UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
Amendment No. 1
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 3, 2008 | | |
| | For the fiscal year ended October 2, 2009 |
OR
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| | For the Transition period from to |
Commission file number
001-5560
SKYWORKS SOLUTIONS, INC.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Charter)
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| Delaware | | 04-2302115 |
| (State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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| 20 Sylvan Road, Woburn, Massachusetts | | 01801 |
(Address of Principal Executive Offices) | | 01801
(Zip Code) |
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Registrant’s telephone number, including area code: |
Registrant’s telephone number, including area code: (781) 376-3000
Securities registered pursuant to Section 12(b) of the Act:
| | | |
| 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: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large acceleratedAccelerated filerþ | | Accelerated filero | | Non-accelerated filero
(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 Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter (March 28, 2008)(April 3, 2009)) was approximately $1,144,736,590.$1,467,316,160. The number of outstanding shares of the registrant’s common stock, par value, $0.25 per share as of November 21, 200816, 2009, was 165,764,093.
DOCUMENTS INCORPORATED BY REFERENCE
| | |
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 |
174,378,774.
SKYWORKS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED OCTOBER 3, 2008
TABLE OF CONTENTS
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CAUTIONARY STATEMENTEXPLANATORY NOTE
This Amendment No. 1 amends Skyworks Solutions, Inc.’s (“Skyworks” or the “Company”) Annual Report contains forward-looking statements withinon Form 10-K for 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 is 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. 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 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 uncertainties discussed elsewhere in this report and in the other documentsyear ended October 2, 2009, which was filed by us with the Securities and Exchange CommissionsCommission (“SEC”) on November 30, 2009 (the “Original Filing”). The Company is filing this Amendment No. 1 for the sole purpose of providing the information required in evaluating our forward-looking statements. We have no plans,Part III of Form 10-K, as the Company’s 2010 Annual Meeting of Stockholders is scheduled for May 11, 2010, and, undertake no obligation,accordingly, the Company’s Proxy Statement relating to revise or update our forward-looking statementssuch Annual Meeting will be filed after the date hereof. Except as described above, this Amendment No. 1 does not amend any other information set forth in the Original Filing, and the Company has not updated disclosures included therein 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 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.
Skyworks Solutions, Inc. (“Skyworks” or the “Company”) designs, manufactures and markets a broad range of high performance analog and mixed signal semiconductors 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 medical 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 plan to 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 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 Delaware corporation, was formed through the merger of the wireless business of Conexant Systems, Inc., and Alpha Industries, Inc., on June 25, 2002.
Headquartered in Woburn, Massachusetts, we have worldwide operations with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America. Our Internet address is www.skyworksinc.com. We make available on our website 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 to the SEC. The information contained in our website is not incorporated by reference in this Annual Report. 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 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 there 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 a market share consolidation underway. By virtually all analyst estimates, approximately 80 percent of the handset 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 multimedia-rich mobile platforms and the increasingly important role of multimode FEMs in the rapidly evolving wireless handset market — particularly as the industry shifts to 3G 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 soon become the majority of the more than one billion cellular phones the industry is expected to produce annually. With this accelerating trend, the complexity in the FEM increases as each new operating frequency band requires additional amplifier, filtering and switching content to support:
| • | | 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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Convergence of Multimedia in Mobile Platforms
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 tend to be the critical link between the analog and digital worlds. Precision analog technology allows for the detection, measurement, amplification and conversion of temperature, pressure and audio information into the digital realm. According to independent market research, the total available market for the analog semiconductor segment is expected to approach $45 billion in 2011. Today, this adjacent analog semiconductor market, which is characterized by longer product lifecycles and relatively high gross margins, is fragmented and diversified among various end-markets, customer bases and applications.
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Select Analog End Markets
SKYWORKS’ STRATEGY
Skyworks’ vision is to become the leading supplier of high performance analog and mixed signal semiconductors enabling mobile connectivity. Key elements in our strategy include:
Diversifying into Adjacent Linear Markets of Skyworks
By leveraging core analog, mixed signal and RF technology, Skyworks is also able to deliver solutions to broader and diverse markets that are characterized by longer product lifecycles, sustained revenue profiles and higher contribution margins than our handset business. While the addressable market for linear products is highly fragmented, it is significantly larger than the cellular handset RF industry.
Expanding Power Amplifier and Front-End Solutions Market Share
Our 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 and continued innovation, leveraging our leading–edge process and packaging technologies.
Capturing Increasing Dollar Content in Third and Fourth Generation Applications
As the industry 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 exiting the baseband business at the end of fiscal 2006, we are now effectively partnering with, rather than competing against, system-level developers. We believe these strategic relationships will enhance our competitive position as the market migrates to 3G multimode and system-on-a-chip architectures where best-in-class baseband, radio and front-end solutions are increasingly required.
Delivering Operational Excellence
Skyworks’ strategy is to vertically integrate where we can differentiate or 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
We have aligned our product portfolio around two markets: mobile platforms and linear products.
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PRODUCT OVERVIEW
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Mobile Platforms | | Linear Products |
CDMA Power Amplifiers | | Amplifiers |
GSM/GPRS/EDGE Power Amplifiers | | Attenuators |
Helios™ Radio Solutions | | Diodes |
Intera™ EDGE/WEDGE Front-End Modules | | Directional Couplers/Detectors |
TD-SCDMA Power Amplifiers | | Infrastructure RF Subsystems |
WCDMA Power Amplifiers | | Mixers/Demodulators |
WiMax Power Amplifiers and Front-End Modules | | Switches |
| | Synthesizers / PLLs |
| | Technical Ceramics |
Mobile Platforms:
| • | | Front-End Modules (FEM): power amplifiers that are integrated with switches, diplexers, filters and other components to create a single package front-end 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 |
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| • | | Helios™ Radio 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 |
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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| • | | Ceramic:material used in semiconductors which contain transition metal oxides that are II-VI semiconductors, such as zinc-oxide |
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| • | | Diodes:semiconductor devices that pass current in one direction only |
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| • | | Directional Coupler:a transmission coupling device for separately sampling the forward or backward wave in a transmission line |
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| • | | Directional Detector:intended for use in power management 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 |
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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 |
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| • | | Synthesizer:designed for tuning systems and is optimized for low-phase noise with comparison 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 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 a new program. This relationship 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 maintain 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 relationships 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 resources 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 each of the last three fiscal years, see Note 17 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 might 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 located around the world 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 years ended October 3, 2008, September 28, 2007, and September 29, 2006 were $146.0 million, $126.1 million, and $164.1 million, respectively.
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 maintain Skyworks-owned finished goods inventory at certain customer “hub” locations. We do not recognize revenue until these customers consume the Skyworks-owned inventory from these 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 have 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.
SEASONALITY
Sales of our products are subject to seasonal fluctuation and periods of increased demand in end-user consumer applications, such as mobile handsets. The highest demand for our mobile handset products generally occurs in the last calendar quarter ending in December. The lowest demand for our mobile handset products generally occurs in the first calendar quarter ending in March.
GEOGRAPHIC INFORMATION
For information regarding net revenues by geographic region for each of the last three fiscal years, see Note 17 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 October 3, 2008, we employed approximately 3,300 persons. Approximately 500 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 operate 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 business 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 the 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 business, financial condition and 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, |
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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, |
| • | | 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. |
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.
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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, |
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| • | | limiting our ability to obtain additional financing, |
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| • | | 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, |
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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 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.
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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
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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, |
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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.
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 are headquartered in Woburn, Massachusetts and have executive offices in Irvine, California. For information regarding property, plant and equipment by geographic region for each of the last two fiscal years, see Note 17 of Item 8 of this Annual Report on Form 10-K. The following table sets forth our principal 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 |
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 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 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 a party in legal proceedings in the ordinary course of 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 October 3, 2008.
26
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 Global 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 Global Select Market. The number of stockholders of record of Skyworks’ common stock as of November 24, 2008, was approximately 30,915.
| | | | | | | | | |
| | | High | | Low |
| |
Fiscal year ended October 3, 2008: | | | | | | | | |
| | | | | | | | | |
| First quarter | | $ | 9.36 | | | $ | 8.01 | |
| Second quarter | | | 9.03 | | | | 6.71 | |
| Third quarter | | | 11.20 | | | | 7.28 | |
| Fourth quarter | | | 10.85 | | | | 7.47 | |
| | | | | | | | | |
Fiscal year ended September 28, 2007: | | | | | | | | |
| | | | | | | | | |
| First quarter | | $ | 7.86 | | | $ | 5.06 | |
| Second quarter | | | 7.48 | | | | 5.67 | |
| Third quarter | | | 7.47 | | | | 5.69 | |
| Fourth quarter | | | 9.44 | | | | 6.93 | |
| |
Skyworks has not paid cash dividends on its common stock and we 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.
The following table provides information regarding repurchases of 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. |
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(2) | | Skyworks has no publicly announced plans or programs. |
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ITEM 6. SELECTED FINANCIAL DATA.
You should read the data set forth below in conjunction with Item 7,Management’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. The Company’s fiscal year ends on the Friday closest to September 30. Fiscal 2008 consisted of 53 weeks and ended on October 3, 2008, and fiscal years 2007 and 2006 each consisted of 52 weeks and ended on September 28, 2007 and September 29, 2006, respectively. The following balance sheet data and statements of operations data for the five years ended October 3, 2008 were derived from our audited consolidated financial statements. Consolidated balance sheets at October 3, 2008 and at September 28, 2007, and the related consolidated statements of operations and cash flows for each of the three years in the period ended October 3, 2008, and notes thereto appear elsewhere in this Annual Report on Form 10-K.
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| | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
| | |
(1) | | In the fourth quarter of fiscal 2006, we recorded $23.3 million of inventory charges and reserves primarily related to the exit of our baseband product area. |
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(2) | | In the fourth quarter of fiscal 2006, we recorded bad debt expense of $35.1 million. Specifically, we recorded charges related to two customers: Vitelcom Mobile and an Asian component distributor. |
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(3) | | The increase in amortization expense in fiscal 2008 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. During fiscal 2008, the base of our amortizable intangible assets increased by approximately $13.2 million. |
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| | |
(4) | | In fiscal 2008, we recorded restructuring and other special charges of $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 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. |
|
| | 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 baseband product area. |
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(5) | | In the fourth quarter of fiscal 2008, we recorded approximately $5.8 million of premium in excess of par value and $1.0 million of deferred financing costs relating to the early retirement of $62.4 million of 1.25% and 1.50% convertible subordinated notes. |
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(6) | | Fiscal 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. 123 (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 $11.5 million in cost of goods sold, research and development expense, and selling, general and administrative expense, respectively. Fiscal year ended September 28, 2007 includes share-based compensation expense of approximately $1.3 million, $5.6 million and $6.8 million in cost of goods sold, research and development 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, $6.3 million and $5.7 million in cost of goods sold, research and development expense and selling, general and administrative expense, respectively. |
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(7) | | Based 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 amount reversed consisted of $1.7 million recognized as income tax benefit, and $12.5 million recognized as a reduction to 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. 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”) designs, manufactures and markets a broad range of high performance analog and mixed signal semiconductors that enable wireless connectivity. Our power amplifiers
30
(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 medical applications.
BUSINESS FRAMEWORK
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, 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 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
The Company’s fiscal year ends on the Friday closest to September 30. Fiscal 2008 consisted of 53 weeks and ended 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 2007 and 2006 each consisted of 52 weeks and ended on September 28, 2007 and September 29, 2006, respectively.
RESULTS OF OPERATIONS
YEARS ENDED OCTOBER 3, 2008, SEPTEMBER 28, 2007, AND SEPTEMBER 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 |
| | | |
| Net revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of goods sold | | | 60.1 | | | | 61.3 | | | | 66.1 | |
| | | | | | | | | | | | | |
| Gross margin | | | 39.9 | | | | 38.7 | | | | 33.9 | |
| Operating expenses: | | | | | | | | | | | | |
| Research and development | | | 17.0 | | | | 17.0 | | | | 21.2 | |
| Selling, general and administrative | | | 11.6 | | | | 12.8 | | | | 17.6 | |
| Amortization of intangible assets | | | 0.7 | | | | 0.3 | | | | 0.3 | |
| Restructuring and special charges | | | 0.1 | | | | 0.8 | | | | 3.5 | |
| | | | | | | | | | | | | |
| Total operating expenses | | | 29.4 | | | | 30.9 | | | | 42.6 | |
| | | | | | | | | | | | | |
| Operating income (loss) | | | 10.5 | | | | 7.8 | | | | (8.7 | ) |
| Interest expense | | | (0.9 | ) | | | (1.6 | ) | | | (1.9 | ) |
| Loss on early retirement of convertible debt | | | (0.8 | ) | | | (0.1 | ) | | | — | |
| Other income, net | | | 0.7 | | | | 1.5 | | | | 1.1 | |
| | | | | | | | | | | | | |
| 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) | | | 12.9 | % | | | 7.7 | % | | | (11.5 | )% |
| | | | | | | | | | | | | |
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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. |
|
| § | | 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. |
|
| § | | 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. |
|
| § | | 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. |
|
| § | | 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. |
|
| § | | 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
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| Net revenues | | $ | 860,017 | | | | 15.9 | % | | $ | 741,744 | | | | (4.1 | )% | | $ | 773,750 | |
We market and sell our mobile platforms and linear products to top tier Original Equipment Manufacturers (“OEMs”) of communication electronic products, third-party Original 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.
Overall revenues in fiscal 2008 increased by $118.3 million, or 15.9%, from fiscal 2007. This revenue growth was principally due to the ramp of new mobile platform products, the addition of new mobile platform customers, diversification into new, adjacent markets and the 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 fiscal year ended October 3, 2008 as compared to 48.5% for the corresponding period in the prior year, reflecting continued
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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 17 of Item 8 of this Annual Report on Form 10-K.
GROSS PROFIT
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| Gross profit | | $ | 342,963 | | | | 19.3 | % | | $ | 287,385 | | | | 9.4 | % | | $ | 262,679 | |
| % of net revenues | | | 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 and equity based compensation expense) associated with product manufacturing.
Gross profit as a percentage of net revenues improved to 39.9% in fiscal year 2008, from 38.7% in fiscal year 2007, and was principally the result of a more favorable revenue mix. Additionally, gross profit margin 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 maintain 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 aggregate dollars and as a percentage of sales. In fiscal year 2008, we continued to benefit from higher contribution margins associated with the licensing and/or sale of intellectual property.
Gross profit as a percentage of net revenues improved to 38.7% in fiscal year 2007, from 33.9% in fiscal year 2006, as higher gross profit margin mobile 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 2006. 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 we experienced improved overall yields and greater equipment efficiency. Finally, we benefited from higher contribution margins received from the licensing and sale of intellectual property in fiscal year 2007 as compared to fiscal year 2006.
RESEARCH AND DEVELOPMENT
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| Research and development | | $ | 146,013 | | | | 15.8 | % | | $ | 126,075 | | | | (23.2 | )% | | $ | 164,106 | |
| % of net revenues | | | 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.
The increase in research and development expenses in aggregate dollars for fiscal year 2008 when compared to fiscal year 2007 is principally attributable to increased labor and benefit costs and increases in elot and mask expenditures and variable materials and supplies expenses as we continued to invest in new product developments in both our mobile platforms and linear product areas.
33
The decrease in research and development expenses in aggregate dollars and as a percentage of net revenues in fiscal year 2007 when compared to fiscal year 2006 is predominantly attributable to decreased labor and benefit costs as a result of the workforce reductions associated with the exit of our baseband product area at the end of fiscal 2006. In addition, efficiencies were achieved in the utilization 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 year 2007.
SELLING, GENERAL AND ADMINISTRATIVE
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 legal, accounting, treasury, human resources, information systems, customer service, bad debt expense, sales representative commissions, advertising, marketing and other costs.
Selling, 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 year 2007 as compared to fiscal year 2006 primarily due to our recording of $35.1 million in bad debt expense in the fourth quarter of fiscal 2006 as we exited our baseband product area. In addition, we incurred lower sales commissions and professional fees in fiscal 2007.
AMORTIZATION OF INTANGIBLE ASSETS
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 consisting of developed technology, customer relationships and a 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 2007 and 2006 primarily represents the amortization of these intangible assets.
For additional information regarding goodwill and intangible assets, see Note 7 of Item 8 of this Annual Report on Form 10-K.
34
RESTRUCTURING AND SPECIAL CHARGES
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 | % |
Restructuring and special charges consist of charges for asset impairments and restructuring activities, as follows:
On 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 fiscal year ended September 29, 2006, we 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.
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 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. In addition, the Company recorded an additional $0.8 million charge for a single lease obligation that expires in 2008 relating to our 2002 restructuring.
During the fourth quarter of fiscal 2008, additional restructuring charges of $0.6 million were recorded relating to lease obligations due to the closure of certain locations that formerly supported the baseband product area.
For additional information regarding restructuring charges and liability balances, see Note 15 of Item 8 of this Annual Report on Form 10-K.
INTEREST EXPENSE
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| Interest expense | | $ | 7,330 | | | | (39.0 | )% | | $ | 12,026 | | | | (18.7 | )% | | $ | 14,797 | |
| % of net revenues | | | 0.9 | % | | | | | | | 1.6 | % | | | | | | | 1.9 | % |
Interest expense is comprised principally of payments in 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 the Company’s 1.25% and 1.50% convertible subordinated notes (the “2007 Convertible Notes”).
The decrease in interest expense for the fiscal year ended October 3, 2008 as compared to fiscal 2007 in aggregate dollars and as a percentage of net revenues is due to the retirement of the remaining $49.3 million of higher interest rate Junior Notes during the first quarter of fiscal 2008 and the early retirement of $62.4 million of the Company’s 2007 Convertible Notes in the fourth quarter of fiscal 2008.
The decrease in interest expense both in aggregate dollars and as a percentage of net revenues for fiscal 2007, when compared to fiscal 2006, is primarily due to the retirement of $130.0 million of our higher interest rate Junior Notes coupled with the issuance of the substantially lower interest rate 2007 Convertible Notes in March 2007.
35
For additional information regarding our borrowing arrangements, see Note 8 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 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
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 3, | | | | | | September 28, | | | | | | September 29, |
| (dollars in thousands) | | 2008 | | Change | | 2007 | | Change | | 2006 |
| | | |
| Other income, net | | $ | 5,983 | | | | (45.0 | )% | | $ | 10,874 | | | | 30.2 | % | | $ | 8,350 | |
| % of net revenues | | | 0.7 | % | | | | | | | 1.5 | % | | | | | | | 1.1 | % |
Other income, net is comprised primarily of interest income on invested cash balances, other non-operating income and expense 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 2007 and fiscal 2006 is primarily due to an increase in interest income on invested cash balances as a result of increased interest rates and higher invested cash balances.
(BENEFIT) PROVISION FOR INCOME TAXES
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 | % |
Income 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 $(36.4) million reduction in the valuation allowance related to the partial recognition of future tax benefits on United States federal and state net operating 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. Accordingly, as of October 3, 2008, we have established a valuation allowance of $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 operating loss carryforwards, research and experimentation tax credit carryforwards, and deferred income tax temporary differences as of October 3, 2008.
No provision has been made for United States, state, or additional foreign income taxes related to approximately $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 United States federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested.
On September 29, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income 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 previously 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 Company’s unrecognized tax benefits was a benefit of $0.4 million.
Of the total unrecognized tax benefits at October 3, 2008, $0.6 million would impact the effective tax rate, if recognized. There are no positions which we anticipate could change within the next twelve months.
37
On October 1, 2007, Mexico enacted a new “flat tax” regime which became effective January 1, 2008. SFAS 109 prescribes that the effect of the new tax on deferred taxes must be included in tax expense in the period that includes the enactment date. The effect of recording deferred taxes in the first fiscal quarter of 2008 to the foreign 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 $0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
| | | | | | | | | | | | | |
| | | 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 2008
Based on our results of operations for fiscal 2008, along with current trends, 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, working capital and other cash requirements for at least the next 12 months. However, we cannot be certain that the capital required to fund these expenses will be available in the 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 sufficient capital to meet our capital needs on a timely basis and on favorable terms (if at 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.
38
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.
39
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 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.
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,
40
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.
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.events.
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 September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 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 160 to impact its results of operations or financial position because the Company does not have any minority interests.
SFAS 161
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133(“SFAS 161”).SFAS 161 amends FASB Statement No. 133 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 under Statement 133 and its 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 financial statements issued
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for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not currently hold any positions in derivative instruments or participate in hedging activities and thus does not expect the adoption of SFAS 161 to have any impact on its results of operations or financial position.
FSP No. 142-3
In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). 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. 142,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 financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption of FSP 142-3 to have any material impact on its results of operations or financial position.
FSP No. APB 14-1
In May 2008, the FASB issued FSP No. APB 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 Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,to require an additional disclosure about the current status of the payment/performance risk of 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 provisions of this FSP that amend Statement 133 and Interpretation 45 shall be effective for reporting 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 thus does not expect the adoption of FSP 133-1 and FIN 45-4 to have any impact on its results of operations or financial position.
FSP No. FAS 157-3
In October 2008, the FASB issued FSP No. FAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”) which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 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 October 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 relates principally to our investment portfolio, which as of October 3, 2008 consisted of the following (in thousands):
| | | | | |
| 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 | |
| | | | |
| | | $ | 233,354 | |
| | | | |
Our main investment objective is the preservation of investment capital. Our policy is to invest with only high-credit-quality issuers and 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. We 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 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 these investments through impairment charges recorded to earnings as appropriate, which could be material.Our short-term debt consists of borrowings under our credit facility with Wachovia Bank, N.A. of $50.0 million. Interest related to our borrowings under our credit facility with Wachovia Bank, N.A. is at LIBOR plus 0.75% and was approximately 4.7% at October 3, 2008. Consequently, we do not have significant cash flow exposure on this short-term debt.
Our 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 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 October 3, 2008, as their effect would have been anti-dilutive.Exchange Rate Risk
Substantially all sales to customers and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, thereby reducing the impact 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 U.S. dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Fluctuations in currency exchange rates could have a greater effect on our business in the future to the extent our expenses increasingly become denominated in foreign currencies.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements of the Company for the fiscal year ended October 3, 2008 are included herewith:
| | | | |
(1) | | Report of Independent Registered Public Accounting Firm | | Page 48 |
| | | | |
(2) | | Consolidated Statements of Operations for the Years Ended October 3, 2008, September 28, 2007, and September 29, 2006 | | Page 49 |
| | | | |
(3) | | Consolidated Balance Sheets at October 3, 2008 and September 28, 2007 | | Page 50 |
| | | | |
(4) | | Consolidated Statements of Cash Flows for the Years Ended October 3, 2008, September 28, 2007, and September 29, 2006 | | Page 51 |
| | | | |
(5) | | 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 |
| | | | |
(6) | | Notes to Consolidated Financial Statements | | Pages 53 through 79 |
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Report 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. as of October 3, 2008 and September 28, 2007, and the related consolidated statements of operations, cash flows, and stockholders’ equity and comprehensive income (loss) for each of the years in the three-year period ended October 3, 2008. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule listed in 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 these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement 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, assessing the accounting principles used and significant estimates made by management, and 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 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. as of October 3, 2008 and September 28, 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended October 3, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, 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. Also in our opinion, Skyworks Solutions, Inc. maintained, in all material respects, effective 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.
/s/ KPMG LLP
Boston, Massachusetts
December 2, 2008
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SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | | | | | | | | | | | | |
| | | 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.
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SKYWORKS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
| | | | | | | | | |
| | | 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.
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SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| | | 2008 | | | 2007 | | | 2006 | |
Cash flows from operating activities: | | | | | | | | | | | | |
| Net income (loss) | | $ | 111,006 | | | $ | 57,650 | | | $ | (88,152 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
| Share-based compensation expense | | | 23,212 | | | | 13,737 | | | | 14,219 | |
| Depreciation | | | 44,712 | | | | 39,237 | | | | 38,217 | |
| Charge in lieu of income tax expense | | | 7,014 | | | | — | | | | — | |
| Amortization of intangible assets | | | 6,933 | | | | 2,144 | | | | 2,144 | |
| Amortization of deferred financing costs | | | 1,753 | | | | 2,311 | | | | 1,992 | |
| 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 | | | (36,648 | ) | | | (1,741 | ) | | | 16,547 | |
| Loss on sale of assets | | | 276 | | | | 227 | | | | 73 | |
| Asset impairments | | | — | | | | — | | | | 4,197 | |
| Provision for losses (recoveries) on accounts receivable | | | (614 | ) | | | 2,203 | | | | 31,206 | |
| Changes in assets and liabilities net of acquired balances: | | | | | | | | | | | | |
| Receivables | | | 21,223 | | | | (10,724 | ) | | | (18,177 | ) |
| Inventories | | | (16,082 | ) | | | (247 | ) | | | (3,454 | ) |
| Other assets | | | 2,860 | | | | (1,534 | ) | | | (3,395 | ) |
| Accounts payable | | | 2,110 | | | | (16,654 | ) | | | 795 | |
| Other liabilities | | | (5,051 | ) | | | (10,815 | ) | | | 16,524 | |
| | | | | | | | | | |
| Net cash provided by operating activities | | | 173,678 | | | | 84,778 | | | | 27,226 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
| Capital expenditures | | | (64,832 | ) | | | (42,596 | ) | | | (49,359 | ) |
| 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 provided by (used in) investing activities | | | (94,959 | ) | | | (20,146 | ) | | | 42,383 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
| 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 | | | — | | | | (6,189 | ) | | | — | |
| Change in restricted cash | | | 541 | | | | (200 | ) | | | (290 | ) |
| Repurchase of common stock | | | (2,063 | ) | | | (31,681 | ) | | | (173 | ) |
| Exercise of stock options | | | 18,049 | | | | 8,266 | | | | 1,746 | |
| | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | (95,192 | ) | | | 40,196 | | | | (49,382 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (16,473 | ) | | | 104,828 | | | | 20,227 | |
| Cash and cash equivalents at beginning of period | | | 241,577 | | | | 136,749 | | | | 116,522 | |
| | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 225,104 | | | $ | 241,577 | | | $ | 136,749 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Supplemental cash flow disclosures: | | | | | | | | | | | | |
| Taxes paid | | $ | 1,156 | | | $ | 1,117 | | | $ | 2,023 | |
| | | | | | | | | | |
| Interest paid | | $ | 6,023 | | | $ | 12,479 | | | $ | 13,787 | |
| | | | | | | | | | |
Supplemental disclosure of non-cash activities: | | | | | | | | | | | | |
| Non-cash proceeds received from non-monetary exchange | | $ | — | | | $ | — | | | $ | 760 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
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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
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Skyworks Solutions, Inc. (“Skyworks” or the “Company”) designs, manufactures and markets a broad range of high performance analog and mixed signal semiconductors 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 medical applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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,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 2008 consisted of 53 weeks and ended 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 2007 and 2006 each consisted of 52 weeks and ended on September 28, 2007 and September 29, 2006, respectively.
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.
53
INVESTMENTS
The Company’s investments are classified as available for sale. These investments consist of an auction rate security (ARS) which has long-term underlying maturities (ranging from 20 to 40 years). 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 illiquid at this time. 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.
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 8 to the Consolidated Financial Statements.
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.
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.
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, 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 that the carrying amount of any such asset or asset group may not be recoverable.
54
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.
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 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.
55
It was previously the Company’s intention to permanently reinvest the undistributed earnings of all its foreign subsidiaries in accordance with Accounting Principles Board Opinion No. 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. For the fiscal year ended October 3, 2008, U.S. income tax 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 the 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 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.
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.
The fair value of stock-based awards is amortized over the requisite 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 each separately vesting tranche.
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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 No. 123,Accounting for Stock-Based Compensation (“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 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.
COMPREHENSIVE INCOME (LOSS)
The Company accounts for comprehensive income (loss) in accordance with the provisions of SFAS No. 130,Reporting Comprehensive Income (“SFAS No. 130”). SFAS No. 130 is a financial statement presentation standard that requires the Company to disclose non-owner changes included in equity but not included in net income or loss. Accumulated comprehensive loss presented in the financial statements consists of adjustments to the Company’s auction rate securities and minimum pension liability as follows (in thousands):
| | | | | | | | | | | | | |
| | | | | | | | | | | 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 September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 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 160 to impact its results of operations or financial position because the Company does not have any minority interests.
SFAS 161
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133(“SFAS 161”).SFAS 161 amends FASB Statement No. 133 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 under Statement 133 and its 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 financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not currently hold any positions in derivative instruments or participate in hedging activities and thus does not expect the adoption of SFAS 161 to have any impact on its results of operations or financial position.
FSP No. 142-3
In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3,Determination of the Useful Life of Intangible Assets (“FSP 142-3”). 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. 142,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 financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption of FSP 142-3 to have any material impact on its results of operations or financial position.
FSP No. APB 14-1
In May 2008, the FASB issued FSP No. APB 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
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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 Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,to require an additional disclosure about the current status of the payment/performance risk of 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 provisions of this FSP that amend Statement 133 and Interpretation 45 shall be effective for reporting 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 thus does not expect the adoption of FSP 133-1 and FIN 45-4 to have any impact on its results of operations or financial position.
FSP No. FAS 157-3
In October 2008, the FASB issued FSP No. FAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active(“FSP 157-3”) which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 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.
3. BUSINESS 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 as of September 28, 2007 were categorized as available for sale and consisted solely of auction rate securities with a fair value equal to amortized cost.
5. INVENTORY
Inventories consist of the following (in thousands):
| | | | | | | | | |
| | | As of | |
| | | October 3, | | | September 28, | |
| | | 2008 | | | 2007 | |
| Raw materials | | $ | 8,005 | | | $ | 6,624 | |
| Work-in-process | | | 64,305 | | | | 48,128 | |
| Finished goods | | | 31,481 | | | | 27,357 | |
| | | | | | | |
| | | $ | 103,791 | | | $ | 82,109 | |
| | | | | | | |
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
| | | | | | | | | |
| | | As of | |
| | | October 3, | | | September 28, | |
| | | 2008 | | | 2007 | |
| Land | | $ | 9,423 | | | $ | 9,423 | |
| Land and leasehold improvements | | | 4,989 | | | | 4,394 | |
| Buildings | | | 39,708 | | | | 39,730 | |
| Furniture and Fixtures | | | 24,889 | | | | 24,485 | |
| Machinery and equipment | | | 382,582 | | | | 343,551 | |
| Construction in progress | | | 29,845 | | | | 12,671 | |
| | | | | | | |
| | | | 491,436 | | | | 434,254 | |
| Accumulated depreciation and amortization | | | (318,076 | ) | | | (280,738 | ) |
| | | | | | | |
| | | $ | 173,360 | | | $ | 153,516 | |
| | | | | | | |
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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 changes in the gross carrying amount of 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 reduced by $11.0 million in fiscal 2008 and $12.5 million in fiscal 2007 as a result of the realization of deferred tax assets. The benefit from the recognition of a portion of these deferred items reduces the carrying value of goodwill instead of reducing income tax expense. Accordingly, future realization of certain deferred tax assets will reduce the carrying value of goodwill. The remaining deferred tax assets that could reduce goodwill in future periods are $7.6 million as of October 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 2008 and determined that as of July 1, 2008, its goodwill was not impaired.
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Annual amortization expense related to intangible assets is expected to be as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 |
| Amortization expense | | $ | 4,406 | | | $ | 4,406 | | | $ | 4,106 | | | $ | 3,559 | | | $ | — | |
8. BORROWING ARRANGEMENTS
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
| | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | |
| | | 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 | |
| | | | | | | |
| | | $ | 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 Notes represent the Company’s 4.75% convertible subordinated notes due November 2007. Prior to repayment, these Junior Notes 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 paid 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 Junior Notes approximated $50.2 million at September 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
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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 | | 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 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. 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 0.75%. As of October 3, 2008, Skyworks USA had borrowed $50.0 million under this agreement.
9. INCOME TAXES
Income (loss) before income taxes consists of the following components (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | |
| United States | | $ | 79,931 | | | $ | 54,685 | | | $ | (87,169 | ) |
| Foreign | | | 2,257 | | | | 2,085 | | | | 14,395 | |
| | | | | | | | | | |
| | | $ | 82,188 | | | $ | 56,770 | | | $ | (72,774 | ) |
| | | | | | | | | | |
The provision for income taxes consists of the following (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | |
| Current tax expense (benefit): | | | | | | | | | | | | |
| Federal | | $ | 1,310 | | | $ | — | | | $ | (52 | ) |
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| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| | | 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 | | | (571 | ) | | | 104 | | | | 14,992 | |
| | | | | | | | | | |
| | | | (36,976 | ) | | | (1,568 | ) | | | 14,992 | |
| | | | | | | | | | | | | |
| Charge in lieu of tax expense | | | 7,014 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | |
| Provision for income taxes | | $ | (28,818 | ) | | $ | (880 | ) | | $ | 15,378 | |
| | | | | | | | | | |
The actual income tax expense is different than that which would have been computed by applying the federal statutory tax rate to income (loss) before income taxes. A reconciliation of income tax expense as computed at the United States Federal statutory income tax rate to the provision for income tax expense follows (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | |
| Tax (benefit) expense at United States statutory rate | | $ | 28,766 | | | $ | 19,870 | | | $ | (25,471 | ) |
| Foreign tax rate difference | | | (436 | ) | | | (301 | ) | | | 10,391 | |
| Deemed dividend from foreign subsidiary | | | 102 | | | | — | | | | — | |
| Research and development credits | | | (7,970 | ) | | | (7,495 | ) | | | (1,500 | ) |
| Release of tax reserve | | | (999 | ) | | | (461 | ) | | | — | |
| Change in valuation allowance | | | (59,315 | ) | | | (14,306 | ) | | | 31,261 | |
| Charge in lieu of tax expense | | | 7,014 | | | | — | | | | — | |
| Foreign withholding tax | | | — | | | | 825 | | | | — | |
| Non deductible debt retirement premium | | | 1,741 | | | | — | | | | — | |
| Alternative minimum tax | | | 1,306 | | | | — | | | | — | |
| Other, net | | | 973 | | | | 988 | | | | 697 | |
| | | | | | | | | | |
| Provision for income taxes | | $ | (28,818 | ) | | $ | (880 | ) | | $ | 15,378 | |
| | | | | | | | | | |
During 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):
| | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | |
| | | 2008 | | | 2007 | |
| | | |
| Deferred Tax Assets: | | | | | | | | |
| Current: | | | | | | | | |
| Inventories | | $ | 3,726 | | | $ | 5,978 | |
| Bad debts | | | 329 | | | | 559 | |
| Accrued compensation and benefits | | | 3,460 | | | | 3,364 | |
| Product returns, allowances and warranty | | | 849 | | | | 1,037 | |
| Restructuring | | | 888 | | | | 1,904 | |
| | | | | | | |
| Current deferred tax assets | | | 9,252 | | | | 12,842 | |
| Less valuation allowance | | | (3,420 | ) | | | (10,213 | ) |
| | | | | | | |
| Net current deferred tax assets | | | 5,832 | | | | 2,629 | |
| | | | | | | |
| Long-term: | | | | | | | | |
| Property, plant and equipment | | | 9,726 | | | | 10,739 | |
| Intangible assets | | | 9,904 | | | | 11,018 | |
| Retirement benefits and deferred compensation | | | 13,817 | | | | 9,949 | |
| Net operating loss carryforwards | | | 44,903 | | | | 75,884 | |
| Federal tax credits | | | 37,170 | | | | 34,139 | |
| State investment credits | | | 19,106 | | | | 16,268 | |
| Other – net | | | 733 | | | | 1,482 | |
| | | | | | | |
| Long-term deferred tax assets | | | 135,359 | | | | 159,479 | |
| Less valuation allowance | | | (79,429 | ) | | | (141,042 | ) |
| | | | | | | |
64
| | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | |
| | | 2008 | | | 2007 | |
| | | | |
| Net long-term deferred tax assets | | | 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 | | | 56,064 | | | | 14,823 | |
| | | | | | | |
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. As of October 3, 2008, the Company has established a valuation allowance for deferred tax assets of $82.9 million. The net change in the valuation allowance of $68.4 million during fiscal 2008 is principally due to the recognition of tax benefits offset against current year taxable income of $83.4 million and a reduction in the end of year valuation allowance of $40.0 million based on our assessment of the amount of deferred tax assets 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 October 3, 2008 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.
Based on the Company’s evaluation of the realizability of its United States net deferred tax assets and other future deductible items through the generation of future taxable 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. Deferred tax assets have been recognized for foreign operations when management believes they will more likely than not be recovered during the carryforward period. We will continue to assess our valuation allowance in future periods.
In 2006, the Company reorganized its Mexico operations. As a result, the long term deferred tax asset relating to the impairment of Mexico assets was written off because the machinery and equipment was transferred to a United States company. The write-off increased tax expense by $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 the Company’s U.S. deferred tax assets subject to a valuation allowance as previously discussed.
As of October 3, 2008, the Company has United States federal net operating loss carryforwards of approximately $130.6 million, which will expire at various dates through 2027 and aggregate state net operating loss carryforwards of approximately $1.4 million, which will expire at various dates through 2017. The Company also has United States federal and state income tax credit carryforwards of approximately $56.3 million. The United States federal tax credits expire at various dates through 2028. The state tax credits relate primarily to California research tax credits which can be carried forward indefinitely.
No provision has been made for United States federal, state, or additional foreign income taxes related to approximately $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 United States federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested.
65
The 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 3, 2008, the 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 remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, due to the Company’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 unrecognized tax benefits was a benefit of $0.4 million.
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.
In March 2007, the Company repurchased approximately 4.3 million of its common shares for $30.1 million as authorized by the Company’s Board of Directors. The Company has no publicly disclosed stock repurchase plans.
At October 3, 2008, the Company had 170,322,804 shares of common stock issued and 165,591,830 shares outstanding.
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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 October 3, 2008, the Company had no shares of preferred stock issued or outstanding.
EMPLOYEE STOCK BENEFIT PLANS
The following table summarizes pre-tax share-based compensation expense related to employee stock options, restricted stock grants, performance stock grants, employee 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 unrestricted common stock after year end. The Company anticipates an immaterial amount of share dilution as a result of this arrangement.
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 offering period (generally six months). The plans provide for purchases by employees of up to an aggregate of 8.1 million shares through December 31, 2012. Shares of common stock purchased under these plans in fiscal 2008, 2007, and 2006 were 790,556, 830,103, and 835,621, respectively. At October 3, 2008, there are 2.7 million shares available for purchase. The Company recognized 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 less 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 plans, 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:
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| | |
- | | 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 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.
The 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 addition, during the 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 Directors with a three-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 be 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 restricted 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 $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. The 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 | |
| | | | | | | | | | | | | |
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| | |
(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 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 and September 19,
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2008. The implied volatility was calculated by analyzing the 52-week minimum and maximum prices of publicly traded call options on the Company’s common stock. The Company concluded that an arithmetic average of these two calculations provided for the most 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 vest, 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 time of grant and revised, 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, 6.4 million, and 7.5 million options at a weighted average exercise price per share of $20.69, $20.62, and $20.44, respectively.
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 discretionary Company 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 contributed a match of up to 4.0% of an employee’s annual eligible compensation. For fiscal years 2008, 2007, and 2006, the Company contributed and recognized expense for 0.6 million, 0.7 million, and 0.8 million shares, respectively, of the Company’s common stock valued at $5.0 million, $4.8 million, and $4.1 million, respectively, to fund the Company’s obligation under the 401(k) plan.
In fiscal 2008, the Company began phasing out its funding of retiree medical benefits. On September 18, 2007, a letter was mailed to the participants of the Retiree Health Plan informing them of the Company’s plan to 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 $0.1 million for pension benefits and $0.1 million for retiree medical benefits in each of the fiscal years ending October 3, 2008, September 28, 2007, and September 29, 2006.
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 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | 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 | ) |
| | | | | | | | | | | | | |
12. COMMITMENTS
The Company has various operating leases primarily for computer equipment and buildings. Rent expense amounted to $8.6 million, $8.5 million, and $9.3 million in fiscal 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 | | | | |
| 2009 | | | 7,045 | |
| 2010 | | | 5,715 | |
| 2011 | | | 2,205 | |
| 2012 | | | 542 | |
| 2013 | | | 13 | |
| Thereafter | | | — | |
| | | | |
| | | $ | 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. Pursuant to the terms of these agreements, the Company is committed to making aggregate payments of $3.9 million, $2.3 million, $2.1 million, and $0.4 million in fiscal years 2009, 2010, 2011, and 2012, respectively.
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.
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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 will have, individually or in the aggregate, a material adverse effect on our business.
14. GUARANTEES AND INDEMNITIES
The Company has no guarantees. The Company generally indemnifies its customers from third-party intellectual property infringement litigation claims related to its 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.
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.
15. RESTRUCTURING AND SPECIAL CHARGES
Restructuring and special charges consists of the following (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | October 3, | | | September 28, | | | September 29, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | |
| Asset impairments | | $ | — | | | $ | — | | | $ | 4,197 | |
| Restructuring and special charges | | | 567 | | | | 5,730 | | | | 22,758 | |
| | | | | | | | | | |
| | | $ | 567 | | | $ | 5,730 | | | $ | 26,955 | |
| | | | | | | | | | |
2006 RESTRUCTURING CHARGES AND OTHER
On September 29, 2006, the 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 charges of $90.4 million which 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 and other inventory charges and reserves and $5.0 million related to baseband product area revenue adjustments. These charges were recorded 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 exit of the baseband product area during the fiscal year ended September 28, 2007. 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
75
technology licenses and design software, offset by a $1.5 million benefit related to the reversal of a reserve originally recorded to account for an engineering vendor charge.
During the fiscal year ended October 3, 2008, the Company recorded additional restructuring charges of $0.6 million relating to lease obligations due to the closure of certain locations associated with the baseband product area.
Activity and liability balances related to the fiscal 2006 restructuring actions are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | License and | | | | | | | | | | |
| | | Facility | | | Software | | | Workforce | | | Asset | | | | |
| | | Closings | | | Write-offs | | | Reductions | | | Impairments | | | Total | |
| | | |
| Charged to costs and expenses | | $ | 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 | | | (1,690 | ) | | | (1,847 | ) | | | (13,242 | ) | | | — | | | | (16,779 | ) |
| | | | | | | | | | | | | | | | |
| 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 | | | (1,667 | ) | | | (225 | ) | | | (806 | ) | | | — | | | | (2,698 | ) |
| | | | | | | | | | | | | | | | |
| Restructuring balance, October 3, 2008 | | $ | 2,217 | | | $ | — | | | $ | 236 | | | $ | — | | | $ | 2,453 | |
| | | | | | | | | | | | | | | | |
The Company anticipates that most of the remaining payments associated with the exit of the baseband product area will be remitted during fiscal year 2009.
16. 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 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 had earned at least $78.8 million in net income for the fiscal year ended September 28, 2007 the Junior Notes would have been dilutive to earnings per share.
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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.
17. SEGMENT INFORMATION AND CONCENTRATIONS
In accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information(“SFAS 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 management’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. All of the 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. The Company 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, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | |
| United States | | $ | 79,952 | | | $ | 66,868 | | | $ | 43,180 | |
| Other Americas | | | 10,636 | | | | 11,230 | | | | 18,925 | |
| | | | | | | | | | |
| Total Americas | | | 90,588 | | | | 78,098 | | | | 62,105 | |
| | | | | | | | | | | | | |
| China | | | 410,645 | | | | 293,035 | | | | 224,539 | |
| South Korea | | | 184,208 | | | | 128,253 | | | | 114,926 | |
| Taiwan | | | 86,544 | | | | 101,107 | | | | 116,073 | |
| Other Asia-Pacific | | | 36,005 | | | | 98,200 | | | | 173,523 | |
| | | | | | | | | | |
| Total Asia-Pacific | | | 717,402 | | | | 620,595 | | | | 629,061 | |
| | | | | | | | | | | | | |
| Europe, Middle East and Africa | | | 52,027 | | | | 43,051 | | | | 82,584 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | $ | 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.
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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 2008 as compared to fiscal 2007 and fiscal 2006 is due to continued weakness at one of our OEM customers and the transitioning of the aforementioned Sony Ericsson Mobile Comm. AB revenues to the 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, | |
| | | 2008 | | | 2007 | |
| | | |
| United States | | $ | 114,794 | | | $ | 97,097 | |
| Mexico | | | 56,378 | | | | 54,324 | |
| Other | | | 2,188 | | | | 2,095 | |
| | | | | | | |
| | | $ | 173,360 | | | $ | 153,516 | |
| | | | | | | |
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 October 3, 2008, Motorola, Inc., Samsung Electronics Co., and Sony Ericsson Mobile Comm. AB accounted for approximately 14%, 12% and 10%, respectively, of the Company’s gross accounts receivable.
As of September 28, 2007, Motorola, Inc. and Sony Ericcson Mobile Comm. AB accounted for approximately 21% and 14%, respectively, of the Company’s gross accounts receivable.
The following customers accounted for 10% or more of net revenues:
| | | | | | | | | | | | | |
| | | 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. |
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | 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 fiscal year ended September 28, 2007, the Company recorded charges of $5.7 million which included $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, and an additional $0.8 million charge for a single lease obligation that expires in 2008 relating to our 2002 restructuring. |
19. SUBSEQUENT EVENTS
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of 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 our disclosure controls and procedures as of October 3, 2008, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(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) of the Exchange Act) occurred during the 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 the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, 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 and includes those policies and procedures that:
| • | | 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. 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.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of October 3, 2008. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on their assessment, management concluded that, as of October 3, 2008, the Company’s internal control over financial reporting is effective based on those criteria.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears on page 48.
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
DIRECTORS AND EXECUTIVE OFFICERS
The information underfollowing table sets forth for each director and executive officer of the captions “DirectorsCompany his position with the Company as of January 15, 2010:
| | | |
| Name | | | Title |
| David J. McLachlan | | | Chairman of the Board |
| David J. Aldrich | | | President, Chief Executive Officer and Director |
| Kevin L. Beebe | | | Director |
| Moiz M. Beguwala | | | Director |
| Timothy R. Furey | | | Director |
| Balakrishnan S. Iyer | | | Director |
| Thomas C. Leonard | | | Director |
| David P. McGlade | | | Director |
| Robert A. Schriesheim | | | Director |
| Donald W. Palette | | | Vice President and Chief Financial Officer |
| Bruce J. Freyman | | | Vice President, Worldwide Operations |
| Liam K. Griffin | | | Senior Vice President, Sales and Marketing |
| George M. LeVan | | | Vice President, Human Resources |
| Mark V.B. Tremallo | | | Vice President, General Counsel and Secretary |
| Gregory L. Waters | | | Executive Vice President and General Manager, Front-End Solutions |
David J. Aldrich,age 52, has served as Chief Executive Officer, President 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 Officers”Vice President, Mr. Aldrich served as Vice President and General Manager of the semiconductor products business unit. Mr. Aldrich joined the Company 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), “Corporate Governance-Committeesincluding Manager Integrated Circuits Active Products, Corporate Vice President of Strategic Planning, Director of Finance and Administration and Director of Strategic Initiatives with the Microelectronics Division. Mr. Aldrich has also served since February 2007 as a director of Belden Inc. (a publicly traded designer and manufacturer of cable products and transmission solutions).
Kevin L. Beebe, age 50, has been a director since January 2004. Since November 2007, he has been President and Chief Executive Officer of 2BPartners, LLC (a partnership that provides strategic, financial and operational advice to investors and management, and whose clients include Carlyle Group, GS Capital Partners, KKR and TPG Capital). Previously, beginning in 1998, he was Group President of Operations at ALLTEL Corporation, a telecommunications services company. From 1996 to 1998, Mr. Beebe served as Executive Vice President of Operations for 360° Communications Co., 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. Mr. Beebe also serves as a director for SBA Communications Corporation (a publicly traded North American operator of wireless communications towers).
2
Moiz M. Beguwala, age 63, has been a director since June 2002. He 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 Powerwave Technologies, Inc. (a publicly traded wireless solutions supplier for communications networks worldwide) and as Chairman of the Board of Directors”RF Nano Corporation (a privately held semiconductor company in Newport Beach, CA).
Timothy R. Furey,age 51, has been a director since 1998. He has been Chief Executive Officer of MarketBridge (a privately owned sales and “Other Matters-Sectionmarketing 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 53, has been a director since June 2002. He served as Senior Vice President and Chief Financial Officer of Conexant Systems, Inc. from October 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, Life Technologies Corp., Power Integrations, Inc., QLogic Corporation, and IHS Inc. (each a publicly traded company).
Thomas C. Leonard,age 75, 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 of 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 49, has been a director since February 2005. Since April 2005, he has served as the Chief Executive Officer and Deputy Chairman of Intelsat Global SA (a privately held worldwide provider of fixed satellite 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.
David J. McLachlan,age 71, has been a director since 2000 and Chairman of the Board since May 2008. Mr. McLachlan served as a senior advisor to the Chairman and Chief Executive Officer of Genzyme Corporation (a publicly traded biotechnology company) from 1999 to 2004. He also was the Executive Vice President and Chief Financial Officer of Genzyme from 1989 to 1999. Prior to joining Genzyme, Mr. McLachlan served as Vice President and Chief Financial Officer of Adams-Russell Company (an electronic component supplier and cable television franchise owner). Mr. McLachlan also serves on the Board of Directors of Dyax Corp. (a publicly traded biotechnology company) and HearUSA, Ltd. (a publicly traded hearing care services company).
Robert A. Schriesheim,age 49, has been a director since 2006. Mr. Schriesheim currently serves as the Chief Financial Officer of Hewitt Associates, Inc. (a publicly traded global human resources consulting and outsourcing company). Previously, from October 2006 until December 2009, he was the Executive Vice President, Chief Financial Officer and Principal Financial Officer of Lawson Software, Inc. (a publicly traded ERP software provider). From August 2002 to October 2006, he was affiliated with ARCH Development Partners, LLC, a seed stage venture capital fund. Before joining ARCH, Mr. Schriesheim held executive positions at Global TeleSystems, SBC Equity Partners, Ameritech, AC Nielsen, and Brooke Group Ltd. Mr. Schriesheim is also a director of Lawson Software, Inc. and Enfora (a privately held provider of intelligent wireless machine-to-machine modules and integrated platform solutions).
Donald W. Palette, age 52, joined the Company as Vice President and Chief Financial Officer of Skyworks in August 2007. Previously, from May 2005 until August 2007, Mr. Palette served as Senior Vice President, Finance and Controller of Axcelis Technologies, Inc. (a publicly traded semiconductor equipment manufacturer). Prior to May 2005, he was Axcelis’ Controller beginning in 1999, Director of Finance beginning August 2000, and Vice President and Treasurer beginning in 2003. Before joining Axcelis in 1999, Mr. Palette was Controller of Financial Reporting/Operations for Simplex, a leading manufacturer of fire protection and security systems. Prior to that, Mr. Palette was Director of Finance for Bell & Howell’s Mail Processing Company, a leading manufacturer of high speed mail insertion and sorting equipment.
3
Bruce J. Freyman,age 49, joined the Company as Vice President, Worldwide Operations in May 2005. Previously, he served as President and Chief Operating Officer of Amkor Technology and also held various senior management positions, including Executive Vice President of Operations from 2001 to 2004. Earlier, Mr. Freyman spent 10 years with Motorola managing their semiconductor packaging operations for portable communications products.
Liam K. Griffin,age 43, 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. Mr. Griffin also serves as a director of Vicor Corp. (a publicly traded designer, developer, manufacturer and marketer of modular power components and complete power systems).
George M. LeVan,age 64, 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, Mr. LeVan held human resources positions at Data Terminal Systems, Inc., W.R. Grace & Co., Compo Industries, Inc. and RCA.
Mark V.B. Tremallo,age 53, 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). Earlier, Mr. Tremallo served as Vice President, General Counsel and Secretary at Cabot Safety Corporation.
Gregory L. Waters,age 49, joined the Company in April 2003, and has served as Executive Vice President and General Manager, Front-End Solutions since October 2006, Executive Vice President beginning November 2005, and Vice President and General Manager, Cellular Systems as of 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.
Audit Committee: We have established an Audit Committee comprised of the following individuals, each of whom qualifies as independent within the meaning of the applicable Listing Rules of the NASDAQ Stock Market LLC (the “NASDAQ Rules”) and meets the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934 (“Exchange Act”): Robert A. Schriesheim (Chairman), Kevin L. Beebe, Balakrishnan S. Iyer, Moiz M. Beguwala and David J. McLachlan.
Audit Committee Financial Expert: The Board of Directors has determined that each of Mr. Schriesheim (Chairman), Mr. Iyer and Mr. McLachlan, meets the qualifications of an “audit committee financial expert” under SEC Rules and the qualifications of “financial sophistication” under the NASDAQ Rules, and qualifies as “independent” as defined under the NASDAQ Rules.
SECTION 16(a) Beneficial Ownership Reporting Compliance”BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Exchange Act requires our directors, executive officers and beneficial owners of more than 10% of our equity securities to file reports of holdings and transactions in securities of Skyworks with the SEC. Based solely on a review of Forms 3, 4 and 5 and any amendments thereto furnished to us, and written representations provided to us, with respect to our definitive proxy statement for thefiscal year ended October 2, 2009, Annual Meetingwe believe that all Section 16(a) filing requirements applicable to our directors, executive officers and beneficial owners of Stockholders is incorporated herein by reference.more than 10% of our common stock with respect to such fiscal year were timely made.
4
CODE OF ETHICS
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, 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 SEC and the NASDAQ Global Select MarketRules by posting any such amendment or waivers on our website and disclosing any such waivers in a Form 8-K filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION DISCUSSION AND ANALYSIS
Who Sets Compensation for Senior Executives?
The informationCompensation Committee, which is comprised solely of independent directors within the meaning of applicable NASDAQ Rules, outside directors within the meaning of Section 162 of the Internal Revenue Code (“Section 162(m)”) and non-employee directors within the meaning of Rule 16b-3 under the Exchange Act, is responsible for determining all components, and amounts, of compensation to be includedpaid to our Chief Executive Officer, our Chief Financial Officer and each of our other executive officers, as well as any other officers or employees who report directly to the Chief Executive Officer.
This Compensation Discussion and Analysis section discusses the compensation policies and programs for our Chief Executive Officer, our Chief Financial Officer and our three next most highly paid executive officers during fiscal 2009 as determined under the caption “Information aboutrules of the SEC. We refer to this group of executive officers as our “Named Executive Officers.”
What are the Objectives of Our Compensation Program?
The objectives of our executive compensation program are to attract, retain and Director Compensation”motivate highly qualified executives to operate our business, and to link the compensation of those executives to improvements in the Company’s financial performance and increases in stockholder value. Accordingly, the Compensation Committee’s goals in establishing our executive compensation program include:
(1) ensuring that our executive compensation program is competitive with a group of companies in the semiconductor industry with which we compete for executive talent;
(2) providing a base salary that serves as the foundation of a compensation package that attracts and retains the executive talent needed to achieve our business objectives;
(3) providing short-term variable compensation that motivates executives and rewards them for achieving financial performance targets;
(4) providing long-term stock-based compensation that aligns the interest of our executives with stockholders and rewards them for increases in stockholder value; and
(5) ensuring that our executive compensation program is perceived as fundamentally fair to all of our employees.
How Do We Determine the Components and Amount of Compensation to Pay?
The Compensation Committee sets compensation for the Named Executive Officers, including salary, short-term incentives and long-term stock-based awards, at levels generally intended to be competitive with the compensation of comparable executives in semiconductor companies with which the Company competes for executive talent.
| | Retention of Compensation Consultant |
The Compensation Committee has engaged Aon/Radford Consulting to assist the Compensation Committee in determining the components and amount of executive compensation. The consultant reports directly to the Compensation Committee, through its chairperson, and the Compensation Committee retains the right to terminate or replace the consultant at any time. The consultant advises the Compensation Committee on such compensation matters as are requested by the Compensation Committee. The Compensation Committee considers the consultant’s advice on such matters in addition to any other information or factors it considers relevant in making its compensation determinations.
5
| | Role of Chief Executive Officer |
The Compensation Committee also considers the recommendations of the Chief Executive Officer regarding the compensation of each of his direct reports, including the other Named Executive Officers. These recommendations include an assessment of each individual’s responsibilities, experience, individual performance and contribution to the Company’s performance, and also generally takes into account internal factors such as historical compensation and level in the organization, in addition to external factors such as the current environment for attracting and retaining executives.
| | Establishment of Comparator Group Data |
In determining compensation for each of the Named Executive Officers, the committee utilizes “Comparator Group” data for each position. For fiscal year 2009, the Compensation Committee approved Comparator Group data consisting of a 50/50 blend of (i) Aon/Radford survey data of 45 semiconductor companies1 and (ii) the public “peer” group data for 14 publicly-traded semiconductor companies with which the Company competes for executive talent (the “Peer Group”):
| | | | | | |
*Anadigics
*Analog Devices
*Broadcom
*Cypress Semiconductor | | *Fairchild Semiconductor
*Integrated Device Technology
*Intersil
*Linear Technology | | *LSI Logic
*National Semiconductor
*ON Semiconductor
*RF Micro Devices | | *Silicon Laboratories
*TriQuint Semiconductor |
Utilization of Comparator Group Data
The Compensation Committee annually compares the components and amounts of compensation that we provide to our Chief Executive Officer and other Named Executive Officers with the components and amounts of compensation provided to their counterparts in the Comparator Group and uses this comparison data as a guideline in its review and determination of base salaries, short-term incentives and long-term stock-based compensation awards. In addition, in setting fiscal year 2009 compensation, the Compensation Committee sought and received input from its consultant regarding the base salaries for the Chief Executive Officer and each of his direct reports, the award levels and performance targets relating to the short-term incentive program for executive officers, and the individual stock-based compensation awards for executive officers, as well as the related vesting schedules.
After reviewing the data and considering the input, the Compensation Committee established (and the full Board of Directors was advised of) the base salary, short-term incentive target and long-term stock-based compensation award for each Named Executive Officer. In establishing individual compensation, the Compensation Committee also considered the input of the Chief Executive Officer, as well as the individual experience and performance of the executive. In determining the compensation of our Chief Executive Officer, our Compensation Committee focused on (i) competitive levels of compensation for chief executive officers who are leading a company of similar size and complexity, (ii) the importance of retaining a chief executive officer with the strategic, financial and leadership skills necessary to ensure our continued growth and success, (iii) the Chief Executive Officer’s role relative to other Named Executive Officers and (iv) the considerable length of his 15-year service to the Company. Aon/Radford advised the Compensation Committee that the base salary, annual performance targets and short-term incentive target opportunity, and equity-based compensation for 2009 were competitive for chief executive officers in the sector. The Chief Executive Officer was not present during voting or deliberations of the Compensation Committee concerning his compensation. As stated above, however, the Compensation Committee did consider the recommendations of the Chief Executive Officer regarding the compensation of all of his direct reports, including the other Named Executive Officers. | | |
| 1 | | Where sufficient data was not available in the semiconductor survey data — for example, for a VP/General Manager position — the Comparator Group data reflected survey data regarding high-technology companies, which included a larger survey sample. Semiconductor companies included in the survey had average annual revenue of approximately $1 billion, whereas the high-technology companies included in the survey were segregated based on the annual revenue of the general manager’s business unit. |
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What are the Components of Executive Compensation?
The key elements of compensation for our Named Executive Officers are base salary, short-term incentives, long-term stock-based incentives, 401(k) plan retirement benefits, and medical and insurance benefits. Consistent with our objective of ensuring that executive compensation is perceived as fair to all employees, the Named Executive Officers do not receive any retirement benefits beyond those generally available to our full-time employees, and we do not provide medical or insurance benefits to Named Executive Officers that are different from those offered to other full-time employees.
Base Salary
Base salaries provide our executive officers with a degree of financial certainty and stability. The Compensation Committee determines a competitive base salary for each executive officer using the Comparator Group data and input provided by its consultant. Based on these factors, base salaries of the Named Executive Officers for fiscal year 2009 were generally targeted at the Comparator Group median, with consideration given to role, responsibility, performance and length of service. After taking these factors into account, the base salary increase for each Named Executive Officer for fiscal year 2009 was approximately 4%, with the exception of the Chief Financial Officer, who received a 10% increase in order to bring his base salary closer to the median.
Our short-term incentive compensation plan for executive officers is established annually by the Compensation Committee. For fiscal year 2009, the Compensation Committee adopted the 2009 Executive Incentive Plan (the “Incentive Plan”). The Incentive Plan established short-term incentive awards that could be earned semi-annually by certain officers of the Company, including the Named Executive Officers, based on the Company’s achievement of certain corporate performance metrics established on a semi-annual basis. Short-term incentives are intended to motivate and reward executives by tying a significant portion of their total compensation to the Company’s achievement of pre-established performance metrics that are generally short-term (i.e., less than one year). In establishing the short-term incentive plan, the Compensation Committee first determined a competitive short-term incentive target for each Named Executive Officer based on the Comparator Group data, and then set threshold, target and maximum incentive payment levels. At the target payout level, Skyworks’ short-term incentive was designed to result in an incentive payout equal to the median of the Comparator Group, while a maximum incentive payout for exceeding the performance metrics would result in a payout above the median of the Comparator Group, and a threshold payout for meeting the minimal corporate performance metrics would result in a payout below the median. The following table shows the incentive payment levels the Named Executive Officers could earn in fiscal year 2009 (shown as a percentage of base salary), depending on the Company’s achievement of the performance metrics. Actual performance between the threshold and the target metrics or between the target and maximum metrics was determined based on a linear sliding scale.
| | | | | | | | | | | | | |
| | | Threshold | | | Target | | | Maximum | |
| Chief Executive Officer | | | 50% | | | | 100% | | | | 200% | |
| Other Named Executive Officers | | | 30% | | | | 60% | | | | 120% | |
For fiscal year 2009, in establishing the Incentive Plan, the Compensation Committee considered the fact that for the first half of fiscal 2009 our primary corporate goal was to increase revenue in excess of the market growth rate by gaining market share, while at the same time leveraging our fixed cost structure to generate higher earnings. As in the prior year, for fiscal year 2009, the Compensation Committee split the Incentive Plan into two six month performance periods, with the performance metrics focused on achieving business unit revenue, non-GAAP gross margin and specified non-GAAP operating margin targets, in addition to a cash and customer satisfaction metric. The weighting of the different metrics for the first half of fiscal year 2009 is set forth as follows.
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| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Non- | | | | | | |
| | | | | | | Non-GAAP | | GAAP | | Customer | | |
| | | | | | | Operating | | Gross | | Satisfaction | | Cash |
| | | Revenue | | Margin % | | Margin | | Metric | | Metric |
| President and Chief Executive Officer; Vice President and Chief Financial Officer | | 20% | | 40% | | 20% | | 10% | | 10% |
| Vice President, Worldwide Operations | | 20% | | 20% | | 40% | | 10% | | 10% |
| Executive Vice President and General Manager, Front-End Solutions | | 30% (based on business
unit revenue) | | 20% (based on business
unit OM%) | | 30% | | 10% | | 10% |
| Senior Vice President, Sales and Marketing | | 30% | | 30% (based on | | 20% | | 10% | | 10% |
| | | | | | | business unit OM%) | | | | | | | | | | | | |
For the first half of fiscal 2009, each executive officer’s incentive award was consistent with the metrics set forth above, although the Compensation Committee exercised discretion permitted by the plan to make such award payments by waiving the minimum operating income margin metric, given that the Company nearly achieved such objective despite the severe and unanticipated economic downturn that occurred during the first half of fiscal 2009. The Company only made payments for the performance metrics that were achieved, and no payment was made based on the operating income margin metric. Accordingly, the Chief Executive Officer, Vice-President and Chief Financial Officer, Executive Vice President and General Manager, Front-End Solutions, Senior Vice President, Sales and Marketing, and Vice President, Worldwide Operations earned a first half incentive award equal to approximately 14%, 8%, 14%, 26% and 11% of their annual base salary, respectively. In addition, in recognition of their contributions to the Company’s performance during the first half of fiscal 2009, the Compensation Committee approved payments to approximately 800 other non-executive employees under non-executive incentive plans containing terms and conditions similar to the Incentive Plan. Consistent with the Incentive Plan (and other employee incentive plans), actual payments for the first six month performance period were capped at 80% of the award earned, with 20% of the award held back until the end of the fiscal year to ensure sustained financial performance. The amount held back was subsequently paid after the end of the fiscal year since the Company sustained its financial performance throughout fiscal year 2009.
For the second half of fiscal year 2009, the Committee again established performance metrics based on achieving specified revenue, non-GAAP gross margin, non-GAAP operating margin targets and a cash and customer satisfaction metric. The weighting of the different metrics for the second half of fiscal year 2009 is set forth as follows.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Non- | | | | | | |
| | | | | | | Non-GAAP | | GAAP | | Customer | | |
| | | | | | | Operating | | Gross | | Satisfaction | | Cash |
| | | Revenue | | Margin % | | Margin % | | Metric | | Metric |
| President and Chief Executive Officer; Vice President and Chief Financial Officer | | 20% | | 40% | | 20% | | 10% | | 10% |
| Vice President, Worldwide Operations | | 20% | | 20% | | 40% | | 10% | | 10% |
| Executive Vice President and General Manager, Front-End Solutions | | 10% (based on corporate revenue)
30% (based on business unit revenue) | | 20% (based on business unit OM%) | | 30% | | 10% | | 0% |
| Senior Vice President, Sales and Marketing | | 30% | | 10% (based on
corporate OM%)
20% (based
on business unit OM%) | | 20% | | 10% | | 10% |
In determining the weightings among the Named Executive Officers, the Compensation Committee’s goal was to align the incentive compensation of each Named Executive Officer with the performance metrics such executive could most impact. For instance, the performance metrics for the Chief Executive Officer, Vice-President and Chief Financial Officer and Vice President, Worldwide Operations were designed to focus such executives on improving the Company’s competitive position and achieving profitable growth overall. The performance metrics for the Executive Vice President and General Manager, Front-End Solutions were designed to focus such executive on business unit revenue (i.e., the ramping of new products and expansion of the customer base), and the performance metrics for the Senior Vice President, Sales and Marketing were designed to focus such executive on increasing overall corporate revenue while at the same time increasing gross margin.
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In the second half of the year, the Company met or exceeded its targets. Accordingly, the Chief Executive Officer, Vice- President and Chief Financial Officer, Executive Vice President and General Manager, Front-End Solutions, Senior Vice President, Sales and Marketing, and Vice President, Worldwide Operations earned a second half incentive award equal to approximately 95%, 57%, 57%, 57% and 57% of their annual base salary, respectively. The Compensation Committee determined to pay, in lieu of cash, unrestricted common stock of the Company for the portion of each of the Named Executive Officer’s second half short-term incentive earned above the “target” level. Accordingly, the Chief Executive Officer, the Vice-President and Chief Financial Officer, the Executive Vice President and General Manager, Front-End Solutions, Senior Vice President, Sales and Marketing, and the Vice President, Worldwide Operations each received approximately 47% of their respective second half incentive payments in the form of unrestricted common stock of the Company. In addition, the 20% “holdback” of the first half incentive was paid out to each executive officer due to the Company’s sustained financial performance.
For the full fiscal year, the total payments under the Incentive Plan to the Chief Executive Officer, Vice-President and Chief Financial Officer, the Executive Vice President and General Manager, Front-End Solutions, the Senior Vice President, Sales and Marketing, and the Vice President, Worldwide Operations were approximately 109%, 65%, 71%, 83% and 68% of their respective annual base salaries.
The target financial performance metrics established by the Compensation Committee under the Incentive Plan are based on our historical operating results and growth rates as well as our expected future results, and are designed to require significant effort and operational success on the part of our executives and the Company. The maximum financial performance metrics established by the Committee have historically been difficult to achieve and are designed to represent outstanding performance that the Committee believes should be rewarded. The Compensation Committee retains the discretion, based on the recommendation of the Chief Executive Officer, to make payments even if the threshold performance metrics are not met or to make payments in excess of the maximum level if the Company’s performance exceeds the maximum metrics. The Compensation Committee believes it is appropriate to retain this discretion in order to make short-term incentive awards in extraordinary circumstances, such as existed during the severe and unanticipated economic downturn that occurred during the first half of fiscal 2009.
Long-Term Stock-Based Compensation
The Compensation Committee generally makes stock-based compensation awards to executive officers on an annual basis. Stock-based compensation awards are intended to align the interests of our executive officers with stockholders, and reward them for increases in stockholder value over long periods of time (i.e., greater than one year). It is the Company’s practice to make stock-based compensation awards to executive officers in November of each year at a pre-scheduled Compensation Committee meeting. For fiscal year 2009, the Compensation Committee made awards to executive officers, including certain Named Executive Officers, on November 4, 2008, at a regularly scheduled Compensation Committee meeting. Stock options awarded to executive officers at the meeting had an exercise price equal to the closing price of the Company’s common stock on the meeting date.
In making stock-based compensation awards to certain executive officers for fiscal year 2009, the Compensation Committee first reviewed the Comparator Group data to determine the percentage of the outstanding number of shares that are typically used for employee compensation programs. The Compensation Committee then set the number of Skyworks shares of common stock that would be made available for executive officer awards at approximately the median of the Comparator Group based on the business need, internal and external circumstances and RiskMetrics/ISS guidelines. The Compensation Committee then reviewed the Comparator Group by executive position to determine the allocation of the available shares among the executive officers. The Compensation Committee then attributed a long-term equity-based compensation value to each executive officer. One-half of that value was converted to a number of stock options using an estimated Black-Scholes value, and the remaining half of the value was converted to a number of performance share awards (at target) based on the fair market value of the common stock. The Compensation Committee’s rationale for awarding performance shares is to further align the executive’s interest with those of the Company’s stockholders by using equity-awards that will vest only if the Company achieves a pre-established performance metric(s).
In addition, given the significant changes in the economic environment and the financial markets in the first half of fiscal 2009, and that certain previously granted performance share awards were not exempt from the deduction limitations under Section 162(m), on June 4, 2009, the Company gave each of its executive officers, including the Named Executive Officers, the opportunity to forfeit an outstanding Performance Share Award dated November 6, 2007, such executive had previously been granted (the “2007 PSA”) and receive, in its place, the following equity awards:
(1) a restricted stock award (the “2009 Replacement RSA”) covering shares equal to the “Threshold/Nominal” tranche of
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shares of the Company’s common stock that could be earned under the executive’s 2007 PSA, which shares will vest on November 6, 2010, provided that the executive continues employment with the Company through such date, and
(2) a Section 162(m) compliant performance share award (the “2009 Replacement PSA”, and together with the 2009 Replacement RSA, the “2009 Replacement Awards”) pursuant to which the executive will receive a number of shares of the Company’s common stock equal to the aggregate amount of the “Target” and “Maximum/Stretch” tranches of shares of the Company’s common stock that could be earned under the 2007 PSA, if certain conditions are satisfied. The conditions that must be satisfied are as follows:
(a)Relative Stock Price Performance Condition
The “Target” relative stock price condition, which covers 50% of the underlying shares, shall be deemed met on November 6, 2010, if the percentage change in the price of Skyworks’ common stock exceeds the 60th percentile of the Peer Group1 during the Measurement Period. The “Stretch” relative stock price condition, which covers 50% of the underlying shares, shall be deemed met on November 6, 2010, if the percentage change in the price of Skyworks’ common stock exceeds the 70th percentile of the Peer Group during the Measurement Period. For purposes of the 2009 Replacement PSA, the “Measurement Period” was deemed to have started on November 6, 2007, and will end on November 6, 2010.
(b)Continued Employment Condition
If the Relative Stock Price Performance Condition is met for either the “Target” or “Stretch” tranche (or both), then 50% of the total shares for which the relative stock price performance metric was met would be issuable to the executive on November 6, 2010, and the other 50% of such total shares would be issuable to the executive on November 6, 2011, provided that the executive is employed with Skyworks through such date(s).
Each of the Named Executive Officers accepted the Company’s offer and agreed to have his 2007 PSA cancelled and replaced with the 2009 Replacement Awards. The maximum number of shares issued under the 2009 Replacement Awards for each Named Executive Officer on June 10, 2009, is equal to the maximum number of shares that would have been issuable to such executive under his cancelled 2007 PSA.
| | Other Compensation and Benefits |
We also provide other benefits to our executive officers that are intended to be part of a competitive overall compensation program and are not tied to any company performance criteria. Consistent with the Compensation Committee’s goal of ensuring that executive compensation is perceived as fair to all stakeholders, the Company offers medical plans, dental plans, vision plans, life insurance plans and disability insurance plans to executive officers under the same terms as such benefits are offered to all other employees. Additionally, executive officers are permitted to participate in the Company’s 401(k) Savings and Investment Plan and Employee Stock Purchase Plan under the same terms as all other employees. The Company does not provide executive officers with any enhanced retirement benefits (i.e., executive officers are subject to the same limits on contributions as other employees, as the Company does not offer any SERP or other similar non-qualified deferred compensation plan), and they are eligible for 401(k) company-match contributions under the same terms as other employees.
Although certain Named Executive Officers were historically provided an opportunity to participate in the Company’s Executive Compensation Plan (the “Executive Compensation Plan”) — an unfunded, non-qualified deferred compensation plan, under which participants were allowed to defer a portion of their compensation — as a result of deferred compensation legislation under Section 409A of the Internal Revenue Code (“IRC”), effective December 31, 2005, the Company no longer permits employees to make contributions to the plan. Although the Company had discretion to make additional contributions to the accounts of participants while the Executive Compensation Plan was active, it never did so.
| | Severance and Change of Control Benefits |
None of our executive officers, including the Named Executive Officers, has an employment agreement that provides a specific term of employment with the Company. Accordingly, the employment of any such employee may be terminated at any time. We do provide certain benefits to our Named Executive Officers upon certain qualifying terminations and in connection with terminations under certain circumstances following a change of control. A description of the material terms
| | |
| 1 | | For purposes of the 2009 Replacement PSAs, Maxim Integrated Products was included in the Peer Group. |
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of our severance and change of control arrangements with the Named Executive Officers can be found under the “Potential Payments Upon Termination or Change of Control” section below.
The Company believes that severance protections can play a valuable role in recruiting and retaining superior talent. Severance and other termination benefits are an effective way to offer executives financial security to incent them to forego an opportunity with another company. These agreements also protect the Company as the Named Executive Officers are bound by restrictive non-compete and non-solicit covenants for two years after termination of employment. Outside of the change in control context, severance benefits are payable to the Named Executive Officers if their employment is involuntarily terminated by the Company without cause, or if a Named Executive Officer terminates his own employment for a good reason (as defined in the agreement). In addition, provided he forfeits certain equity awards and agrees to serve on the Company’s Board of Directors for a minimum of two years, the Chief Executive Officer is entitled to certain severance benefits upon termination of his employment for any reason on or after January 1, 2010. The Compensation Committee believes that this provision facilitates his retention with the Company. The level of each Named Executive Officer’s severance or other termination benefit is generally tied to his respective annual base salary and targeted short-term incentive opportunity (or past short-term incentive earned).
Additionally, the Named Executive Officers would receive enhanced severance and other benefits if their employment terminated under certain circumstances in connection with a change in control of the Company. These benefits are described in detail under the “Potential Payments Upon Termination or Change of Control” section below. The Named Executive Officers are also entitled to receive a tax gross-up payment (with a $500,000 cap for Named Executive Officers other than the Chief Executive Officer) if they become subject to the 20% golden parachute excise tax imposed by Section 280G of the IRC, as the Company believes that the executives should be able to receive their contractual rights to severance without being subject to punitive excise taxes. The Company further believes these enhanced severance benefits are appropriate because the occurrence, or potential occurrence, of a change in control transaction would likely create uncertainty regarding the continued employment of each Named Executive Officer, and these enhanced severance protections encourage the Named Executive Officers to remain employed with the Company through the change in control process and to focus on enhancing stockholder value both before and during the change in control process.
Lastly, each Named Executive Officer’s outstanding unvested stock options and restricted stock awards fully vest upon the occurrence of a change in control. In addition, each outstanding performance share award shall be deemed earned as to the greater of (a) the “target” level or (b) the number of shares that would have been deemed earned under the award as of the day prior to the change in control. The Company believes this accelerated vesting is appropriate given the importance of long-term equity awards in our definitive proxy statementexecutive compensation program and the uncertainty regarding the continued employment of Named Executive Officers that typically occurs in a change in control context. The Company’s view is that this vesting protection helps assure the Named Executive Officers that they will not lose the expected value of their equity awards because of a change in control of the Company and encourages the Named Executive Officers to remain employed with the Company through the change in control process and to focus on enhancing stockholder value both before and during the process.
11
Compensation Tables for Named Executive Officers
Summary Compensation Table
The following table summarizes compensation earned by, or awarded or paid to, our Named Executive Officers for fiscal year 2009, fiscal year 2008 and fiscal year 2007.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Non-Equity | | | | | | | |
| | | | | | | | | | | Stock | | | Option | | | Incentive Plan | | | All Other | | | | |
| | | | | | | | | | | Awards | | | Awards | | | Compensation | | | Compensation | | | Total | |
| Name and Principal Position | | Year | | | Salary ($) | | | ($)(2) | | | ($)(2) | | | ($)(3) | | | ($)(4) | | | ($) | |
| David J. Aldrich | | | 2009 | | | $ | 598,077 | | | $ | 2,207,652 | | | $ | 932,825 | | | $ | 653,750 | | | $ | 12,879 | | | $ | 4,405,183 | |
| President and Chief | | | 2008 | | | $ | 583,404 | | | $ | 1,936,986 | | | $ | 933,064 | | | $ | 1,048,220 | | | $ | 12,191 | | | $ | 4,513,865 | |
| Executive Officer | | | 2007 | | | $ | 552,000 | | | $ | 837,318 | | | | 719,233 | | | | 691,276 | | | $ | 11,838 | | | | 2,811,665 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Donald W. Palette | | | 2009 | | | $ | 327,692 | | | $ | 346,441 | | | $ | 268,214 | | | $ | 215,738 | | | $ | 11,471 | | | $ | 1,169,556 | |
| Vice President and Chief | | | 2008 | | | $ | 305,769 | | | $ | 195,917 | | | $ | 195,653 | | | $ | 328,138 | | | $ | 12,199 | | | $ | 1,037,676 | |
| Financial Officer | | | 2007 | (1) | | $ | 34,615 | | | $ | 5,005 | | | $ | 18,507 | | | $ | 56,354 | | | $ | 340 | | | $ | 114,821 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gregory L. Waters | | | 2009 | | | $ | 378,846 | | | $ | 464,160 | | | $ | 278,907 | | | $ | 270,085 | | | $ | 10,025 | | | $ | 1,402,023 | |
| Executive Vice President and | | | 2008 | | | $ | 370,635 | | | $ | 393,257 | | | $ | 270,445 | | | $ | 397,347 | | | $ | 9,464 | | | $ | 1,441,148 | |
| General Manager, Front-End Solutions | | | 2007 | | | $ | 353,000 | | | $ | 240,198 | | | $ | 325,824 | | | $ | 252,715 | | | $ | 9,810 | | | $ | 1,181,547 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liam K. Griffin | | | 2009 | | | $ | 352,923 | | | $ | 696,259 | | | $ | 258,069 | | | $ | 295,148 | | | $ | 44,888 | | | $ | 1,647,287 | |
| Senior Vice President, Sales | | | 2008 | | | $ | 344,000 | | | $ | 568,901 | | | $ | 249,207 | | | $ | 365,526 | | | $ | 82,132 | | | $ | 1,609,766 | |
| and Marketing | | | 2007 | | | $ | 318,000 | | | $ | 201,410 | | | $ | 189,483 | | | $ | 256,603 | | | $ | 136,062 | | | $ | 1,101,558 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bruce J. Freyman | | | 2009 | | | $ | 350,923 | | | $ | 453,887 | | | $ | 308,879 | | | $ | 240,680 | | | $ | 11,772 | | | $ | 1,366,141 | |
| Vice President, Worldwide | | | 2008 | | | $ | 343,000 | | | $ | 344,246 | | | $ | 313,207 | | | $ | 335,879 | | | $ | 11,218 | | | $ | 1,347,550 | |
| Operations | | | 2007 | | | $ | 325,000 | | | $ | 121,820 | | | $ | 258,473 | | | $ | 262,252 | | | $ | 10,189 | | | $ | 977,734 | |
| | |
| (1) | | Mr. Palette was hired as Vice-President and Chief Financial Officer effective August 20, 2007, at an annual salary of $300,000. In addition, he was guaranteed a short-term incentive payment for fiscal year 2007 equal to 25% of the incentive payout he would have received under the 2007 Incentive Plan had he been employed for the entire fiscal year. |
|
| (2) | | The aggregate dollar amount of the expense recognized in fiscal years 2009, 2008 and 2007 for outstanding stock and options was determined in accordance with the provisions of ASC 718-Compensation-Stock Compensation(“ASC 718”), but without regard to any estimated forfeitures related to service-based vesting provisions. For a description of the assumptions used in calculating the fair value of equity awards under ASC 718, see Note 11 of the Company’s financial statements included in the Original Filing. The reported expense also reflects incremental expenses relating to the 2009 Replacement Awards as follows: Mr. Aldrich ($117,470), Mr. Palette ($13,705), Mr. Waters ($15,663), Mr. Griffin ($39,157) and Mr. Freyman ($19,578). |
|
| (3) | | Reflects amounts paid to the Named Executive Officers pursuant to the Incentive Plan. For the second half of fiscal years 2008 and 2009, the portion of the Incentive Plan attributable to Company performance above the “target” performance metric was paid in the form of unrestricted common stock of the Company as follows: Mr. Aldrich (2008: $248,508; 2009: $270,000), Mr. Palette (2008: $77,794; 2009: $89,100), Mr. Waters (2008: $80,866; 2009: $102,600), Mr. Griffin (2008: $87,342; 2009: $95,580) and Mr. Freyman (2008: $64,839; 2009: $95,040). The number of shares awarded in lieu of cash was based on the fair market value of the common stock on November 4, 2008, and November 10, 2009, the dates the second half Incentive Plan payment for each fiscal year was approved by the Compensation Committee. For fiscal year 2007, all short-term incentive payments were made in cash. |
|
| (4) | | “All Other Compensation” includes the Company’s contributions to each Named Executive Officer’s 401(k) plan account and the cost of group term life insurance premiums. Mr. Griffin’s amount includes subsidized mortgage and miscellaneous relocation expenses of $72,381, $124,741 and $34,548 for fiscal years 2007, 2008, and 2009, respectively. |
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Grants of Plan-Based Awards Table
The following table summarizes all grants of plan-based awards made to the Named Executive Officers in fiscal year 2009, including incentive awards payable under our Fiscal Year 2009 Executive Incentive Plan.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | All Other | | All Other | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock | | Option | | Exercise | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Awards: | | Awards: | | or Base | | Grant |
| | | | | | | Possible Payouts Under | | Estimated Future Payouts | | Number | | Number of | | Price of | | Date Fair |
| | | | | | | Non-Equity Incentive | | Under Equity Incentive | | of Shares | | Securities | | Option | | Value of |
| | | | | | | Plan Awards(1) | | Plan Awards(2) | | of Stock | | Underlying | | Awards | | Stock and |
| | | Grant | | Threshold | | Target | | Maximum | | Threshold | | Target | | Maximum | | or Units | | Options | | ($/Sh) | | Option |
| Name | | Date | | ($) | | ($) | | ($) | | (#) | | (#) | | (#) | | (#) | | (#)(3) | | (4) | | Awards (5) |
| David J. Aldrich | | | 11/4/2008 | | | $ | 300,000 | | | $ | 600,000 | | | $ | 1,200,000 | | | | 75,000 | | | | 150,000 | | | | 300,000 | | | | n/a | | | | 300,000 | | | $ | 7.18 | | | $ | 3,505,921 | |
| President and Chief Executive Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Donald W. Palette | | | 11/4/2008 | | | $ | 99,000 | | | $ | 198,000 | | | $ | 396,000 | | | | 23,500 | | | | 47,000 | | | | 94,000 | | | | n/a | | | | 90,000 | | | $ | 7.18 | | | $ | 1,085,656 | |
| Vice President and Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gregory L. Waters | | | 11/4/2008 | | | $ | 114,000 | | | $ | 228,000 | | | $ | 456,000 | | | | 26,000 | | | | 52,000 | | | | 104,000 | | | | n/a | | | | 100,000 | | | $ | 7.18 | | | $ | 1,202,520 | |
| Executive Vice President and General Manager, Front-End Solutions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liam K. Griffin | | | 11/4/2008 | | | $ | 106,200 | | | $ | 212,400 | | | $ | 424,800 | | | | 26,000 | | | | 52,000 | | | | 104,000 | | | | n/a | | | | 100,000 | | | $ | 7.18 | | | $ | 1,202,520 | |
| Senior Vice President, Sales and Marketing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bruce J. Freyman | | | 11/4/2008 | | | $ | 105,600 | | | $ | 211,200 | | | $ | 422,400 | | | | 23,500 | | | | 47,000 | | | | 94,000 | | | | n/a | | | | 90,000 | | | $ | 7.18 | | | $ | 1,085,656 | |
| Vice President, Worldwide Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Actual performance between the Threshold and Target metrics are paid on a linear sliding scale beginning at the Threshold percentage and moving up to the Target percentage. The same linear scale applies for performance between Target and Maximum metrics. The amounts actually paid to the Named Executive Officers under the Incentive Plan are shown above in the Summary Compensation Table under Non-Equity Incentive Plan Compensation. For fiscal year 2009, the portion of the Incentive Plan payment attributable to Company performance above the Target level for the second half of the fiscal year was paid to the Named Executive Officers in the form of unrestricted common stock of the Company. |
|
| (2) | | Represents performance share awards made on November 4, 2008, under the Company’s 2005 Long-Term Incentive Plan (the “FY09 PSA”). The FY09 PSAs have both “performance” and “continued employment” conditions that must be met in order for the executive to receive shares underlying the award. The “performance” condition required that the Company achieve certain pre-established non-GAAP operating margin metrics (i.e., “minimum”, “target” and “maximum” non-GAAP operating margin levels), with the “minimum” number of shares equal to one-half (1/2) the “target” share level, and the “maximum” number of shares equal to two times (2x) the “target” share level. For purposes of the FY09 PSAs, the “non-GAAP operating margin” meant the Company’s non-GAAP operating margin for Fiscal Year 2009 as reported publicly by the Company following the fiscal year end. Actual Company performance between the “minimum” and the “maximum” performance metrics was to be determined based on a linear sliding scale. The “continued employment” condition of the FY09 PSAs provides that, to the extent that the non-GAAP operating margin performance metric is met for the fiscal year, then one-third (33%) of the total shares for which the performance metric was met would be issuable to the executive on the first anniversary of the Grant Date, the next one-third (33%) of such shares would be issuable to the executive on the second anniversary of the Grant Date (the “Second Issuance Date”) , and the final one-third (33%) of such shares would be issuable to the Participant on the third anniversary of the Grant Date (the “Third Issuance Date”), provided that the executive continues employment with the Company through each such vesting date(s). |
13
| | |
| (3) | | The options vest over four years 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. |
|
| (4) | | Stock options awarded to executive officers had an exercise price equal to the closing price of the Company’s common stock on the grant date. |
|
| (5) | | Amount reflects stock options and performance share awards granted on November 4, 2008. The total excludes the incremental FMV of the 2009 Replacement Awards as follows: Mr. Aldrich ($775,200), Mr. Palette ($90,440), Mr. Waters ($103,360), Mr. Griffin ($258,400) and Mr. Freyman ($129,200). As described above in “Long–Term Stock Based Compensation”, the 2009 Replacement Awards consisted of (1) the 2009 Replacement RSAs that vest on November 6, 2010, as follows: Mr. Aldrich (150,000 shares), Mr. Palette (17,500 shares), Mr. Waters (20,000 shares), and Mr. Griffin (50,000 shares), and Mr. Freyman (25,000 shares); and (2) the 2009 Replacement PSAs as follows (at the “maximum” share level): Mr. Aldrich (300,000 shares), Mr. Palette (35,000 shares), Mr. Waters (40,000 performance shares), and Griffin (100,000 shares), and Mr. Freyman (50,000 performance shares). The 2009 Replacement PSAs have both “performance” and “continued employment” conditions that must be met in order for the executive to receive any shares underlying the award. The “performance” conditions requires that the percentage change in the price of Skyworks’ common stock exceeds the 60th percentile (i.e., “target” level of shares, which is equal to 50% of the total shares), and/or the 70th percentile (i.e., the “maximum” level of shares, which is equal to the other 50% of the total shares), of the Peer Group during the Measurement Period. The percentage change in the price of the common stock of the Company, as well as each member of the Peer Group, during the Measurement Period will be determined by comparing (x) the average of such entity’s stock price for the ninety (90) day period beginning on November 6, 2007 to (y) the average of the entity’s stock price for the ninety (90) day period ending on November 6, 2010. For purposes of calculating the average price of the common stock of an entity during such ninety (90) day periods, only “trading days” (days on which the NASDAQ Global Select Market is open for trading) shall be used in such calculation and trading volume on any such trading day shall not be factored into such calculation. For purposes of the 2009 Replacement PSAs, the “Measurement Period” was deemed to have started on November 6, 2007, and will end on November 6, 2010. The “continued employment” condition provides that, if the relative stock price performance condition is met for either the “Target” or “Maximum” tranche (or both), then 50% of the total shares for which the relative stock price performance metric was met would be issuable to the executive on November 6, 2010, and the other 50% of such total shares would be issuable to the executive on or about November 6, 2011, provided that the executive is employed with Skyworks through such date(s). |
Outstanding Equity Awards at Fiscal Year End Table
The following table summarizes the unvested stock awards and all stock options held by the Named Executive Officers as of the end of Fiscal Year 2009.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Option Awards | | | Stock Awards |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity | | Equity |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incentive | | Incentive |
| | | | | | | | | | | | | Plan | | Plan |
| | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | Awards: | | Awards: |
| | | | | | | | | | | Incentive | | | | | | | | | | | | | | | | | | Number of | | Market or |
| | | | | | | | | | | Plan | | | | | | | | | | Number | | Market | | Unearned | | Payout Value |
| | | | | | | | | | | Awards: | | | | | | | | | | of Shares | | Value of | | Shares, | | of Unearned |
| | | Number of | | Number of | | Number of | | | | | | | | | | or Units | | Shares or | | Units or | | Shares, |
| | | Securities | | Securities | | Securities | | | | | | | | | | of Stock | | Units of | | Other | | Units |
| | | Underlying | | Underlying | | Underlying | | | | | | | | | | That | | Stock | | Rights | | or Other |
| | | Unexercised | | Unexercised | | Unexercised | | Option | | | | | | Have | | That | | That | | Rights That |
| | | Options | | Options | | Unearned | | Exercise | | Option | | Not | | Have Not | | Have Not | | Have Not |
| | | (#) | | (#) | | Options | | Price | | Expiration | | Vested | | Vested | | Vested | | Vested |
| Name | | Exercisable | | Unexercisable | | (#) | | ($) | | Date | | (#) | | ($)(1) | | (#)(9) | | ($)(1) |
| David J. Aldrich | | | 75,000 | | | | 0 | | | | 0 | | | $ | 44.688 | | | | 4/26/10 | | | | 210,000 | (2) | | $ | 2,499,000 | | | | 300,000 | | | $ | 3,570,000 | |
| President and Chief | | | 75,000 | | | | 0 | | | | 0 | | | $ | 28.938 | | | | 10/6/10 | | | | | | | | | | | | | | | | | |
| Executive Officer | | | 160,000 | | | | 0 | | | | 0 | | | $ | 13.563 | | | | 4/4/11 | | | | | | | | | | | | | | | | | |
| | | | 175,000 | | | | 0 | | | | 0 | | | $ | 12.650 | | | | 4/25/12 | | | | | | | | | | | | | | | | | |
| | | | 500,000 | | | | 0 | | | | 0 | | | $ | 9.180 | | | | 1/7/14 | | | | | | | | | | | | | | | | | |
| | | | 274,254 | | | | 0 | (3) | | | 0 | | | $ | 8.930 | | | | 11/10/14 | | | | | | | | | | | | | | | | | |
| | | | 187,500 | | | | 62,500 | (4) | | | 0 | | | $ | 4.990 | | | | 11/8/12 | | | | | | | | | | | | | | | | | |
| | | | 125,000 | | | | 125,000 | (5) | | | 0 | | | $ | 6.730 | | | | 11/7/13 | | | | | | | | | | | | | | | | | |
| | | | 45,000 | | | | 135,000 | (6) | | | 0 | | | $ | 9.330 | | | | 11/6/14 | | | | | | | | | | | | | | | | | |
| | | | 0 | | | | 300,000 | (10) | | | | | | $ | 7.180 | | | | 11/4/15 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Donald W. Palette | | | 12,000 | | | | 100,000 | (7) | | | 0 | | | $ | 7.500 | | | | 8/20/14 | | | | 36,666 | (2) | | $ | 436,325 | | | | 64,500 | | | $ | 767,550 | |
| Vice President and | | | 5,000 | | | | 15,000 | (6) | | | 0 | | | $ | 9.330 | | | | 11/6/14 | | | | | | | | | | | | | | | | | |
| Chief Financial Officer | | | 0 | | | | 90,000 | (10) | | | 0 | | | $ | 7.180 | | | | 11/4/15 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gregory L. Waters | | | 100,000 | | | | 0 | | | | 0 | | | $ | 9.180 | | | | 1/7/14 | | | | 36,666 | (2) | | $ | 436,325 | | | | 72,000 | | | $ | 856,800 | |
| Executive Vice President | | | 64,530 | | | | 0 | (3) | | | 0 | | | $ | 8.930 | | | | 11/10/14 | | | | | | | | | | | | | | | | | |
| and General Manager, | | | 75,000 | | | | 25,000 | (4) | | | 0 | | | $ | 4.990 | | | | 11/8/12 | | | | | | | | | | | | | | | | | |
| Front-End Solutions | | | 37,500 | | | | 37,500 | (5) | | | 0 | | | $ | 6.730 | | | | 11/7/13 | | | | | | | | | | | | | | | | | |
| | | | 12,500 | | | | 37,500 | (6) | | | 0 | | | $ | 9.330 | | | | 11/6/14 | | | | | | | | | | | | | | | | | |
| | | | 0 | | | | 100,000 | (10) | | | 0 | | | $ | 7.180 | | | | 11/4/15 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liam K. Griffin | | | 100,000 | | | | 0 | | | | 0 | | | $ | 24.780 | | | | 9/7/11 | | | | 66,666 | (2) | | $ | 793,325 | | | | 102,000 | | | $ | 1,213,800 | |
| Senior Vice President, | | | 50,000 | | | | 0 | | | | 0 | | | $ | 12.650 | | | | 4/25/12 | | | | | | | | | | | | | | | | | |
| Sales and Marketing | | | 110,000 | | | | 0 | | | | 0 | | | $ | 9.180 | | | | 1/7/14 | | | | | | | | | | | | | | | | | |
| | | | 64,530 | | | | 0 | (3) | | | 0 | | | $ | 8.930 | | | | 11/10/14 | | | | | | | | | | | | | | | | | |
| | | | 0 | | | | 17,500 | (4) | | | 0 | | | $ | 4.990 | | | | 11/8/12 | | | | | | | | | | | | | | | | | |
| | | | 37,500 | | | | 37,500 | (5) | | | 0 | | | $ | 6.730 | | | | 11/7/13 | | | | | | | | | | | | | | | | | |
| | | | 12,500 | | | | 37,500 | (6) | | | 0 | | | $ | 9.330 | | | | 11/6/14 | | | | | | | | | | | | | | | | | |
| | | | 0 | | | | 100,000 | (10) | | | 0 | | | $ | 7.180 | | | | 11/4/15 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bruce J. Freyman | | | 150,000 | | | | 0 | (8) | | | 0 | | | $ | 5.120 | | | | 5/2/15 | | | | 40,000 | (2) | | $ | 476,000 | | | | 72,000 | | | $ | 856,800 | |
| Vice President, | | | 30,000 | | | | 10,000 | (4) | | | 0 | | | $ | 4.990 | | | | 11/8/12 | | | | | | | | | | | | | | | | | |
| Worldwide Operations | | | 30,000 | | | | 30,000 | (5) | | | 0 | | | $ | 6.730 | | | | 11/7/13 | | | | | | | | | | | | | | | | | |
| | | | 11,250 | | | | 33,750 | (6) | | | 0 | | | $ | 9.330 | | | | 11/6/14 | | | | | | | | | | | | | | | | | |
| | | | 0 | | | | 90,000 | (10) | | | 0 | | | $ | 7.180 | | | | 11/4/15 | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Assumes a price of $11.90 per share, the fair market value as of October 2, 2009. |
14
| | |
| (2) | | Other than Mr. Palette’s restricted stock grant on August 20, 2007, which was made as part of a new hire grant package and vests 25% per year over four years, unvested restricted shares shown are comprised of (a) two-thirds (66%) of the November 6, 2007, grant and (b) 100% of the 2009 Replacement RSAs (as described in footnote 5 of the “Grants of Plan-Based Awards Table”above). The restricted stock awards made on November 6, 2007, had both performance and service based vesting conditions. The performance condition allowed for accelerated vesting of an award as of the first anniversary, second anniversary and, if not previously accelerated, the third anniversary of the grant date. Specifically, if the Company’s stock performance met or exceeded the 60th percentile of its selected peer group for the years ended on each of the first three anniversaries of the grant date, then one-third of the award vests upon each anniversary (up to 100%). If the restricted stock recipient met the service condition but not the performance condition in years one, two, three and four, the restricted stock would have vested in three equal installments on the second, third and fourth anniversaries of the grant date. In November 2008, the first third (33%) of the November 6, 2007 grant vested as a result of a performance accelerator triggered as the Company exceeded the 60th percentile of its peers on the basis of stock performance. In November 2009, another third (33%) of such grant vested as a result of a performance accelerator triggered as the Company exceeded the 60th percentile of it peers. In addition, the last third (33%) of such grant vested in November 2009 as a result of the passage of time. |
|
| (3) | | These options were granted on November 10, 2004, and vested at a rate of 25% per year until they became fully vested on November 10, 2008. |
|
| (4) | | These options were granted on November 8, 2005, and vested at a rate of 25% per year until they became fully vested on November 8, 2009. |
|
| (5) | | These options were granted on November 7, 2006, and vest at a rate of 25% per year until fully vested on November 7, 2010. |
|
| (6) | | These options were granted on November 6, 2007, and vest at a rate of 25% per year until fully vested on November 6, 2011. |
|
| (7) | | These options were granted on August 20, 2007, and vest at a rate of 25% per year until fully vested on August 20, 2011. |
|
| (8) | | These options were granted on May 2, 2005, and vested at a rate of 25% per year until they became fully vested on May 2, 2009. |
|
| (9) | | Reflects the FY09 PSAs and 2009 Replacement PSAs awarded to the Named Executive Officers on November 4, 2008, and June 10, 2009, respectively, both at the “target” level, and as described in footnotes 2 and 5 of the “Grants of Plan-Based Awards Table”above, respectively. With respect to the FY09 PSAs, the Company achieved 95.8% of the “maximum” non-GAAP operating margin and, accordingly, on November 4, 2009, the Company issued one-third of each executive’s “earned” shares, and held back the other two-thirds of such “earned” shares for possible issuance on the Second and/or Third Issuance Dates provided the executive meets the continued employment condition. |
|
| (10) | | These options were granted on November 4, 2008, and vest at a rate of 25% per year until fully vested on November 4, 2012. |
15
Option Exercises and Stock Vested Table
The following table summarizes the Named Executive Officers’ option exercises and stock award vesting during fiscal year 2009.
| | | | | | | | | | | | | | | | | |
| | | Option Awards | | | Stock Awards | |
| | | Number of | | | | | | | Number of | | | | |
| | | Shares | | | Value | | | Shares | | | Value | |
| | | Acquired on | | | Realized | | | Acquired on | | | Realized | |
| | | Exercise | | | on Exercise | | | Vesting | | | on Vesting | |
| Name | | (#) | | | ($) | | | (#)(1) | | | ($)(2) | |
| David J. Aldrich | | | 225,000 | | | $ | 1,531,130 | | | | 148,843 | | | $ | 992,375 | |
| President and Chief Executive Officer | | | | | | | | | | | | | | | | |
| Donald W. Palette | | | 88,000 | | | $ | 586,714 | | | | 9,584 | | | $ | 93,342 | |
| Vice President and Chief Financial Officer | | | | | | | | | | | | | | | | |
| Gregory L. Waters | | | 225,000 | | | $ | 965,724 | | | | 37,767 | | | $ | 250,946 | |
| Executive Vice President and General Manager, Front-End Solutions | | | | | | | | | | | | | | | | |
| Liam K. Griffin | | | 102,500 | | | $ | 919,040 | | | | 37,767 | | | $ | 250,946 | |
| Senior Vice President, Sales and Marketing | | | | | | | | | | | | | | | | |
| Bruce J. Freyman | | | 100,000 | | | $ | 826,230 | | | | 27,500 | | | $ | 174,150 | |
| Vice President, Worldwide Operations | | | | | | | | | | | | | | | | |
| | |
| (1) | | Includes restricted stock that vested on November 6, 2008, and November 7, 2008, for Mr. Aldrich (30,000 shares and 100,000 shares), Mr. Waters (8,334 shares and 25,000 shares), Mr. Griffin (8,334 shares and 25,000 shares) and Mr. Freyman (7,500 shares and 20,000 shares) and restricted stock that vested on May 11, 2009 for Mr. Aldrich (18,843), Mr. Waters (4,433), and Mr. Griffin (4,433). For Mr. Palette, the table includes restricted stock that vested on November 6, 2008 (3,334 shares) and August 20, 2009 (6,250 shares). |
|
| (2) | | Represents the aggregate fair market value of the stock awards on the applicable vesting dates. |
Nonqualified Deferred Compensation Table
In prior fiscal years, certain executive officers were provided an opportunity to participate in the Company’s Executive Compensation Plan, an unfunded, non-qualified deferred compensation plan, under which participants were allowed to defer a portion of their compensation, as a result of deferred compensation legislation under Section 409A of the IRC. Effective December 31, 2005, the Company no longer permits employees to make contributions to the Executive Compensation Plan. Mr. Aldrich is the only Named Executive Officer that participated in the Executive Compensation Plan. Mr. Aldrich’s contributions are credited with earnings/losses based upon the performance of the investments he selects. Upon retirement, as defined, or other separation from service, or, if so elected, upon any earlier change in control of the Company, a participant is entitled to a payment of his or her vested account balance, either in a single lump sum or in annual installments, as elected in advance by the participant. Although the Company had discretion to make additional contributions to the accounts of participants while it was active, it never made any company contributions.
The following table summarizes the aggregate earnings in the fiscal year 2009 for Mr. Aldrich under the Executive Compensation Plan.
| | | | | | | | | | | | | | | | | | | | | |
| | | Executive | | | Registrant | | | Aggregate | | | | | | | Aggregate | |
| | | Contributions | | | Contributions | | | Earnings | | | Aggregate | | | Balance at | |
| | | in Last | | | in Last | | | in Last | | | Withdrawals / | | | Last Fiscal | |
| | | Fiscal Year | | | Fiscal Year | | | Fiscal Year | | | Distributions | | | Year-End | |
| Name | | ($) | | | ($) | | | ($) | | | ($) | | | ($)(1) | |
| David J. Aldrich, | | $ | 0 | | | $ | 0 | | | $ | 1,302 | | | $ | 0 | | | $ | 622,469 | |
| President and Chief Executive Officer | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Balance as of October 2, 2009. This amount is comprised of Mr. Aldrich’s individual contributions and the return/(loss) generated from the investment of those contributions. |
16
Potential Payments Upon Termination or Change of Control
Chief Executive Officer
In January 2008, the Company entered into an amended and restated Change of Control / Severance Agreement with Mr. Aldrich (the “Aldrich Agreement”). The Aldrich Agreement sets out severance benefits that become payable if, within two (2) years after 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 payment equal to two and one-half (21/2) times the sum of (A) his annual base salary immediately prior to the change of control and (B) his annual short-term incentive award (calculated as the greater of (x) the average short-term incentive awards received for the three years prior to the year in which the change of control occurs or (y) the target annual short incentive award for the year in which the change of control occurs); (ii) all then outstanding stock options will remain exercisable for a period of thirty (30) months after the termination date (but not beyond the expiration of their respective maximum terms); and (iii) continued medical benefits for a period of eighteen (18) months after the termination date. The foregoing payments are subject to a gross-up payment for any applicable excise taxes incurred under Section 4999 of the IRC. Additionally, in the event of a change of control, Mr. Aldrich’s Agreement provides for full acceleration of the vesting of all then outstanding stock options and restricted stock awards and partial acceleration of any outstanding performance share awards.
The Aldrich Agreement also sets out severance benefits outside of a change of control that become payable if, while employed by the Company, 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 either of these circumstances will consist of the following: (i) a payment equal to two (2) times the sum of (A) his annual base salary immediately prior to such termination and (B) his annual short-term incentive award (calculated as the greater of (x) the average short-term incentive awards received for the three years prior to the year in which the termination occurs or (y) the target annual short-term incentive award for the year in which the termination occurs); and (ii) full acceleration of the vesting of all outstanding stock options and restricted stock awards, with such stock options to remain exercisable for a period of two (2) years after the termination date (but not beyond the expiration of their respective maximum terms), and, with respect to any performance share awards outstanding, shares subject to such award will be deemed earned to the extent any such shares would have been earned pursuant to the terms of such award as of the day prior to the date of such termination (without regard to any continued service requirement) (collectively, “Severance Benefits”). 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).
In addition, the Aldrich Agreement provides that if Mr. Aldrich voluntarily terminates his employment after January 1, 2010, subject to certain notice requirements and his availability to continue to serve on the Board of Directors of the Company and as chairman of a committee thereof for up to two (2) years, he shall be entitled to the Severance Benefits; provided however, that all Company stock options, stock appreciation rights, restricted stock, and any other equity-based awards, which were both (a) granted to him in the eighteen (18) month period prior to such termination and (b) scheduled to vest more than two (2) years from the date of such termination, will be forfeited.
The Aldrich Agreement is intended to be compliant with Section 409A of the IRC and has a three (3) year term. Additionally, the Aldrich Agreement requires Mr. Aldrich to sign a release of claims in favor of the Company before he is eligible to receive any benefits under the agreement, and contains non-compete and non-solicitation provisions applicable to him while he is employed by the Company and for a period of twenty-four (24) months following the termination of his employment.
17
Other Named Executive Officers
In January 2008, the Company entered into Change of Control / Severance Agreements with each of Bruce J. Freyman, Liam K. Griffin, Donald W. Palette and Gregory L. Waters (each a “COC Agreement”). Each COC Agreement sets out severance benefits that become payable if, within twelve (12) months after 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 payment equal to two (2) times the sum of (A) his annual base salary immediately prior to the change of control and (B) his annual short-term incentive award (calculated as the greater of (x) the average short-term incentive awards received for the three years prior to the year in which the change of control occurs or (y) the target annual short-term incentive award for the year in which the change of control occurs); (ii) all then 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); and (iii) continued medical benefits for eighteen (18) months after the termination date. The foregoing payments are subject to a gross-up payment limited to a maximum of $500,000 for any applicable excise taxes incurred under Section 4999 of the IRC. Additionally, in the event of a change of control, each COC Agreement provides for full acceleration of the vesting of all then outstanding stock options and restricted stock awards and partial acceleration of any outstanding performance share awards. In the case of Mr. Freyman’s COC Agreement, the severance payment due will be paid out in bi-weekly installments over a twelve (12) month period.
Each COC Agreement also sets out severance benefits outside a change of control that become payable if, while employed by the Company, the executive is involuntarily terminated without cause. The severance benefits provided to the executive under such circumstance will consist of the following: (i) a payment equal to the sum of (x) his annual base salary and (y) any short-term incentive award then due; and (ii) all then vested outstanding stock options will remain exercisable for a period of twelve (12) months after the termination date (but not beyond the expiration of their respective maximum terms). In the case of Mr. Freyman’s COC Agreement, any severance payment due will be paid out in bi-weekly installments over a 12 month period. In the event of 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 is intended to be compliant with Section 409A of the IRC and has an initial two (2) year term, which is thereafter renewable on an annual basis for up to five (5) additional years upon mutual agreement of the Company and the executive. Additionally, each COC Agreement requires that the executive sign a release of claims in favor of the Company before he is eligible to receive any benefits under the agreement, and, except for Mr. Freyman’s COC Agreement, each 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. Mr. Freyman’s COC Agreement contains non-solicitation provisions applicable to him while he is employed by the Company and for a period of twelve (12) months following the termination of his employment.
The terms “change in control,” “cause,” and “good reason” are each defined in the COC Agreements. Change in control means, in summary: (i) the acquisition by a person or a group of 40% or more of the outstanding stock of Skyworks; (ii) a change, without Board of Directors approval, of a majority of the Board of Directors of Skyworks; (iii) the acquisition of Skyworks by means of a reorganization, merger, consolidation or asset sale; or (iv) the approval of a liquidation or dissolution of Skyworks. Cause means, in summary: (i) deliberate dishonesty that is significantly detrimental to the best interests of Skyworks; (ii) conduct constituting an act of moral turpitude; (iii) willful disloyalty or insubordination; or (iv) incompetent performance or substantial or continuing inattention to or neglect of duties. Good reason means, in summary: (i) a material diminution in base compensation or authority, duties or responsibility, (ii) a material change in office location, or (iii) any action or inaction constituting a material breach by Skyworks of the terms of the agreement.
18
The following table summarizes payments and benefits that would be made to the Named Executive Officers under their change of control/severance agreements with the Company in the following circumstances as of October 2, 2009:
| • | | termination without cause or for good reason in the absence of a change of control; |
|
| • | | termination without cause or for good reason after a change of control; |
|
| • | | after a change of control not involving a termination of employment for good reason or for cause; and |
|
| • | | in the event of termination of employment because of death or disability. |
19
The following table does not reflect any equity awards made after October 2, 2009.
| | | | | | | | | | | | | | | | | | | |
| | | | | Before | | | After | | | | | | | |
| | | | | Change in | | | Change in | | | | | | | |
| | | | | Control: | | | Control: | | | | | | | |
| | | | | Termination | | | Termination | | | | | | | |
| | | | | w/o Cause | | | w/o Cause | | | | | | | |
| | | | | or for | | | or for | | | Upon Change | | | Death/ | |
| | | | | Good Reason | | | Good Reason | | | in Control | | | Disability | |
| Name | | Benefit | | (1) | | | (1) | | | (1) | | | (1) | |
| David J. Aldrich | | Salary and Short-Term Incentive(4) | | $ | 2,396,154 | | | $ | 2,995,192 | | | $ | 0 | | | $ | 0 | |
| President and Chief | | Accelerated Options | | $ | 2,841,075 | | | $ | 2,841,075 | | | $ | 2,841,075 | | | $ | 2,841,075 | |
| Executive Officer(2) | | Accelerated Restricted Stock | | $ | 2,499,000 | | | $ | 2,499,000 | | | $ | 2,499,000 | | | $ | 2,499,000 | |
| | | Accelerated Performance Shares | | $ | 0 | | | $ | 3,570,000 | | | $ | 3,570,000 | | | $ | 0 | |
| | | Medical | | $ | 0 | | | $ | 20,590 | | | $ | 0 | | | $ | 0 | |
| | | Excise Tax Gross-Up(3) | | $ | 0 | | | $ | 2,085,024 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | |
| | | TOTAL | | $ | 7,736,229 | | | $ | 14,010,881 | | | $ | 8,910,075 | | | $ | 5,340,075 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Donald W. Palette | | Salary and Short-Term Incentive(4) | | $ | 525,692 | | | $ | 1,051,385 | | | $ | 0 | | | $ | 0 | |
| Vice President and | | Accelerated Options | | $ | 0 | | | $ | 903,350 | | | $ | 903,350 | | | $ | 903,350 | |
| Chief Financial Officer | | Accelerated Restricted Stock | | $ | 0 | | | $ | 436,325 | | | $ | 436,325 | | | $ | 436,325 | |
| | | Accelerated Performance Shares | | $ | 0 | | | $ | 767,550 | | | $ | 767,550 | | | $ | 0 | |
| | | Medical | | $ | 0 | | | $ | 23,219 | | | $ | 0 | | | $ | 0 | |
| | | Excise Tax Gross-Up(3) | | $ | 0 | | | $ | 500,000 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | |
| | | TOTAL | | $ | 525,692 | | | $ | 3,681,829 | | | $ | 2,107,225 | | | $ | 1,339,675 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | �� | | | | |
| Gregory L. Waters | | Salary and Short-Term Incentive(4) | | $ | 606,846 | | | $ | 1,213,692 | | | $ | 0 | | | $ | 0 | |
| Executive Vice President | | Accelerated Options | | $ | 0 | | | $ | 935,000 | | | $ | 935,000 | | | $ | 935,000 | |
| and General Manager, | | Accelerated Restricted Stock | | $ | 0 | | | $ | 436,325 | | | $ | 436,325 | | | $ | 436,325 | |
| Front-End Solutions | | Accelerated Performance Shares | | $ | 0 | | | $ | 856,800 | | | $ | 856,800 | | | $ | 0 | |
| | | Medical | | $ | 0 | | | $ | 23,219 | | | $ | 0 | | | $ | 0 | |
| | | Excise Tax Gross-Up(3) | | $ | 0 | | | $ | 500,000 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | |
| | | TOTAL | | $ | 606,846 | | | $ | 3,965,037 | | | $ | 2,228,125 | | | $ | 1,371,325 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Liam K. Griffin | | Salary and Short-Term Incentive(4) | | $ | 565,323 | | | $ | 1,130,646 | | | $ | 0 | | | $ | 0 | |
| Senior Vice President, | | Accelerated Options | | $ | 0 | | | $ | 883,175 | | | $ | 883,175 | | | $ | 883,175 | |
| Sales and Marketing | | Accelerated Restricted Stock | | $ | 0 | | | $ | 793,325 | | | $ | 793,325 | | | $ | 793,325 | |
| | | Accelerated Performance Shares | | $ | 0 | | | $ | 1,213,800 | | | $ | 1,213,800 | | | $ | 0 | |
| | | Medical | | $ | 0 | | | $ | 23,219 | | | $ | 0 | | | $ | 0 | |
| | | Excise Tax Gross-Up(3) | | $ | 0 | | | $ | 500,000 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | |
| | | TOTAL | | $ | 565,323 | | | $ | 4,544,166 | | | $ | 2,890,300 | | | $ | 1,676,500 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Bruce J. Freyman | | Salary and Short-Term Incentive(4) | | $ | 562,123 | | | $ | 1,124,246 | | | $ | 0 | | | $ | 0 | |
| Vice President, | | Accelerated Options | | $ | 0 | | | $ | 735,738 | | | $ | 735,738 | | | $ | 735,738 | |
| Worldwide Operations | | Accelerated Restricted Stock | | $ | 0 | | | $ | 476,000 | | | $ | 476,000 | | | $ | 476,000 | |
| | | Accelerated Performance Shares | | $ | 0 | | | $ | 856,800 | | | $ | 856,800 | | | $ | 0 | |
| | | Medical | | $ | 0 | | | $ | 20,590 | | | $ | 0 | | | $ | 0 | |
| | | Excise Tax Gross-Up(3) | | $ | 0 | | | $ | 500,000 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | |
| | | TOTAL | | $ | 562,123 | | | $ | 3,713,374 | | | $ | 2,568,538 | | | $ | 1,211,738 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Assumes a price of $11.90 per share, based on the closing sale price of the Company’s common stock on the NASDAQ Global Select Market on October 2, 2009. Excludes Mr. Aldrich’s contributions to deferred compensation plan as there have been no employer contributions. |
|
| (2) | | Good reason in change in control circumstances for Mr. Aldrich includes voluntarily terminating employment. |
|
| (3) | | Other than Mr. Aldrich, the Named Executive Officer’s excise tax gross-up is capped at $500,000. |
|
| (4) | | Assumes an Incentive Plan payment at the target level, and does not include the value of accrued vacation/paid time off to be paid upon termination as required by law. |
20
Director Compensation
Directors who are not employees of the Company are paid, in quarterly installments, an annual retainer of $50,000. Additional annual retainers are paid, in quarterly installments, to the Chairman of the Board ($17,500); the Chairman of the Audit Committee ($15,000); the Chairman of the Compensation Committee ($10,000); and the Chairman of the Nominating and Governance Committee ($5,000). Additional annual retainers are also paid, in quarterly installments, to directors who serve on committees in roles other than as Chairman as follows: Audit Committee ($5,000); Compensation Committee ($3,000); and Nominating and Corporate Governance Committee ($2,000). In addition, the Compensation Committee retains discretion to recommend to the full Board of Directors that additional cash payments be made to a non-employee director(s) for extraordinary service during a fiscal year.
In addition, non-employee directors receive the following stock-based compensation: each non-employee director, when first elected to serve as a director, automatically receives a nonqualified stock option to purchase 25,000 shares of common stock, at an exercise price equal to the fair market value of the common stock on the date of grant, and a restricted stock award for 12,500 shares of common stock. In addition, following each annual meeting of stockholders, each non-employee director who is continuing in office or re-elected receives a restricted stock award for 12,500 shares. Unless otherwise determined by the Board of Directors, the nonqualified stock options awarded under the 2008 Director’s Plan will vest in four (4) equal annual installments and the restricted stock awards under the 2008 Director’s Plan will vest in three (3) equal annual installments. In the event of a change of control of the Company, the outstanding options and restricted stock under the 2008 Director’s Plan shall become fully exercisable and deemed fully vested, respectively.
No director who is also an employee receives separate compensation for services rendered as a director. David J. Aldrich is currently the only director who is also an employee of the Company.
Director Compensation Table
The following table summarizes the compensation paid to the Company’s non-employee directors for fiscal year 2009.
| | | | | | | | | | | | | | | | | |
| | | Fees Earned | | | | | | |
| | | or | | Stock | | Option | | |
| | | Paid in Cash | | Awards | | Awards | | Total |
| Name | | ($) (3) | | ($)(1)(2) | | ($)(1)(2) | | ($) |
| David J. McLachlan, Chairman | | $ | 74,500 | | | $ | 42,402 | | | $ | 35,047 | | | $ | 151,949 | |
| Timothy R. Furey | | $ | 62,000 | | | $ | 42,402 | | | $ | 35,047 | | | $ | 139,449 | |
| Kevin L. Beebe | | $ | 61,750 | | | $ | 42,402 | | | $ | 35,047 | | | $ | 139,199 | |
| David P. McGlade | | $ | 58,750 | | | $ | 42,402 | | | $ | 51,147 | | | $ | 152,299 | |
| Robert A. Schriesheim | | $ | 68,000 | | | $ | 42,402 | | | $ | 58,864 | | | $ | 169,266 | |
| Balakrishnan S. Iyer | | $ | 57,500 | | | $ | 42,402 | | | $ | 35,047 | | | $ | 134,949 | |
| Moiz M. Beguwala | | $ | 54,500 | | | $ | 42,402 | | | $ | 35,047 | | | $ | 131,949 | |
| Thomas C. Leonard | | $ | 50,000 | | | $ | 42,402 | | | $ | 35,047 | | | $ | 127,449 | |
| | |
| (1) | | Represents the dollar amount recognized for financial statement reporting purposes for the year ended October 2, 2009 in accordance with ASC 718 and, accordingly, includes amounts from options granted prior to fiscal year 2009. For a description of the assumptions used in calculating the fair value of equity awards under ASC 718, see Note 11 of the Company’s financial statements included in the Original Filing. The non-employee members of our board of |
21
| | |
| | directors who held such position on October 2, 2009, held the following aggregate number of unexercised options as of such date: |
| | | | |
| | Number of |
| | Securities Underlying |
| Name | | Unexercised Options |
| David J. McLachlan, Chairman | | | 180,000 | |
| Timothy R. Furey | | | 135,000 | |
| Kevin L. Beebe | | | 105,000 | |
| David P. McGlade | | | 90,000 | |
| Robert A. Schriesheim | | | 60,000 | |
| Balakrishnan S. Iyer | | | 309,435 | |
| Moiz M. Beguwala | | | 216,840 | |
| Thomas C. Leonard | | | 150,000 | |
| (2) | | The following table presents the fair value of each grant of restricted stock in fiscal 2009 to non-employee members of our board of directors, computed in accordance with ASC 718: |
| | | | | | | | | | | | | |
| | | | | | | Number | | Grant Date |
| | | Grant | | of Securities | | Fair Value |
| Name | | Date | | Awarded | | of Shares(4) |
| David J. McLachlan, Chairman | | | 5/12/09 | | | | 12,500 | | | $ | 105,875 | |
| Timothy R. Furey | | | 5/12/09 | | | | 12,500 | | | $ | 105,875 | |
| Kevin L. Beebe | | | 5/12/09 | | | | 12,500 | | | $ | 105,875 | |
| David P. McGlade | | | 5/12/09 | | | | 12,500 | | | $ | 105,875 | |
| Robert A. Schriesheim | | | 5/12/09 | | | | 12,500 | | | $ | 105,875 | |
| Balakrishnan S. Iyer | | | 5/12/09 | | | | 12,500 | | | $ | 105,875 | |
| Moiz M. Beguwala | | | 5/12/09 | | | | 12,500 | | | $ | 105,875 | |
| Thomas C. Leonard | | | 5/12/09 | | | | 12,500 | | | $ | 105,875 | |
| (3) | | Director meeting fees were not prorated for committee assignment changes that became effective May 12, 2009 (i.e., when Mr. Iyer replaced Mr. Beebe as Chairman of the Nominating and Corporate Governance Committee, and Mr. Beguwala replaced Mr. McGlade as a member of the Audit Committee, each director received quarterly fees as if they had held both positions throughout the applicable quarter). |
|
| (4) | | Based on the fair market value of $8.47 per share of common stock on May 12, 2009. |
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently comprises, and during fiscal year 2009 Annual Meetingwas comprised of, Stockholders is incorporatedMessrs. Beebe, Furey (Chairman), McGlade and Schriesheim. 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 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.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included herein by reference.with management, and based on the review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Form 10-K/A.
| | |
| | The Compensation Committee |
| | Kevin L. Beebe |
| | Timothy R. Furey, Chairman |
| | David P. McGlade |
| | Robert A. Schriesheim |
22
| | |
| ITEM 12. | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information to be includedSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the Company’s knowledge, the following table sets forth the beneficial ownership of the Company’s common stock as of January 15, 2010, 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 January 15, 2010; (ii) the Named Executive Officers (as defined herein under the captions “Security Ownershipheading “Compensation Tables for Named Executive Officers”); (iii) each director and nominee for director; and (iv) all current executive officers and directors of Certainthe Company, as a group.
Beneficial Ownersownership is determined in accordance with the rules of the SEC, is not necessarily indicative of beneficial ownership for any other purpose, and Management”does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. As of January 15, 2010, there were 175,342,941 shares of Skyworks common stock issued and “Equityoutstanding.
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 sixty (60) days of January 15, 2010, are deemed outstanding. These shares are not, however, deemed outstanding for the purpose of computing the percentage ownership of any other person.
| | | | | | | | | |
| | | Number of Shares | | Percent |
| Names and Addresses of Beneficial Owners(1) | | Beneficially Owned(2) | | of Class |
| Wellington Management Company, LLP | | | 17,993,820 | (3) | | | 10.3 | % |
| The Vanguard Group, Inc. | | | 10,682,689 | (4) | | | 6.1 | % |
| Dimensional Fund Advisors L.P. | | | 10,197,121 | (5) | | | 5.8 | % |
| Barclays Global Investors, N.A | | | 10,953,178 | (6) | | | 6.2 | % |
| Fidelity Management and Research Company | | | 8,586,594 | (7) | | | 4.9 | % |
| David J. Aldrich | | | 2,319,383 | (8) | | | 1.3 | % |
| Kevin L. Beebe | | | 118,750 | | | | (* | ) |
| Moiz M. Beguwala | | | 221,445 | | | | (* | ) |
| Bruce J. Freyman | | | 378,129 | (8) | | | (* | ) |
| Timothy R. Furey | | | 148,750 | | | | (* | ) |
| Liam K. Griffin | | | 520,120 | (8) | | | (* | ) |
| Balakrishnan S. Iyer | | | 329,267 | | | | (* | ) |
| Thomas C. Leonard | | | 195,307 | | | | (* | ) |
| David P. McGlade | | | 103,750 | | | | (* | ) |
| David J. McLachlan | | | 196,350 | | | | (* | ) |
| Donald W. Palette | | | 112,343 | (8) | | | (* | ) |
| Robert A. Schriesheim | | | 66,250 | | | | (* | ) |
| Gregory L. Waters | | | 530,717 | (8) | | | (* | ) |
| All current directors and executive officers as a group (15 persons) | | | 5,728,528 | (8) | | | 3.2 | % |
| | |
| * | | Less than 1% |
|
| (1) | | Unless otherwise noted in the following notes, 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 sole investment power with respect to the shares, except to the extent such power may be shared by a spouse or otherwise subject to applicable community property laws. |
23
| | |
| (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 January 15, 2010 (the “Current Options”), as follows: Mr. Aldrich — 1,772,754 shares under Current Options; Mr. Beebe — 93,750 shares under Current Options; Mr. Beguwala — 183,090 shares under Current Options; Mr. Freyman — 280,000 shares under Current Options; Mr. Furey — 123,750 shares under Current Options; Mr. Griffin — 374,530 shares under Current Options; Mr. Iyer — 298,185 shares under Current Options; Mr. Leonard — 138,750 shares under Current Options; Mr. McGlade — 78,750 shares under Current Options; Mr. McLachlan — 168,750 shares under Current Options; Mr. Palette — 44,500 shares under Current Options; Mr. Schriesheim — 41,250 shares under Current Options; Mr. Waters — 370,780 shares under Current Options; current directors and executive officers as a group (15 persons) — 4,277,660 shares under Current Options. |
|
| (3) | | Consists of shares beneficially owned by Wellington Management Company, LLP, which has shared voting control as to 13,823,929 shares and shared dispositive power over all such shares. With respect to the information relating to Wellington Management Company, LLP, the Company has relied on information supplied by Wellington Management Company, LLP on a Schedule 13G filed with the SEC on January 11, 2010. The address and principal business office of Willington Management Company, LLP is 75 State Street, Boston, Massachusetts 02109. |
|
| (4) | | Consists of shares beneficially owned by The Vanguard Group, Inc., which has sole voting control as to 189,911 shares and sole dispositive power over all such shares. With respect to the information relating to The Vanguard Group, Inc., the Company has relied on information supplied by The Vanguard Group, Inc. on a Schedule 13G filed with the SEC on February 13, 2009. The address and principal business office of the Vanguard Group, Inc. is 100 Vanguard Blvd., Malvern, Pennsylvania 19355. |
|
| (5) | | Consists of shares beneficially owned by Dimensional Fund Advisors L.P., an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, in its capacity as investment advisor to certain investment companies, trusts and accounts. Dimensional Fund Advisors L.P. has sole voting power with respect to 9,828,608 shares and sole dispositive power over 10,197,121 shares. With respect to the information relating to Dimensional Fund Advisors L.P., the Company has relied on information supplied by Dimensional Fund Advisors L.P. on a Schedule 13G/A filed with the SEC on February 9, 2009. The address of Dimensional Fund Advisors L.P. is Palisades West, Building One, 6300 Bee Cave Road, Austin, Texas 78746. |
|
| (6) | | Consists of shares beneficially owned by Barclays Global Investors, NA. and a group of affiliated entities, which reported sole voting and dispositive power as of December 31, 2008, as follows: (i) Barclays Global Investors, N.A., sole voting power as to 3,150,393 shares and sole dispositive power as to 3,667,026 shares; (ii) Barclays Global Fund Advisors, sole voting power as to 5,287,026 shares and sole dispositive power as to 7,173,996 shares; and (iii) Barclays Global Investors, Ltd., sole voting power as to 5,880 shares and sole dispositive power as to 112,156 shares. With respect to the information relating to the affiliated Barclays Global Investors entities, the Company has relied on information supplied by Barclays Global Investors, NA on a Schedule 13G filed with the SEC on February 5, 2009. The address of the principal business office of Barclays Investors Global, NA is 400 Howard Street, San Francisco, California 94105. |
|
| (7) | | Consists of shares beneficially owned by FMR LLC, an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, as a result of its sole ownership of Fidelity Management & Research Company (“Fidelity Research”) and indirect ownership of Pyramis Global Advisors Trust Company (“PGATC”). Fidelity Research, an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, is the beneficial owner of 8,201,904 shares as a result of acting as investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940 that hold the shares. PGATC, a bank as defined in Section 3(a)(6) of the Securities Exchange Act of 1934, is the beneficial owner of 384,690 shares as a result of its serving as investment manager of institutional accounts owning such shares. Of the shares beneficially owned, FMR LLC. (through its ownership Fidelity Research and PGATC) has sole voting power with respect to 373,680 shares and sole disposition power with respect to 8,586,594 shares. The address of Fidelity Research and Fidelity Trust is 82 Devonshire Street, Boston, Massachusetts 02109. The address of PGATC is 900 Salem Street, Smithfield, Rhode Island, 02917. With respect to the information relating to the affiliated FMR LLC entities, the Company has relied on information supplied by FMR LLC on a Schedule 13G/A filed with the SEC on September 10, 2009. |
|
| (8) | | Includes shares held in the Company’s 401(k) Savings and Investment Plan. |
24
Equity Compensation Plan Information” inInformation
The Company currently maintains nine (9) stock-based compensation plans under which our definitive proxy statementsecurities are authorized for issuance to our employees and/or directors:
| • | | the 1994 Non-Qualified Stock Option Plan |
|
| • | | the 1996 Long-Term Incentive 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 |
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| • | | the 2005 Long-Term Incentive Plan, and |
|
| • | | 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 stock-based compensation plans was approved by our stockholders. A description of the material features of each non-stockholder approved 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 October 2, 2009.
| | | | | | | | | | | | | |
| | | | | | | | | | | Number of Securities |
| | | Number of Securities | | | | | | Remaining Available for |
| | | to be Issued Upon | | Weighted-Average | | Future Issuance Under |
| | | Exercise of | | Exercise Price of | | Equity Compensation |
| | | Outstanding | | Outstanding | | Plans (Excluding |
| | | Options, Warrants, | | Options, Warrants | | Securities Reflected in |
| Plan Category | | and Rights (a) | | and Rights (b) | | Column(a)) (c) |
| Equity compensation plans approved by security holders | | | 6,122,380 | (1) | | $ | 9.17 | | | | 14,971,285 | (3) |
| Equity compensation plans not approved by security holders | | | 12,228,500 | | | $ | 11.07 | | | | 0 | (4) |
| | | | | | | | | | | | | |
| Total | | | 18,350,880 | (2) | | $ | 10.44 | | | | 14,971,285 | |
| | | | | | | | | | | | | |
| | |
| (1) | | Excludes 748,979 unvested restricted shares and 3,001,915 unvested shares under performance shares awards. |
|
| (2) | | Includes 1,642,149 options held by non-employees (excluding non-employee directors). |
|
| (3) | | No further grants will be made under the 1994 Non-Qualified Stock Option Plan. |
|
| (4) | | No further grants will be made under the Washington Sub Inc. 2002 Stock Option Plan or the 1999 Employee Long-Term Incentive Plan. |
1999 Employee Long-Term Incentive Plan
The Company’s 1999 Employee Long-Term Incentive Plan (the “1999 Employee Plan”) provided 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
25
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. As of April 26, 2009, Annual Meetingno additional grants were issuable under the 1999 Employee Long-Term Incentive Plan.
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. At the time of Stockholdersthe spin-off of Conexant’s wireless business and merger of such business into Alpha Industries, Inc., outstanding Conexant options granted pursuant to certain Conexant stock-based compensation 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 incorporatedto 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 spin-off and merger, held outstanding options granted pursuant to certain Conexant stock option plans. No further options to purchase shares of Skyworks common stock have been or 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 reference.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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information to be included under the captions “CertainCertain Relationships and Related Transactions”Transactions: Other than compensation agreements and “Corporate Governance-Director Independence”other arrangements which are described above in Item 11 “Executive Compensation”, since October 4, 2008, there has not been a transaction or series of related transactions to which the Company was or is a party involving an amount in excess of $120,000 and in which any director, executive officer, holder of more than five percent (5%) of any class of our definitive proxy statementvoting securities, or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest. In January 2008, the Board of Directors adopted a written related person transaction approval policy which sets forth the Company’s policies and procedures for the 2009 Annual Meetingreview, approval or ratification of Stockholdersany transaction required to be reported in its filings with the SEC. The Company’s policy with regard to related person transactions is incorporated hereinthat all related person transactions between the Company and any related person (as defined in Item 404 of Regulation S-K) or their affiliates, in which the amount involved is equal to or greater then $120,000, be reviewed by reference.the Company’s General Counsel and approved in advance by the Audit Committee. In addition, the Company’s Code of Business Conduct and Ethics requires that employees discuss with the Company’s Compliance Officer any significant relationship (or transaction) that might raise doubt about such employee’s ability to act in the best interest of the Company.
Director Independence: Each year, the Board of Directors reviews the relationships that each director has with the Company and with other parties. Only those directors who do not have any of the categorical relationships that preclude them from being independent within the meaning of applicable NASDAQ Rules and who the Board of Directors affirmatively determines have no relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, are considered to be independent directors. The Board of Directors has reviewed a number of factors to evaluate the independence of each of its members. These factors include its members’ current and historic relationships with the Company and its competitors, suppliers and customers; their relationships with management and other directors; the relationships their current and former employers have with the Company; and the relationships between the
26
Company and other companies of which a member of the Company’s Board of Directors is a director or executive officer. After evaluating these factors, the Board of Directors has determined that a majority of the members of the Board of Directors, namely, Kevin L. Beebe, Moiz M. Beguwala, Timothy R. Furey, Balakrishnan S. Iyer, Thomas C. Leonard, David J. McLachlan, David P. McGlade and Robert A. Schriesheim, do not have any relationships that would interfere with the exercise of independent judgment in carrying out their responsibilities as a director and are independent directors of the Company within the meaning of applicable NASDAQ Rules.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
KPMG LLP provided audit services to the Company consisting of the annual audit of the Company’s 2009 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 2009. The informationfollowing table summarizes the fees of KPMG LLP billed to the Company for the last two fiscal years.
| | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | | | | Fiscal Year | | | | |
| Fee Category | | 2009 | | | % of Total | | | 2008 | | | % of Total | |
| Audit Fees — Integrated Audit(1) | | $ | 1,215,000 | | | | 97 | % | | $ | 1,356,000 | | | | 97 | % |
| Audit-Related Fees(2) | | | 5,000 | | | | 0 | % | | | — | | | | 0 | % |
| Tax Fees(3) | | | 33,000 | | | | 3 | % | | | 45,000 | | | | 3 | % |
| All Other Fees(4) | | | 2,000 | | | | 0 | % | | | 2,000 | | | | 0 | % |
| | | | | | | | | | | | | |
| Total Fees | | $ | 1,255,000 | | | | 100 | % | | $ | 1,403,000 | | | | 100 | % |
| | | | | | | | | | | | | |
| | |
| (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. Fiscal year 2009 and fiscal year 2008 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 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 $33,000 and $45,000 of the total tax fees for fiscal year 2009 and 2008, respectively. Tax advice and tax planning services relate to assistance with tax audits. |
|
| (4) | | All other fees for fiscal year 2009 and 2008 consist of licenses for accounting research software. |
In 2003, the Audit Committee adopted a formal policy concerning approval of audit and non-audit services to be included underprovided to the caption “Ratification of Independent Registered Public Accounting Firm-Audit Fees” in our definitive proxy statement forCompany by its independent registered public accounting firm, 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 2009 Annual Meeting of Stockholders is incorporated herein by reference.and fiscal 2008.
81
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following arelist of Exhibits filed as part of this Annual Reportreport are set forth on Form 10-K:
| | | | |
| | Page number in this report |
1. Index to Financial Statements | | |
Report of Independent Registered Public Accounting Firm | | Page 48 |
Consolidated Statements of Operations for the Years Ended October 3, 2008, September 28, 2007, and September 29, 2006 | | Page 49 |
Consolidated Balance Sheets at October 3, 2008 and September 28, 2007 | | Page 50 |
Consolidated Statements of Cash Flows for the Years Ended October 3, 2008, September 28, 2007, and September 29, 2006 | | Page 51 |
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 53 through 79 |
|
| | Page number in this report |
2. The schedule listed below is filed as part of this Annual Report on Form 10-K: | | | |
Schedule II-Valuation and Qualifying Accounts | | Page 85 |
All otherthe Exhibit Index immediately preceding such exhibits, and is incorporated herein by this reference. This list includes a subset containing each management contract, compensatory plan, or arrangement 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. |
The exhibits required by Item 601 of Regulation S-K arebe filed herewith and incorporated by reference herein. The responseas an exhibit to this portion of Item 15 is submitted under Item 15 (a) (3).report.
8227
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 2, 2008 February 1, 2010
| | | | | |
| | SKYWORKS SOLUTIONS, INC.
Registrant
| |
| |
| | By: | /s/ DAVIDDavid J. ALDRICHAldrich | |
| | | David J. Aldrich | |
| | | President and Chief Executive Officer
President
Director | |
83
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 2, 2008.
| | | | |
Signature and Title | | | | |
| |
/s/ DAVID J. MCLACHLANDavid 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
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Charged to | | | | | | | | | | |
| | | Beginning | | Cost and | | | | | | | | | | Ending |
| Description | | Balance | | Expenses | | Deductions | | Misc. | | Balance |
| Year Ended September 29, 2006 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 5,815 | | | $ | 35,959 | | | $ | (4,752 | ) | | $ | — | | | $ | 37,022 | |
| Reserve for sales returns | | $ | 3,059 | | | $ | 4,867 | | | $ | (3,803 | ) | | $ | (19 | ) | | $ | 4,104 | |
| Allowance for excess and obsolete inventories | | $ | 11,979 | | | $ | 23,154 | | | $ | (7,428 | ) | | $ | — | | | $ | 27,705 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 28, 2007 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 37,022 | | | $ | 2,623 | | | $ | (37,983 | ) | | $ | — | | | $ | 1,662 | |
| Reserve for sales returns | | $ | 4,104 | | | $ | 2,271 | | | $ | (3,893 | ) | | $ | — | | | $ | 2,482 | |
| Allowance for excess and obsolete inventories | | $ | 27,705 | | | $ | 8,641 | | | $ | (20,189 | ) | | $ | — | | | $ | 16,157 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended October 3, 2008 | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,662 | | | $ | 2,258 | | | $ | (2,872 | ) | | $ | — | | | $ | 1,048 | |
| Reserve for sales returns | | $ | 2,482 | | | $ | 1,926 | | | $ | (2,273 | ) | | $ | — | | | $ | 2,135 | |
| Allowance for excess and obsolete inventories | | $ | 16,157 | | | $ | 4,515 | | | $ | (12,843 | ) | | $ | — | | | $ | 7,829 | |
8528
EXHIBIT INDEX
| | | | | | | | | | | | | | | |
| Exhibit | | | | | | Incorporated by Reference | | Filed | |
| Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Herewith |
| |
| 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 | | | 3.B | | | 12/23/2002 | | | | |
| | | | | | | | | | | | | | | |
| 4.A | | Specimen Certificate of Common Stock | | S-3 | | 333-92394 | | | 4 | | | 7/15/2002 | | | | |
| | | | | | | | | | | | | | | |
| 4.B | | Indenture dated as of March 2, 2007 | | | | | | | | | | | | |
| | between the Registrant and U.S. Bank | | | | | | | | | | | | |
| | National Association, as Trustee | | 8-K | | 001-5560 | | | 4.1 | | | 3/5/2007 | | | | |
| | | | | | | | | | | | | | | |
| 10.A* | | Skyworks Solutions, Inc., Long-Term | | | | | | | | | | | | |
| | Compensation 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 | | | | |
| | | | | | | | | | | | | | | |
| 10.B* | | Skyworks Solutions, Inc. 1994 Non-Qualified | | | | | | | | | | | | |
| | Stock Option Plan for Non-Employee | | | | | | | | | | | | |
| | Directors | | 10-K | | 001-5560 | | 10.C | | 12/14/2005 | | | | |
| | | | | | | | | | | | | | |
| 10.C* | | Skyworks Solutions, Inc. Executive | | | | | | | | | | | | |
| | 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.D | | 12/14/2005 | | | | |
| | | | | | | | | | | | | | |
| 10.D* | | Skyworks Solutions, Inc. 1997 | | | | | | | | | | | | |
| | Non-Qualified Stock Option Plan for | | | | | | | | | | | | |
| | Non-Employee Directors | | 10-K | | 001-5560 | | | 10.C | 10.E | | 12/14/2005 | | | | |
| | | | | | | | | | | | | | |
| 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.G* | | Washington Sub Inc., 2002 Stock Option | | | | | | | | | | | | |
| | Plan | | S-3 | | 333-92394 | | 99.A | | 7/15/2002 | | | | |
| | | | | | | | | | | | | | |
| 10.H* | | Skyworks Solutions, Inc. Non-Qualified | | | | | | | | | | | | |
| | Employee Stock Purchase Plan | | 10-Q | | 001-5560 | | 10.H | | 5/7/2008 | | | | |
| | | | | | | | | | | | | | |
| 10.I* | | Skyworks Solutions Inc. 2002 Qualified | | | | | | | | | | | | |
| | Employee Stock Purchase Plan (as amended | | | | | | | | | | | | |
| | 1/31/2006) | | 10-Q | | 001-5560 | | 10.L | | 2/07/2007 | | | | |
| | | | | | | | | | | | | | |
| 10.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.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.L | | Receivables Purchase Agreement, dated as | | | | | | | | | | | | |
| | of July 15, 2003, by and between Skyworks | | | | | | | | | | | | |
| | USA, Inc. and the Company | | 10-Q | | 001-5560 | | 10.C | | 8/11/2003 | | | | |
| | | | | | | | | | | | | | |
86
| | | | | | | | | | | | | | | |
| Exhibit | | | | | | Incorporated by Reference | | Filed | |
| Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Herewith | |
| 10.N* | | Skyworks Solutions, Inc. 2005 Long-Term | | | | | | | | | | | | |
10.C* | | Skyworks Solutions, Inc. Executive CompensationIncentive Plan dated January 1, 1995(as amended and Trust for the Skyworks Solutions, Inc. Executive Compensation Plan dated January 3, 1995 | | 10-K | | 001-5560 | | | 10.D | | | 12/14/2005 | | |
| | restated | | | | | | | | | | | | |
10.D* | | Skyworks Solutions, Inc. 1997 Non-Qualified Stock Option Plan for Non-Employee Directors5/12/2009) | | 10-KDEF 14A | | 001-5560 | | APPENDIX | 10.E | 3/30/2009 | | | 12/14/2005 | | |
| | | | | | | | | | | | | | |
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.G* | | Washington Sub Inc., 2002 Stock Option Plan | | S-3 | | 333-92394 | | | 99.A | | | 7/15/2002 | | |
| | | | | | | | | | | | | | |
10.H* | | Skyworks Solutions, Inc. Non-Qualified Employee Stock Purchase Plan | | 10-Q | | 001-5560 | | | 10.H | | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
10.I* | | Skyworks Solutions Inc. 2002 Qualified Employee Stock Purchase Plan (as amended 1/31/2006) | | 10-Q | | 001-5560 | | | 10.L | | | 2/07/2007 | | |
| | | | | | | | | | | | | | |
10.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.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.L | | Receivables Purchase Agreement, dated as of July 15, 2003, by and between Skyworks USA, Inc. and the Company | | 10-Q | | 001-5560 | | | 10.C | | | 8/11/2003 | | |
| | | | | | | | | | | | | | |
10.M* | | Form of Notice of Grant of Stock Option under the Company’s 1996 Long-Term Incentive Plan | | 8-K | | 001-5560 | | | 10.1 | | | 11/17/2004 | | |
| | | | | | | | | | | | | | |
10.N* | | Skyworks Solutions, Inc. 2005 Long-Term Incentive Plan (as amended 1/31/2006) | | 10-Q | | 001-5560 | | | 10.S | | | 2/07/2007 | | |
| | | | | | | | | | | | | | | |
| 10.O* | | Skyworks Solutions, Inc. Directors’ 2001 Stock Option Plan | | 8-K | | 001-5560 | | | 10.2 | | | 5/04/2005 | | |
87
| | | | | | | | | | | | | | |
Exhibit | | Stock Option Plan | | 8-K | | 001-5560 | | 10.2 | | 5/04/2005 | | | | | | Incorporated by Reference | | Filed |
Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Herewith |
| | | | | | | | | | | | | | | |
| 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.S* | | Amended and Restated Change in | | | | | | | | | | | | |
| | Control/Severance Agreement, dated | | | | | | | | | | | | |
| | 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 | | | 11/15/2005 | | | | |
| | | | | | | | | | | | | | | |
| 10.Y* | | Skyworks 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 Registrant and Credit | | | | | | | | | | | | |
| | Suisse Securities (USA) LLC | | 8-K | | 001-5560 | | 10.HH | | 3/5/2007 | | | | |
| | | | | | | | | | | | | | | |
| 10.AA* | | Change in Control/Severance Agreement, | | | | | | | | | | | | |
| | dated January 22, 2008, between the | | | | | | | | | | | | |
| | Company and Donald W. Palette | | 10-Q | | 001-5560 | | 10.II | | 5/7/2008 | | | | |
| | | | | | | | | | | | | | | |
10.BB10.BB* | | Form of Performance Share Agreement Under
| | | | | | | | | | | | |
| | the 2005 Long-Term Incentive Plan | | 10-Q | | 001-5560 | | 10.JJ | | 2/6/06/2008 | | | | |
| | | | | | | | | | | | | | | |
10.CC10.CC* | | Change in Control/Severance Agreement, | | | | | | | | | | | | |
| | dated January 22, 2008, between the | | | | | | | | | | | | |
| | Company and Bruce Freyman | | 10-Q | | 001-5560 | | 10.KK | | 5/7/2008 | | | | |
| | | | | | | | | | | | | | | |
10.DD | | Change in Control/Severance Agreement, dated January 22, 2008, between the Company and Stan Swearingen | | 10-Q | | 001-5560 | | 10-LL | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
10.EE | | 2008 Director Long-Term Incentive Plan | | 10-Q | | 001-5560 | | 10-MM | | 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 | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
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. 2002 Employee Stock Purchase Plan | | 10-Q | | 001-5560 | | 10-PP | | 5/7/2008 | | |
| | | | | | | | | | | | | | |
11 | | Statement regarding calculation of per share earnings [see Note 2 to the Consolidated Financial Statements] | | | | | | | | | | | | X |
| | | | | | | | | | | | | | |
12 | | Computation of Ratio 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 | | | | | | | | | | | | 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 | | | | | | | | | | | | 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 | | | | | | | | | | | | X |
| | | | | | | | | | | | | | |
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 | | | | | | | | | | | | X |
| | | | | | | | | | | | | | | |
| Exhibit | | | | | | Incorporated by Reference | | Filed | |
| Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Herewith | |
| 10.DD* | | Change in Control/Severance Agreement, | | | | | | | | | | | | |
| | | dated January 22, 2008, between the | | | | | | | | | | | | |
| | | Company and Stan Swearingen | | 10-Q | | 001-5560 | | 10-LL | | 5/7/2008 | | | | |
| | | | | | | | | | | | | | | |
| 10.EE* | | 2008 Director Long-Term Incentive Plan | | 10-Q | | 001-5560 | | 10-MM | | 5/7/2008 | | | | |
| | | | | | | | | | | | | | | |
| 10.FF* | | Form of Restricted Stock Agreement under | | | | | | | | | | | | |
| | | the Company’s 2008 Director Long-Term | | | | | | | | | | | | |
| | | Incentive Plan | | 10-Q | | 001-5560 | | 10-NN | | 5/7/2008 | | | | |
| | | | | | | | | | | | | | | |
| 10.GG* | | Form of Nonstatutory Stock Option | | | | | | | | | | | | |
| | | Agreement under the Company’s 2008 | | | | | | | | | | | | |
| | | Director Long-Term Incentive Plan | | 10-Q | | 001-5560 | | 10-OO | | 5/7/2008 | | | | |
| | | | | | | | | | | | | | | |
| 10.HH* | | Skyworks Solutions, Inc. 2002 Employee | | | | | | | | | | | | |
| | | Stock Purchase Plan | | 10-Q | | 001-5560 | | 10-PP | | 5/7/2008 | | | | |
| | | | | | | | | | | | | | | |
| 10.II* | | Fiscal 2009 Executive Incentive | | | | | | | | | | | | |
| | | Compensation Plan | | 10-Q | | 001-5560 | | 10-II | | 2/11/2009 | | | | |
| | | | | | | | | | | | | | | |
| 10.JJ* | | Form of Executive Performance Award | | | | | | | | | | | | |
| | | Forfeiture and Replacement Agreement | | | | | | | | | | | | |
| | | Dated June 4, 2009. | | 10-Q | | 001-5560 | | 10-QQ | | 8/11/2009 | | | | |
| | | | | | | | | | | | | | | |
| 12 | | Computation of Ratio of Earnings to Fixed | | | | | | | | | | | | |
| | | Charges | | 10-K | | 001-5560 | | 12 | | 11/30/2009 | | | | |
| | | | | | | | | | | | | | | |
| 21 | | Subsidiaries of the Company | | 10-K | | 001-5560 | | 21 | | 11/30/2009 | | | | |
| | | | | | | | | | | | | | | |
| 23.1 | | Consent of KPMG LLP | | 10-K | | 001-5560 | | 23.1 | | 11/30/2009 | | | | |
| | | | | | | | | | | | | | | |
| 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 | | 10-K | | 001-5560 | | 31.1 | | 11/30/2009 | | | | |
| | | | | | | | | | | | | | | |
| 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 | | 10-K | | 001-5560 | | 31.2 | | 11/30/2009 | | | | |
| | | | | | | | | | | | | | | |
| 31.3 | | 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 | | | | | | | | | | | X | |
| | | | | | | | | | | | | | | |
| 31.4 | | 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 | | | | | | | | | | | 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 | | 10-K | | 001-5560 | | 32.1 | | 11/30/2009 | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 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 | | 10-K | | 001-5560 | | 32.2 | | 11/30/2009 | | | | |
| | |
| * | | Indicates a management contract or compensatory plan or arrangement. |
89
