
| | | | | | | | | | | | | | |
10.W* | | Form of Notice of Stock Option Agreement under the Company’s 2005 Long-Term Incentive Plan | | 10-Q | | 001-5560 | | | 10.A | | | 5/11/2005 | | |
8587
| | | | | | | | | | | | | | | |
| | | | | | | | | |
| Exhibit | | | | | | Incorporated by Reference | | Filed |
| Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Herewith |
10.X* | | | | | | | | | | | | | | |
| 10.P* | | Form of Notice of Grant of Stock Option under the Company’s 2001 Directors’ Plan | | 8-K | | 001-5560 | | | 10.3 | | | 5/04/2005 | | |
| | | | | | | | | | | | | | |
| 10.Q* | | Form of Notice of Stock Option Agreement under the Company’s 2005 Long-Term Incentive Plan | | 10-Q | | 001-5560 | | | 10.A | | | 5/11/2005 | | |
| | | | | | | | | | | | | | |
| 10.R* | | Form of Notice of Restricted Stock Agreement under the Company’s 2005 Long-Term Incentive Plan | | 10-Q | | 001-5560 | | | 10.B | | | 5/11/2005 | | |
| | | | | | | | | | | | | | | |
10.Y*10.S* | | SeveranceAmended and Restated Change in ControlControl/Severance Agreement, dated May 31, 2005,January 22, 2008, between the Company and David J. Aldrich | | 10-Q | | 001-5560 | | | 10.W | | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
| 10.T* | | Change in Control/Severance Agreement, dated January 22, 2008, between the Company and Liam K. Griffin | | 10-Q | | 001-5560 | | | 10.X | | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
| 10.U* | | Change in Control/Severance Agreement, dated January 22, 2008, between the Company and George M. LeVan | | 10-Q | | 001-5560 | | 10.AA | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
| 10.V* | | Change in Control/Severance Agreement, dated January 22, 2008, between the Company and Gregory L. Waters | | 10-Q | | 001-5560 | | 10.BB | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
| 10.W* | | Change in Control/Severance Agreement, dated January 22, 2008, between the Company and Mark V. B. Tremallo | | 10-Q | | 001-5560 | | 10.DD | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
| 10.X* | | Form of Restricted Stock Agreement under the Company’s 2005 Long-Term Incentive Plan | | 8-K | | 001-5560 | | | 10.1 | | | 5/31/11/15/2005 | | |
| | | | | | | | | | | | | | | |
10.Z*10.Y* | | Severance and Change in ControlSkyworks Solutions In. Cash Compensation Plan for Directors | | 10-Q | | 001-5560 | | 10.HH | | 8/8/2007 | | |
| | | | | | | | | | | | | | |
| 10.Z | | Registration Rights Agreement dated March 2, 2007 between the CompanyRegistrant and Liam K. GriffinCredit Suisse Securities (USA) LLC | | 8-K | | 001-5560 | | | 10.210.HH | | | 3/5/31/20052007 | | |
| | | | | | | | | | | | | | | |
| 10.AA* | | Severance and Change in ControlControl/Severance Agreement, dated January 22, 2008, between the Company and Allan M. KlineDonald W. Palette | | 8-K10-Q | | 001-5560 | | | 10.3 | 10.II | | 5/31/20057/2008 | | |
| | | | | | | | | | | | | | | |
10.BB*10.BB | | Severance and Change in ControlForm of Performance Share Agreement, between Under
the Company and George M. LeVan2005 Long-Term Incentive Plan | | 8-K10-Q | | 001-5560 | | | 10.410.JJ | | | 5/31/20052/6/2008 | | |
| | | | | | | | | | | | | | | |
10.CC*10.CC | | Severance and Change in ControlControl/Severance Agreement, dated January 22, 2008, between the Company and Gregory L. WatersBruce Freyman | | 8-K10-Q | | 001-5560 | | | 10.5 | 10.KK | | 5/31/20057/2008 | | |
| | | | | | | | | | | | | | | |
10.DD*10.DD | | Severance and Change in ControlControl/Severance Agreement, dated January 22, 2008, between the Company and Kevin D. BarberStan Swearingen | | 8-K10-Q | | 001-5560 | | | 10.6 | 10-LL | | 5/31/20057/2008 | | |
| | | | | | | | | | | | | | | |
10.EE*10.EE | | Severance and Change in Control Agreement between the Company and Mark V. B. Tremallo2008 Director Long-Term Incentive Plan | | 8-K10-Q | | 001-5560 | | 10-MM | 10.7 | 5/7/2008 | | |
88
| | | | | | | | | | | | | | |
| Exhibit | | | | | | Incorporated by Reference | | Filed |
| Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Herewith |
| | | | | | | | | | | | | | |
| 10.FF | | Form of Restricted Stock Agreement under the Company’s
2008 Director Long-Term Incentive Plan | | 10-Q | | 001-5560 | | 10-NN | | 5/31/20057/2008 | | |
| | | | | | | | | | | | | | | |
10.FF*10.GG | | Form of Nonstatutory Stock Option Agreement
under the the Company’s 2008 Director Long-Term
Incentive Plan | | 10-Q | | 001-5560 | | 10-OO | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
| 10.HH | | Skyworks Solutions, Inc. Restricted2002 Employee Stock Agreement Granted Under 2005 Long-Term IncentivePurchase Plan | | 8-K10-Q | | 001-5560 | | | 10.110-PP | | | 11/15/20055/7/2008 | | |
| | | | | | | | | | | | | | | |
| 11 | | Statement regarding calculation of per share earnings [see Note 2 to the Consolidated Financial Statements] | | | | | | | | | | | | X |
| | | | | | | | | | | | | | | |
| 12 | | Computation of RatiosRatio of Earnings to Fixed Charges | | | | | | | | | | | | X |
| | | | | | | | | | | | | | | |
| 21 | | Subsidiaries of the Company | | | | | | | | | | | | X |
| | | | | | | | | | | | | | | |
| 23.1 | | Consent of KPMG LLP | | | | | | | | | | | | X |
| | | | | | | | | | | | | | | |
| 31.1 | | Certification of the Company’s Chief Executive Officer pursuant to Securities and Exchange Act Rules 13a- 14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002 | | | | | | | | | | | | X |
| | | | | | | | | | | | | | | |
| 31.2 | | Certification of the Company’s Chief Financial Officer pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002 | | | | | | | | | | | | X |
| | | | | | | | | | | | | | | |
| 32.1 | | Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002 | | | | | | | | | | | | X |
86
| | | | | | | | | | | | | | | |
| | | | | | | | |
Exhibit | | | | | | Incorporated by Reference | | Filed |
Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Herewith |
| 32.2 | | Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002 | | | | | | | | | | | | X |
| | |
| * | | Indicates a management contract or compensatory plan or arrangement. |
8789
